VESYNC CO., LTD (Incorporated in the Cayman Islands with limited liability)
GLOBAL OFFERING STOCK CODE: 2148
Joint Sponsors, Joint Global Coordinators, Joint Bookrunners and Joint Lead Managers
Other Joint Bookrunners and Joint Lead Managers IMPORTANT
If you are in any doubt about any of the contents of this prospectus, you should obtain independent professional advice.
Vesync Co., Ltd (Incorporated in the Cayman Islands with limited liability)
GLOBAL OFFERING
Number of Offer Shares under : 281,000,000 Shares (subject to the Over- the Global Offering allotment Option) Number of Hong Kong Offer Shares : 28,100,000 Shares (subject to reallocation) Number of International Offer Shares : 252,900,000 Shares (subject to reallocation and the Over-allotment Option) Maximum Offer Price : HK$5.52 per Offer Share, plus brokerage of 1%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005% (payableinfulluponapplicationinHong Kong dollars and subject to refund) Nominal value : HK$0.01 per Share Stock code : 2148
Joint Sponsors, Joint Global Coordinators, Joint Bookrunners and Joint Lead Managers
Other Joint Bookrunners and Joint Lead Managers
Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this prospectus, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this prospectus. A copy of this prospectus, having attached thereto the documents specified in the section headed ‘‘Documents Delivered to the Registrar of Companies in Hong Kong and Available for Inspection’’ in Appendix V to this prospectus, has been registered with the Registrar of Companies in Hong Kong as required by section 342C of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong). The Securities and Futures Commission of Hong Kong and the Registrar of Companies in Hong Kong take no responsibility for the contents of this prospectus or any other documents referred to above. Prior to making an investment decision, prospective investors should carefully consider all the information set out in this prospectus, including the risk factors set out in the section headed ‘‘Risk Factors’’ in this prospectus. The Offer Price is expected to be fixed by agreement between the Joint Global Coordinators (acting for themselves and on behalf of the Underwriters) and our Company on the Price Determination Date. The Price Determination Date is expected to be on or about Friday, December 11, 2020 and, in any event not later than Thursday, December 17, 2020. The Offer Price will be not more than HK$5.52 per Offer Share and is currently expected to be not less than HK$4.68 per Offer Share, unless otherwise announced. The Joint Global Coordinators (for themselves and on behalf of the Underwriters) may, with our consent, reduce the number of Offer Shares being offered under the Global Offering and/or the indicative Offer Price range below that stated in this prospectus at any time on or prior to the morning of the last day for lodging applications under the Hong Kong Public Offering. In such a case, an announcement will be published on the websites of the Stock Exchange at www.hkexnews.hk and our Company at www.vesync.com not later than the morning of the day which is the last day for lodging applications under the Hong Kong Public Offering. For further information, please refer to the sections headed ‘‘Structure of the Global Offering’’ and ‘‘HowtoApplyforHongKongOfferShares’’ in this prospectus. If, for any reason, the Joint Global Coordinators (for themselves and on behalf of the Underwriters) and our Company are unable to reach an agreement on the Offer Price by Thursday, December 17, 2020, the Global Offering (including the Hong Kong Public Offering) will not proceed and will lapse. The obligations of the Hong Kong Underwriters under the Hong Kong Underwriting Agreement are subject to termination by the Joint Global Coordinators (for themselves and on behalf of the Underwriters) if certain grounds arise prior to 8:00 a.m. on the Listing Date. Such grounds are set out in the section headed ‘‘Underwriting’’ in this prospectus. It is important that you refer to that section for further details. The Offer Shares have not been and will not be registered under the U.S. Securities Act or any state securities law in the United States and may not be offered or sold, pledged or transferred within the United States, except that the Offer Shares may be offered, sold or delivered (i) within the United States in reliance on an exemption from registration under the U.S. Securities Act provided by, and in accordance with the restrictions of, Rule 144A under the U.S. Securities Act or another exemption from registration under the U.S. Securities Act; and (ii) in offshore transactions outside the United States in reliance on Regulation S under the U.S. Securities Act.
December 8, 2020 EXPECTED TIMETABLE(1)
If there is any change in the following expected timetable of the Hong Kong Public Offering, we will issue an announcement in Hong Kong to be published on the websites of the Stock Exchange at www.hkexnews.hk and our Company at www.vesync.com. Event Date(1)
Latest time for completing electronic applications under eWhite Form through the designated website at www.ewhiteform.com.hk(2) ...... 11:30a.m.onFriday,December 11, 2020
Application lists open(3) ...... 11:45a.m.onFriday,December 11, 2020
Latest time for lodging WHITE and YELLOW ApplicationForms...... 12:00noononFriday,December 11, 2020
Latest time for giving electronic application instructions to HKSCC(4)...... 12:00noononFriday,December 11, 2020
Latest time for completing payment of eWhite Form applications by effecting PPS payment transfer(s) . . . . 12:00 noon on Friday, December 11, 2020
Application lists close(3) ...... 12:00noononFriday,December 11, 2020
Expected Price Determination Date(5) ...... Friday,December 11, 2020
Announcement of the final Offer Price, level of indication of interest in the International Offering, level of applications of the Hong Kong Public Offering and the basis of allocation of the Hong Kong Offer Shares to be published on the website of the Stock Exchange at www.hkexnews.hk;and on the website of our Company at www.vesync.com ...... Thursday,December 17, 2020
Announcement of results of allocations in the Hong Kong Public Offering (with successful applicants’ identification document numbers or Hong Kong business registration numbers, where appropriate) to be available through a variety of channels, including the website of the Stock Exchange at www.hkexnews.hk and the website of our Company at www.vesync.com, as described in the section headed ‘‘How to Apply for Hong Kong Offer Shares — 11. Publication of Results’’ inthisprospectusfrom...... Thursday,December 17, 2020
Results of allocations in the Hong Kong Public Offering to be available at www.ewhiteform.com.hk/results with a ‘‘search by ID’’ functionfrom...... Thursday,December 17, 2020
– i – EXPECTED TIMETABLE(1)
Event Date(1)
Dispatch/collection of share certificates in respect of wholly or partially successful applications pursuant to the Hong Kong Public Offering on or before(6)(8) ...... Thursday,December 17, 2020
Dispatch of e-Refund payment instructions/refund cheques in respect of wholly or partially successful applications (where applicable) or wholly or partially unsuccessful applications pursuant to the Hong Kong Public Offering on or before(7) to (12) ...... Thursday,December 17, 2020
DealingsinSharesontheStockExchangetocommenceon...... Friday,December 18, 2020
Notes:
(1) All times refer to Hong Kong local time, except as otherwise stated. Details of the structure of the Global Offering, including its conditions, are set out in the section headed ‘‘Structure of the Global Offering’’ in this prospectus.
(2) You will not be permitted to submit your application through the designated website at www.ewhiteform.com.hk after 11:30 a.m. on the last day for submitting applications. If you have already submitted your application and obtained an application reference number from the designated website at or before 11:30 a.m., you will be permitted to continue the application process (by completing payment of application monies) until 12:00 noon on the last day for submitting applications, when the application lists close.
(3) If there is a ‘‘black’’ rainstorm warning, a tropical cyclone warning signal number 8 or above and/or Extreme Conditions in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Friday, December 11, 2020, the application lists will not open on that day. Further information is set out in the section headed ‘‘How to Apply for Hong Kong Offer Shares—10. Effect of Bad Weather on the Opening of the Application Lists’’ in this prospectus. If the application lists do not open and close on Friday, December 11, 2020, the dates mentioned in ‘‘Expected Timetable’’ may be affected. An announcement will be made by us in such event.
(4) Applicants who apply for Hong Kong Offer Shares by giving electronic application instructions to HKSCC should refer to the section headed ‘‘How to Apply for Hong Kong Offer Shares—6. Applying by Giving Electronic Application Instructions to HKSCC via CCASS’’ in this prospectus.
(5) The Price Determination Date is expected to be on or about Friday, December 11, 2020, and in any event no later than Thursday, December 17, 2020 (Hong Kong time). If, for any reason, the Offer Price is not agreed between the Joint Global Coordinators (acting for themselves and on behalf of the Underwriters) and our Company by Thursday, December 17, 2020 (Hong Kong time), the Global Offering will not proceed and will lapse.
(6) Share certificates for the Hong Kong Offer Shares will become valid certificates of title at 8:00 a.m. on Friday, December 18, 2020 (Hong Kong time), provided that (i) the Global Offering has become unconditional in all respects; and (ii) neither of the Underwriting Agreements has been terminated in accordance with its terms. If the Global Offering does not become unconditional or the Underwriting Agreements are terminated in accordance with their terms, the Global Offering will not proceed and will lapse. In such a case, our Company will make an announcement as soon as possible thereafter.
(7) e-Refund payment instruction/refund cheques will be issued in respect of wholly or partially unsuccessful applications pursuant to the Hong Kong Public Offering and also in respect of wholly or partially successful applications in the event that the final Offer Price is less than the price payable per Offer Share on application. Part
– ii – EXPECTED TIMETABLE(1)
of the applicant’s Hong Kong identity card number or passport number, or, if the application is made by joint applicants, part of the Hong Kong identity card number or passport number of the first-named applicant, provided by the applicant(s) may be printed on the refund cheque, if any. Such data would also be transferred to a third party for refund purposes. Banks may require verification of an applicant’s Hong Kong identity card number or passport number before cashing the refund cheque. Inaccurate completion of an applicant’s Hong Kong identity card number or passport number may lead to delays in encashment of, or may invalidate, the refund cheque.
(8) Applicants who have applied on WHITE Application Forms or through the eWhite Form service for 1,000,000 Hong Kong Offer Shares or more under the Hong Kong Public Offering and have provided all information required by their Application Form may collect their refund cheque(s) (where applicable) and/or Share certificate(s) in person from our Hong Kong Share Registrar, Boardroom Share Registrars (HK) Limited, at 2103B, 21/F, 148 Electric Road, North Point, Hong Kong, from 9:00 a.m. to 1:00 p.m. on Thursday, December 17, 2020. Applicants being individuals who are applying for 1,000,000 Hong Kong Offer Shares or more and opt for personal collection must not authorize any other person to make collection on their behalf. Applicants being corporations who are applying for 1,000,000 Hong Kong Offer Shares or more and opt for personal collection must attend by their authorized representatives bearing letters of authorization from their corporations stamped with the corporations’ chop. Identification and (where applicable) authorization documents acceptable to our Hong Kong Share Registrar, Boardroom Share Registrars (HK) Limited, must be produced at the time of collection.
(9) Applicants who have applied on YELLOW Application Forms for 1,000,000 Hong Kong Offer Shares or more under the Hong Kong Public Offering may collect their refund cheque(s), where applicable, in person but may not elect to collect their Share certificate(s), which will be deposited into CCASS for the credit of their designated CCASS Participants’ stock accounts or CCASS Investor Participant stock accounts, as appropriate. The procedures for collection of refund cheque(s) for YELLOW Application Form applicants are the same as those for WHITE Application Form applicants specified in note (8) above.
(10) For applicants who have applied for Hong Kong Offer Shares by giving electronic application instructions to HKSCC, their refund (if any) will be credited to their designated bank account or the designated bank account of the designated CCASS Participant through which they made their application on Thursday, December 17, 2020. For applicants who have instructed their designated CCASS Participant (other than CCASS Investor Participant) to give electronic application instructions on their behalf, they can check the amount of refund (if any) payable to them with that designated CCASS Participant. For applicants who have applied as CCASS Investor Participant, they can check the amount of refund (if any) payable to them via the CCASS Phone System and CCASS Internet System (under the procedures contained in HKSCC’s ‘‘An Operating Guide for Investor Participants’’ in effect from time to time) on Thursday, December 17, 2020 or in the activity statement showing the amount of refund money credited to their designated bank account made available to them by HKSCC immediately after the credit of refund money to their bank account. Please refer to the section headed ‘‘How to Apply for Hong Kong Offer Shares—14. Despatch/ Collection of Share Certificates and Refund Monies’’ in this prospectus for details.
(11) For applicants who have applied through the eWhite Form service and paid the application monies from a single bank account, refund monies (where applicable) will be despatched to their application payment bank account in the form of e-Refund payment instructions on Thursday, December 17, 2020. For applicants who have applied through eWhite Form service and paid the application monies from multiple bank accounts, refund monies (where applicable) in the form of refund cheque(s) will be despatched on or before Thursday, December 17, 2020 by ordinary post at their own risk. Please refer to the section headed ‘‘How to Apply for Hong Kong Offer Shares—14. Despatch/Collection of Share Certificates and Refund Monies’’ in this prospectus for details.
(12) Uncollected share certificate(s) and refund cheque(s) will be despatched by ordinary post at the applicants’ own risk to the addresses specified in the relevant applications. Further details are set out in ‘‘How to Apply for Hong Kong Offer Shares—14. Despatch/Collection of Share Certificates and Refund Monies’’ in this prospectus.
For details of the structure of the Global Offering, including conditions thereof, please refer to the sections headed ‘‘Underwriting’’, ‘‘Structure of the Global Offering’’ and ‘‘How to Apply for Hong Kong Offer Shares’’ in this prospectus.
– iii – CONTENTS
This prospectus is issued by our Company solely in connection with the Hong Kong Public Offering and does not constitute an offer to sell or a solicitation of an offer to subscribe for or buy any security other than the Hong Kong Offer Shares. This prospectus may not be used for the purpose of, and does not constitute, an offertosellorasolicitationofanoffertobuyany security in any other jurisdiction or in any other circumstances. No action has been taken to permit a public offering of the Offer Shares or the distribution of this prospectus in any jurisdiction other than Hong Kong. The distribution of this prospectus and the offering and sale of the Offer Shares in other jurisdiction are subject to restrictions and may not be made except as permitted under the applicable securities laws of such jurisdictions pursuant to registration with or authorisation by the relevant securities regulatory authorities or an exemption therefrom. You should rely only on the information contained in this prospectus and the Application Forms to make your investment decision. We have not authorised anyone to provide you with information which is different from that contained in this prospectus. Any information or representation not made in this prospectus must not be relied upon by you as having been authorized by us, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Underwriters, any of their respective directors or any other person or party involved in the Global Offering.
Page
Expected Timetable ...... i
Contents ...... iv
Summary ...... 1
Definitions ...... 14
Glossary of Technical Terms ...... 29
Forward-looking statements ...... 31
Risk Factors ...... 32
Waiver from Strict Compliance with the Listing Rules ...... 67
Information about this Prospectus and the Global Offering ...... 69
Directors and Parties Involved in the Global Offering ...... 73
Corporate Information ...... 80
Industry Overview ...... 83
– iv – CONTENTS
Page
Regulatory Overview ...... 95
History, Reorganization and Corporate Structure ...... 115
Business ...... 139
Relationship with Our Controlling Shareholders ...... 207
Directors and Senior Management ...... 211
Substantial Shareholders ...... 227
Cornerstone Investors ...... 229
Share Capital ...... 235
Financial Information ...... 239
Future Plans and Use of Proceeds ...... 301
Underwriting ...... 307
Structure of the Global Offering ...... 318
HowtoApplyforHongKongOfferShares ...... 328
Appendix I — Accountants’ Report ...... I-1
Appendix II — Unaudited Pro Forma Financial Information ...... II-1
Appendix III — Summary of the Constitution of the Company and Cayman Islands Company Law ...... III-1
Appendix IV — Statutory and General Information ...... IV-1
Appendix V — Documents Delivered to the Registrar of Companies in Hong Kong and Available for Inspection ...... V-1
– v – SUMMARY
This summary aims to give you an overview of the information contained in this prospectus. As this is a summary, it does not contain all the information that may be important to you. You should read the whole document before you decide to invest in the Offer Shares. There are risks associated with any investment. Some of the particular risks in investing in the Offer Shares are set out in the section headed ‘‘Risk Factors’’ in this prospectus. You should read that section carefully before you decide to invest in the Offer Shares.
OVERVIEW We are one of the market players in the small home appliance online market in the United States. According to the Frost & Sullivan Report, among small home appliance retailers, we ranked third in terms of retail sales generated through Amazon and fifth through all online channels in 2019 in the United States. Our air purifiers ranked first and our air fryers ranked second in their respective categories, both in terms of retail sales generated through Amazon in 2019 in the United States. Our products are sold to users in a number of countries, primarily the United States, Canada, the United Kingdom, Germany, France, Spain, Italy and Japan. Our business primarily focuses on the online marketing and sales of self-designed and -developed small home appliances and smart home devices under our increasingly recognized brands. We sell our products primarily through e- commerce marketplaces, mainly Amazon, the largest e-commerce marketplace in the United States. With our mission to ‘‘build a better living,’’ we are dedicated to continuously improving consumers’ daily lives in small but meaningful ways with innovative and user-friendly products. Innovation is at the heart of our business and we constantly look for new and better ways to meet our customers’ needs. We believe our success is underpinned by our strong design and R&D capabilities. As of October 31, 2020, we had an experienced in-house product design and development team consisting of 223 engineers and designers in the United States and the PRC. We believe every country or region is different, as are the needs and preferences of those who live there. We have leveraged our in-depth understanding of the preferences of users in different places to design and develop a wide range of products, with a focus on small home appliances. Our products are sold under three core brands, namely, , and .We have received a number of awards recognizing our excellence in product innovation, design and development, such as the Red Dot Awards, IHA Global Innovation Awards, iF Product Design Awards and CES Innovation Awards. To make our products available as widely as possible, we sell our products to our end consumers mainly via third-party online marketplaces, in particular, Amazon, the largest e- commerce marketplace in the United States. We have maintained a stable business relationship with Amazon for around nine years. Since 2017, we have commenced the sale of our products through its Vendor Central program (a by-invite-only program) in the United States. Our marketing success requires us to be able to satisfy high-volume demands, and we have built a strong supply chain capability as a result. We maintain strong relationships with well- established and capable subcontractors in China which manufacture a majority of our products. Such subcontractors have provided stable supply of products and are able to deliver in a timely manner. We adopt strict quality control measures on the procurement and production processes of subcontractors to ensure the quality of our products. Leveraging our R&D capabilities, we develop and sell smart home devices compatible with our own mobile app, the VeSync app, which was launched in 2015. Our VeSync app enables users to achieve centralized control of smart home devices for home automation experience. The VeSync app is built on smart cloud infrastructure incorporating advanced database technologies and data analysis technologies, allowing us to process massive multi-source data and instructions generated by the registered devices on our VeSync app in a highly stable, efficient and secure
– 1 – SUMMARY way. We believe our VeSync app makes our customers’ daily life more convenient, efficient and enjoyable, which in turn enhances the attractiveness of our product offering and helps expand our user base. As of June 30, 2020, there were approximately 1.2 million activated devices on our VeSync app. OUR BUSINESS MODEL We primarily design, develop and sell small home appliances and smart home devices under our three core brands, namely, ‘‘Levoit’’ for home environment appliances, ‘‘Etekcity’’ for smart home gadgets, health monitoring devices, outdoor recreation products and personal care products, and ‘‘Cosori’’ for kitchen appliances and dining ware. The product life cycles for our key products are typically above two years. We constantly introduce new products and iterate existing products with new technology, functionality, features and design with an aim to improve consumers’ daily lives. We typically set the selling prices of our products based on factors such as product positioning, selling prices of comparable products, our cost structure, customer reviews, purchase volume, bargaining power of customers and sales channel. During the Track Record Period, we primarily sold products through Amazon’s two programs, namely, Seller Central and Vendor Central, and sold a small portion of our products through other channels, primarily consisting of chain retailers, other e-commerce marketplaces and our own online shopping websites. We commenced our sales through the Seller Central program in 2011. Under Amazon’s Seller Central program, retail customers purchase products through its online marketplace directly from us. We sell products at retail price to shoppers on Amazon marketplace directly while we use certain services offered by Amazon, such as platform services, fulfilment and warehouse services and other miscellaneous services, and pay various service fees to Amazon separately. In 2017, we were invited by Amazon to be an ‘‘Amazon Vendor’’ under the Vendor Central program in the United States. Under the Ventral Central program, Amazon makes bulk purchase orders for our products and then sell them to its customers through its online marketplace under its own account. We target the same end users, i.e., Amazon’s online purchasers and shoppers, under the Seller Central and Vendor Central programs of Amazon for our products. Under the Vendor Central program, we sell products at bulk purchase price to Amazon, which is based on our negotiations with Amazon, and has taken into account and deducted discounts and rebates. The overall average discounts and rebates offered to Amazon under the Vendor Central program, based on manufacturer suggested retail prices, were approximately 34.2%, 35.5%, 41.4% and 32.8% for 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively. Since we became an Amazon Vendor in 2017, we have strategically increased our sales of products under the Vendor Central program in the United States, as we believe that (i) such program has significantly uplifted our brand awareness as the products under such program will be marked ‘‘sold by Amazon’’ on Amazon’s platform and thus, enhanced customers’ confidence in our products, which in turn has boosted the sales volume of our products under such program; (ii) although we utilize Amazon’sadvertising services to facilitate our sales through both the Seller Central and Vendor Central programs, we can enjoy premium marketing resources exclusive to Amazon Vendors under the Vendor Central program, among other benefits, and have gained valuable market insight and marketing support through our continuous communication with the representatives from Amazon. We participate in marketing campaigns only available under the Vendor Central program such as ‘‘Home Gift Guide’’ to move up the exposure of our products; and (iii) unlike the Seller Central program where the risks of damages or loss for the products will be borne by us until the products are sold and delivered to the customers, the relevant risks under the Vendor Central program will pass to Amazon once we deliver the products to the Amazon-designated carrier or Amazon. As such, if we continue to strategically increase the sales of our products under the Vendor Central program, we expect, our revenue contribution from Amazon, as our largest customer, to continue to grow.
– 2 – SUMMARY
The following table sets forth the breakdown of our revenue by sales channel for the periods indicated: Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 %tototal % to total % to total % to total %tototal US$’000 revenue US$’000 revenue US$’000 revenue US$’000 revenue US$’000 revenue
Amazon Seller Central ...... 77,509 91.0 102,362 70.7 83,201 48.4 43,733 58.1 45,600 35.3 Vendor Central ...... 7,173 8.4 41,400 28.6 87,284 50.8 30,870 41.0 79,125 61.2 Others(1) ...... 528 0.6 996 0.7 1,434 0.8 647 0.9 4,529 3.5
Total ...... 85,210 100.0 144,758 100.0 171,919 100.0 75,250 100.0 129,254 100.0
Note: (1) Others include chain retailers, other e-commerce marketplaces and our online shopping websites. The table below sets out a breakdown of our revenue by geographic location for the periods indicated: Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 %tototal % to total % to total % to total %tototal Revenue revenue Revenue revenue Revenue revenue Revenue revenue Revenue revenue US$’000 US$’000 US$’000 US$’000 US$’000 North America(1) United States ...... 71,582 84.0 115,246 79.6 136,045 79.1 59,309 78.8 99,028 76.6 Canada and others ...... 1,761 2.1 5,740 4.0 12,589 7.3 4,670 6.2 10,633 8.2 Europe(1)(2) ...... 11,733 13.8 22,391 15.5 21,976 12.8 10,607 14.1 17,125 13.3 Asia(1)(3) ...... 134 0.1 1,381 0.9 1,309 0.8 664 0.9 2,468 1.9 Total ...... 85,210 100.0 144,758 100.0 171,919 100.0 75,250 100.0 129,254 100.0
Notes: (1) For the purpose of this table, geographic locations refer to combination of the locations of our accounts with the sales channels and the locations of customers. (2) Includes the United Kingdom, Germany, Spain, France and Italy. (3) Includes Japan and Vietnam. OUR RELATIONSHIP WITH AMAZON We have cultivated our relationship with Amazon since our inception in 2011. We sell our products primarily through Amazon’s Seller Central and Vendor Central programs. In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, revenue generated from sales through Amazon’s Seller Central program amounted to approximately US$77.5 million, US$102.4 million, US$83.2 million, US$43.7 million and US$45.6 million, respectively, representing approximately 91.0%, 70.7%, 48.4%, 58.1% and 35.3%, respectively, of our total revenue; and revenue generated through Amazon’s Vendor Central program amounted to approximately US$7.2 million, US$41.4 million, US$87.3 million, US$30.9 million and US$79.1 million, respectively, representing approximately 8.4%, 28.6%, 50.8%, 41.0% and 61.2%, respectively, of our total revenue. We also procure services from Amazon. For instance, we work with Amazon Web Services as our cloud computing service provider. We also utilize Amazon’s advertising services to facilitate our sales through Amazon’s Vendor Central and Seller Central programs. We believe our relationship with Amazon is mutually beneficial. As we are able to provide high-quality and well-selling products, we believe that Amazon will continue to be our major customer and sales channel and our relationship with Amazon will remain stable in the future. However, in the event that our relationship with Amazon deteriorates, if there are any unfavorable changes in our current arrangements with Amazon, or if Amazon fails to maintain its market share
– 3 – SUMMARY or brand popularity, our business, financial condition and results of operations may be materially and adversely affected. See ‘‘Risk Factors—Risks Relating to Our Business and Industry— Disruption of our relationship and unfavorable changes in terms of our arrangement with Amazon could have a material adverse effect on our business and results of operations.’’ OUR CUSTOMERS Our customers primarily consist of (i) Amazon; (ii) retail customers who purchase products through Amazon’s Seller Central program; (iii) other customers including chain retailers, retail customers who purchase products through other e-commerce marketplaces or our online shopping websites and other individual or enterprise customers who order products from us directly. In 2017, 2018, 2019 and the six months ended June 30, 2020, our aggregate sales to our five largest customers accounted for approximately 8.6%, 28.8%, 51.1% and 62.9%, respectively, of our total revenue; and our aggregate sales to our largest customer, Amazon, accounted for approximately 8.4%, 28.6%, 50.8% and 61.2%, respectively, of our total revenue. The length of our business relationship with our five largest customers ranges from approximately one to three years. OUR SUPPLIERS Our suppliers are primarily subcontractors and raw material suppliers. In 2017, 2018, 2019 and the six months ended June 30, 2020, purchase value from our five largest suppliers accounted for approximately 42.1%, 54.4%, 51.0% and 55.3% of our total purchase value, respectively; and purchase value from our largest supplier accounted for approximately 10.5%, 17.0%, 23.3% and 19.5% of our total purchase value, respectively. The length of our business relationship with our five largest suppliers ranges from two to six years. COMPETITIVE STRENGTHS We believe the following strengths differentiate us from other industry participants and have enabled us to compete effectively in our industry: (i) presence in the small home appliance online market in the United States with increasingly recognized self-developed brands; (ii) comprehensive product portfolio with strong design and R&D capabilities; (iii) a growing portfolio of smart home devices featuring innovative technologies and automation with the potential to evolve into a home IoT platform; (iv) e-commerce expertise to support our marketing strategies and global penetration; (v) optimized operation with synergistic global value chain and complementary local knowledge; and (vi) an experienced and visionary management team and a collaborative corporate culture. BUSINESS STRATEGIES To achieve our goals, we intend to pursue the following strategies: (i) further upgrade our product mix and expand our product portfolio; (ii) expand geographic coverage and sales channels leveraging our brand recognition; and (iii) continue to invest in technologies with an aim to develop VeSync into a home IoT platform.
SELECTED HISTORICAL FINANCIAL INFORMATION
Selected Consolidated Income Statement
Six months ended Year ended December 31, June 30, 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000
REVENUE...... 85,210 144,758 171,919 75,250 129,254 Costofsales...... (50,512) (88,980) (104,685) (46,021) (67,486) Grossprofit...... 34,698 55,778 67,234 29,229 61,768 PROFITBEFORETAX...... 3,136 5,346 6,934 2,375 27,128 Incometaxexpense...... (1,269) (985) (562) (395) (4,647) PROFIT FOR THE YEAR/ PERIOD...... 1,867 4,361 6,372 1,980 22,481
– 4 – SUMMARY
To cater to evolving consumer needs, we have made continuous efforts to offer new products, such as Levoit air humidifiers and air purifiers in February and March 2017 and Cosori air fryers in October 2018, and upgrade our existing products. As a result of our product development efforts and our successful marketing and advertising strategies, we achieved robust growth in revenue from 2017 to 2019 with a CAGR of 42.0%, particularly in the home environment appliance category and kitchen appliances and dining ware category which recorded significant increases in sales volume. In the first half of 2020, when consumers raised their awareness in maintaining a healthy home environment and better life quality and spent more time shopping online during the outbreak of COVID-19 pandemic, the online retail sales in the United States grew to US$371.9 billion in the first half of 2020, representing a year-on-year growth of approximately 30.0% comparing with the same period in 2019, according to the Frost & Sullivan Report. Thanks to our successful marketing and advertising strategies in previous years which allowed us to achieve better rankings for our key products in 2019, we were able to benefit from the favorable market trends in the first half of 2020 and achieved a revenue growth of 71.7% as compared to the same period in 2019. This revenue growth was primarily driven by the significant increases in the number of units sold for our key product categories, namely home environment appliances (including our premium products air purifiers), kitchen appliances & dinning wares (including our premium products air fryers), and health monitoring devices, which recorded a significant increase of 152.4%, 119.2% and 36.9%, respectively, as compared to the same period in 2019. The following table sets forth the breakdown of our revenue and gross profit margin by brand (Levoit, Etekcity, Cosori and other brands including Eteki and Zestkit) for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 Gross Gross Gross Gross Gross %to profit %to profit %to profit %to profit %to profit total margin rotal margin total margin total margin total margin US$’000 revenue (%) US$’000 revenue (%) US$’000 revenue (%) US$’000 revenue (%) US$’000 revenue (%)
Levoit . . . . 14,638 17.2 47.6 54,064 37.3 41.5 67,410 39.2 42.9 26,808 35.6 42.1 60,387 46.7 50.6 Etekcity . . . 66,194 77.7 39.6 80,338 55.5 37.5 63,444 36.9 34.4 31,826 42.3 37.0 36,464 28.2 43.6 Cosori . . . . 3,546 4.2 35.2 9,581 6.6 30.6 40,966 23.8 40.1 16,529 22.0 37.4 32,348 25.0 47.3 Others . . . . 832 0.9 30.3 775 0.6 33.5 99 0.1 9.1 87 0.1 1.1 55 0.1 13.2
Total: .... 85,210 100.0 40.7 144,758 100.0 38.5 171,919 100.0 39.1 75,250 100.0 38.8 129,254 100.0 47.8
Our Levoit brand products achieved robust revenue growth during the Track Record Period and became our largest and most profitable brand since 2019, driven by the strong sales of our air purifiers in the home environment appliances category. Etekcity brand products contributed largest proportion of revenue to the Group in 2017 and 2018 and became less important starting from 2019 because of keen competition and our shift of our strategic focus on premium key products such as air purifiers and air fryers, which generally had higher gross profit margin. The revenue contribution from Etekcity brand products dropped further in the first half of 2020 because its outdoor recreation products decreased significantly as a result of reduced outdoor activities and travelling during the COVID-19 pandemic. Cosori brand products recorded significant growth in terms of both revenue and gross profit contribution since 2019 after the launch of air fryers in the forth quarter of 2018, which was classified in the category of kitchen appliances & dining ware.
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The following table sets forth the breakdown of units sold, revenue, average selling price and gross profit margin by product category for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 Average Gross Average Gross Average Gross Average Gross Average Gross selling profit selling profit selling profit selling profit selling profit Units Revenue price margin Units Revenue price margin Units Revenue price margin Units Revenue price margin Units Revenue price margin US$’000 US$ % US$’000 US$ % US$’000 US$ % US$’000 US$ % US$’000 US$ %
Homeenvironmentappliances.... 165,773 10,335 62.3 44.9 777,447 48,202 62.0 44.7 1,222,703 64,431 52.7 44.8 441,276 25,174 57.0 43.7 1,113,927 59,785 53.7 51.1 Kitchen appliances & dining ware . . 717,898 11,888 16.6 36.9 1,080,518 18,539 17.2 35.0 1,446,886 48,105 33.2 40.4 539,227 19,387 36.0 38.5 1,182,079 39,145 33.1 48.2 Healthmonitoringdevices...... 903,349 17,771 19.7 41.3 1,230,303 24,878 20.2 39.6 1,436,767 25,251 17.6 36.9 750,103 14,124 18.8 39.5 1,027,220 19,182 18.7 45.7 Homeimprovementdevices...... 704,559 18,004 25.6 43.3 801,233 19,908 24.8 29.8 500,627 9,339 18.7 13.8 207,329 4,070 19.6 22.3 112,561 2,074 18.4 15.9 Outdoorrecreationproducts..... 768,334 14,499 18.9 42.4 771,298 19,388 25.1 39.2 628,581 12,792 20.4 33.3 295,106 6,241 21.1 36.2 205,439 3,641 17.7 25.8 Tools...... 475,258 7,798 16.4 39.1 599,507 8,499 14.2 34.3 631,801 8,299 13.1 36.8 304,984 4,445 14.6 34.3 262,695 3,962 15.1 51.3 Others...... 218,477 4,915 22.5 27.1 218,100 5,344 24.5 28.2 147,301 3,702 25.1 27.1 69,907 1,809 25.9 27.5 50,624 1,465 28.9 17.7
Total: ...... 3,953,648 85,210 21.6 40.7 5,478,406 144,758 26.4 38.5 6,014,666 171,919 28.6 39.1 2,607,932 75,250 28.9 38.8 3,954,545 129,254 32.7 47.8 Home improvement devices constituted approximately 21.1%, 13.8%, 5.4% and 1.6%, respectively, of total revenue and the average selling price was on a decreasing trend during the Track Record Period. The decrease was because of (i) more intense competition for products such as smart switches, outlets and salt lamps; and (ii) our increasing focus on our premium key products. Outdoor recreation products constituted approximately 17.0%, 13.4%, 7.4% and 2.8%, respectively, of our total revenue in 2017, 2018, 2019 and the six months ended June 30, 2020, and the average selling price and sale volume were on decreasing trend since 2018. The decrease was mainly due to low entry barrier resulting more intense competition in this category and reduction of outdoor activities and travel during the COVID-19 pandemic. The following table sets forth the gross profit and gross profit margin by sales channel for the periods indicated: Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 Gross Gross Gross Gross Gross Gross profit Gross profit Gross profit Gross profit Gross profit profit margin profit margin profit margin profit margin profit margin US$’000 % US$’000 % US$’000 % US$’000 % US$’000 %
Amazon SellerCentral...... 31,806 41.0 38,185 37.3 28,847 34.7 14,338 32.8 19,137 42.0 VendorCentral...... 2,749 38.3 17,208 41.6 38,019 43.6 14,565 47.2 40,235 50.8 Others(1) ...... 143 27.1 385 38.7 368 25.7 326 50.4 2,396 52.9 Total ...... 34,698 40.7 55,778 38.5 67,234 39.1 29,229 38.8 61,768 47.8
Note: (1) Others include chain retailers, other e-commerce marketplaces and our online shopping websites. The gross profit margin from our sales through Seller Central program was on a general decreasing trend while our sales through Vendor Central program was on a general increasing trend during the three years ended December 31, 2019 mainly because of the difference in product mix in each program. We gradually and strategically sell our key products, which are generally more profitable, through Vendor Central program. Generally, we do not offer the same product for sale through both the Seller Central program and the Vendor Central program in the United States to avoid unnecessary competition. However, as a general principle of pricing,weusetheestimated profitability in Seller Central program as a benchmark when negotiating terms with Amazon for the Vendor Central program. Our Directors confirm that, our profitability for sales of comparable products under the two programs of Amazon should not have material difference. During the six months ended June 30, 2020, our gross profit margin increased for both the Seller Central program and the Vendor Central program as a result of the increasing revenue contribution from premium product categories of home environment appliances and kitchen appliances & dining ware in the first half of 2020 in both the United States and other countries.
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Our selling and distribution expenses was on increasing trend during the Track Record Period, which was mainly due to (i) an increase in commission to platform as our sales generated through Seller Central program increased during the relevant period; and (ii) an increase in marketing and advertising expenses reflecting our enhanced advertising activities. For details, please see ‘‘Financial Information—Principal Components of Consolidated Statements of Profit or Loss— Selling and Distribution Expenses’’. Our administrative expenses increased significantly during the Track Record Period mainly due to (i) an increase in research and development expenses for new product development and upgrading existing products; (ii) an increase in professional fees and listing expenses in relation to legal proceeding and preparation of the Listing. For details, please see ‘‘Financial Information—Principal Components of Consolidated Statements of Profit or Loss—Administrative Expenses’’. We recorded foreign exchange gain, net of approximately US$58,000 and US$0.4 million in 2018 and 2019, respectively as a result of depreciation of RMB against the U.S. dollar. For details, please see ‘‘Financial Information—Principal Components of Consolidated Statements of Profit or Loss—Other Income and Gains’’ for details. Our net profit margin increased significantly to 17.4% for the six months ended June 30, 2020. That was primarily due to (i) higher proportion of sales from our home-appliances-related categories such as home environment appliances, kitchen appliances and dining ware and health monitoring devices in our product mix, which were our most profitable categories, accounting for 91.4% of total revenue in the first half of 2020; and (ii) a lower rate of increase in selling and distribution expenses and administrative expenses due to less promotional activities held in the first half of 2020 and economies of scale for our fixed costs. Summary Consolidated Balance Sheet As of As of December 31, June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000 Totalnon-currentassets...... 7,013 6,718 12,728 15,604 Totalcurrentassets...... 31,730 45,761 75,922 84,317 — Inventories...... 21,969 25,420 33,278 37,924 — Trade receivables ...... 1,574 3,931 17,880 18,621 — Prepayments, other receivables andotherassets...... 4,671 5,585 7,415 10,519 Totalnon-currentliabilities...... 6,495 3,017 8,620 13,832 Totalcurrentliabilities...... 27,087 41,098 63,636 51,960 — Tradepayables...... 10,026 8,201 19,418 32,033 — Otherpayablesandaccruals...... 4,298 10,157 14,367 9,013 — Interest-bearing bank and other borrowings. 4,276 13,999 18,354 4,601 Netcurrentassets...... 4,643 4,663 12,286 32,357 Netassets...... 5,161 8,364 16,394 34,129 Total equity...... 5,161 8,364 16,394 34,129 Summary Consolidated Cash Flows Six months ended Year ended December 31, June 30, 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 Operating cash flows before changes in workingcapital...... 4,835 8,869 10,795 4,318 30,248 Changesinworkingcapital...... (9,773) (2,660) (8,311) (6,993) (1,157) Incometaxpaid...... (466) (3,384) (3,744) (1,792) (318) Net cash flows (used in)/from operating activities...... (5,404) 2,825 (1,260) (4,467) 28,773 Net cash flows (used in) investing activities...... (1,574) (929) (1,833) (1,070) (6,468) Net cash flows from financing activities . 8,824 5,162 2,372 (2,793) (16,375) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS. . 1,846 7,058 (721) (8,330) 5,930 CASH AND CASH EQUIVALENTS AT THEENDOFYEAR/PERIOD...... 2,843 9,856 9,115 1,597 15,045
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We recorded negative operating cash flow in 2017 and 2019 and the six months ended June 30, 2019, primarily due to the increase in inventories and trade receivables. See ‘‘Risk Factors— Risks Relating to Our Business and Industry—We had net cash used in operating activities in 2017, 2019 and the six months ended June 30, 2019 , respectively’’ for details. In view of our business operation and seasonal fluctuations, we generally maintain inventories sufficient for our sales for at least three months, particularly in advance of our sales peak in the second half of the year and generallywealsograntedacreditperiodof30to60daystoAmazonforsalesundertheVendor Central program. As such, there are timing differences between paying our suppliers and receiving payment from our customers. In order to better manage our working capital, we negotiate with our subcontractorstoobtaincreditperiodofupto90daystoshortentheaforementionedtiming difference. SUMMARY OF KEY FINANCIAL RATIOS
Six months ended/As of Year ended/As of December 31, June 30, 2017 2018 2019 2020
Currentratio...... 1.2times 1.1times 1.2times 1.6times Quickratio...... 0.4times 0.5times 0.7times 0.9times Gearingratio...... 214.1% 205.9% 162.6% 52.9% Returnontotalassets...... 4.8% 8.3% 7.2% N/A Returnonequity...... 36.2% 52.1% 38.9% N/A Interestcoverage...... 5.9times 6.7times 6.4times N/A
For details with respect to the definition and analysis for each key financial ratio, see ‘‘Financial Information—Key Financial Ratios.’’ COMPETITIVE LANDSCAPE We face competition from a number of enterprises that provide products similar to ours. According to the Frost & Sullivan Report, the competition of global small home appliance and smart home device industry has gradually intensified in recent years. Some major market players have accumulated high levels of financial, technological and marketing resources and may be able to devote greater resources to the development, promotion, sales and support of their products and services. We mainly compete with other sellers of small home appliances and smart home devices in the markets where we operate on price, quality, industry experience, technology, sales channel and brand awareness. SINO-U.S. TRADE WAR In 2018 and 2019, the U.S. government and the PRC government imposed several rounds of tariffs on products shipped from the PRC and U.S., respectively. On January 15, 2020, the U.S. and PRC governments signed the U.S.-China Economic and Trade Agreement. The United States has been our primary market during the Track Record Period. As a result of the Sino-U.S. trade war, a number of our products were subject to additional tariffs. In September 2018, the United States Trade Representative initiated a tariff exclusion process for certain products. Once obtained, the tariff exclusion could apply from the original date of the additional duties and expire one year from the publication of the notice of product exclusion. Among our
– 8 – SUMMARY products subject to additional tariffs, some are included in the product exclusion list and enjoyed exemptions from additional tariffs, the exemptions enjoyed by which expired or will expire on July 31, 2020, October 1, 2020 and December 31, 2020, respectively. The table below sets forth the list of our top selling products which are subject to additional tariff:
Additional Tariff Incurred Revenue Contribution Six months Six months ended Effective Period of Year ended ended Additional Year ended December 31 June 30, Effective Date of Exclusion from December 31, June 30, Product Tariff Rate 2018 2019 2020 Additional Tariff Additional Tariff 2019 2020 US$’000 US$’000 US$’000
Airpurifier...... 25% 2,302 941 — July 6, 2018 May 14, 2019 to 25.1% 32.7% December 31, 2020 Air purifier filter ...... 25% 269 422 619 July6,2018 4.0% 5.6% Digital laser infrared 25% 209 462 — August 23, 2018 July 31, 2019 to 3.7% 2.4% thermometer...... July 30, 2020(2) Air fryer toaster oven . . . . 10% — 410 51 September 24, 2018 April 22, 2020 to 0.9% 2.1% December 31, 2020 25% May 10, 2019 Saltlamp...... 10% 40 116 22 September24,2018 1.4% 0.4% 25% May 10, 2019 Smartwifioutlet...... 10% 110 308 29 September24,2018 1.4% 0.3% 25% May 10, 2019 Others(1) ...... 372 645 214 18.4% 9.7% Total ...... 3,302 3,304 935
Notes: (1) Among our products other than the top selling products listed above, we also have other products that are subject to additional tariff, such as multi-meter, power cable, reflector, speaker, sealer, water filter pitcher. These products are subject to additional tariff at rates ranging between 7.5% and 25%. The effective dates of additional tariff are July 6, 2018, August 23, 2018, September 24, 2018, May 10, 2019, September 1, 2019 and February 14, 2020, as the case may be. Some of these products were within the additional tariff exclusion list. Certain exclusions ended on September 17, 2020. (2) Digital laser infrared thermometer is subject to additional tariff of 25% after the expiry of exclusion period. In 2017, 2018, 2019 and for the six months ended June 30, 2020, our customs duties incurred amounted to US$1.2 million, US$4.9 million, US$5.5 million, and US$2.2 million, representing 1.5%, 4.2%, 3.8% and 4.0% of our total cost of sales, respectively. In 2018, 2019 and for the six months ended June 30, 2020, we incurred customs duties amounting to US$3.3 million, US$3.3 million and US$0.9 million, respectively, as a result of the additional tariffs imposed on our products, representing 67.3%, 60.0% and 40.9% of our total customs duties incurred during the corresponding period, respectively. In addition, we recorded tax reimbursement in the amount of US$2.3 million and US$0.1 million in 2019 and the six months ended June 30, 2020, respectively. The imposition of additional tariff in the U.S. had a negative impact on our profitability. In response to the Sino-U.S. trade war, we have adopted certain measures to minimize the financialimpactonus.See‘‘Business—Sino-U.S. Trade War’’ for details. However, we cannot predict how the Sino-U.S. relationship may develop. If the Sino-U.S. trade war continues to intensity, our business, results of operations and financial position may be materially and adversely affected. OUR CONTROLLING SHAREHOLDERS Immediately following the completion of the Capitalization Issue and the Global Offering assuming the Over-allotment Option is not exercised and without taking into account any Shares which may be allotted and issued upon the exercise of any options which may be granted under the Share Option Scheme, Karis I LLC, Karis II LLC, Caerus BVI and Arceus BVI will hold an aggregate of approximately 69.6130% of the issued share capital of our Company.
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Each of Karis I LLC and Karis II LLC is wholly owned by North Point Trust Company L.L.C., the trustee of the Annuity Trusts, on trust for the benefit of the Annuity Trusts, which were established by Ms. Yang for the ultimate benefit of the Family Trusts pursuant to certain arrangements, of which Ms. Yang is both the settlor and trustee. Pursuant to the Annuity Trusts, Ms. Yang, as the powerholder, has the power to appoint additional trustees and remove and replace North Point Trust Company L.L.C., and as the sole manager of Karis I LLC and Karis II LLC, has the authority to make all decisions in relation to them.Ms.Yangisdeemedtobeinterestedinboth Karis I LLC and Karis II LLC, and hence the Shares held by them. Caerus BVI is wholly owned by Mr. Yang Yuzheng. Arceus BVI is wholly owned by Mr. Yang Hai. Ms. Yang, Mr. Yang Yuzheng and Mr. Yang Hai are family members of one another. Accordingly, Ms. Yang, Mr. Yang Yuzheng, Mr. Yang Hai, Karis I LLC, Karis II LLC, Caerus BVI, Arceus BVI and North Point Trust Company L.L.C. are regarded as a group of Controlling Shareholders. FUTURE PLANS AND USE OF PROCEEDS We estimate that we will receive an aggregate net proceeds of approximately HK$1,330.0 million (equivalent to around US$171.6 million) from the Global Offering, assuming that the Over- allotment Option is not exercised (after deducting underwriting commissions and estimated expenses payable by us in connection with the Global Offering, and assuming an Offer Price of HK$5.10 per Offer Share, being the mid-point of the indicative Offer Price range). We currently intend to apply such net proceeds in the following manner: (i) approximately 30% of the proceeds, or approximately HK$399.0 million (equivalent to around US$51.4 million), is expected to be used for R&D of new products and upgrade and iteration of existing products; (ii) approximately 25% of the net proceeds, or approximately HK$332.5 million (equivalent to around US$42.9 million), is expected to be used in expanding our sales channels and geographic coverage, and enhancing our brand awareness; (iii) approximately 25% of the net proceeds, or approximately HK$332.5 million (equivalent to around US$42.9 million), is expected to be used to continuously upgrade the VeSync app into a home IoT platform; (iv) approximately 10% of the net proceeds, or approximately HK$133.0 million (equivalent to around US$17.2 million), is expected to be used in developing smart solutions for business customers, including smart security solutions; and (v) approximately 10% of the net proceeds, or approximately HK$133.0 million (equivalent to around US$17.2 million), is expected to be used for our general working capital. For details, see ‘‘Future Plans and Use of Proceeds.’’ GLOBAL OFFERING STATISTICS Basedonthe Based on the Offer Price of Offer Price of HK$4.68 HK$5.52 per Share per Share
Market capitalization(1)...... HK$5,256.1 HK$6,199.5 million million Unaudited pro forma adjusted consolidated net tangible US$0.17 US$0.2 assets attributable to owners of our Company per Share(2) (HK$1.32) (HK$1.55)
Notes: (1) The calculation of market capitalization is based on 1,123,104,800 Shares expected to be in issue immediately following the completion of the Global Offering and the Capitalization Issue, without taking into account Shares to be issued pursuant to the exercise of the Over-allotment Option and any options to be granted under the Share Option Scheme. (2) Please refer to ‘‘Appendix II—Unaudited Pro Forma Financial Information’’ for the bases and assumptions in calculating these figures.
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LISTING EXPENSES Based on the mid-point Offer Price of HK$5.10, the total estimated listing related expenses payable by us in connection with the Global Offering is approximately US$13.3 million (equivalent to HK$103.1 million and assuming the Over-allotment Option is not exercised), representing approximately 7.2% of the total proceeds from the Global Offering, of which approximately US$0.6 million, US$0.9 million and US$2.2 million, respectively, was charged to our consolidated income statement in 2018 and 2019 and the six months ended June 30, 2020, respectively. We estimate that approximately US$2.2 million will be charged to our consolidated income statement for the year ending December 31, 2020, and expect the remaining balance of approximately US$7.4 million to be capitalized. Our Directors would like to emphasize that the listing expenses stated above are the current estimation for reference purpose only and the actual amount to be recognized may differ from this estimation. DIVIDEND In 2018, a subsidiary of our Group declared dividends of US$0.6 million to the then shareholders. In June 2020, our Company declared dividend of US$4.2 million (equivalent to approximately RMB29.9 million) and such amount has been distributed out of share premium of our Company and settled in cash. Any amount of dividends we pay will be at the discretion of our Directors and will depend on our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our Directors consider relevant. Any declaration and payment as well as the amount of dividends will be subject to our constitutional documents and the Cayman Companies Law. Our Shareholders in a general meeting may approve any declaration of dividends, which must not exceed the amount recommended by our Board. No dividend will be declared or payable except out of our profit and reserves lawfully available for distribution. Our future declarations of dividends may or may not reflect our historical declarations of dividends and will be at the absolute discretion of the Board. NON-COMPLIANCE MATTERS AND LEGAL PROCEEDINGS During Track Record Period, certain of our PRC subsidiaries failed to make adequate social insurance and housing provident fund contributions, As of the Latest Practicable Date, we had not received such a demand from the relevant governmental authority. Our PRC Legal Advisers are of the view that the risk that we would be subject to material administrative penalties by relevant authorities is remote. Our Directors consider that such non-compliance incident would not have a material adverse effect on our business, financial condition and results of operations. During the Track Record Period, we were involved in certain legal proceedings or disputes in the ordinary course of business, including product liability disputes with customers and patents infringement disputes. For details, see ‘‘Business—Legal Proceedings and Compliance—Legal Proceedings.’’ RECENT DEVELOPMENTS SUBSEQUENT TO THE TRACK RECORD PERIOD Effects of the COVID-19 Outbreak Toward the end of 2019, a respiratory illness caused by a highly infectious novel coronavirus was detected. The World Health Organization, or WHO, later named the novel coronavirus as COVID-19. In March 2020, the WHO characterized the outbreak of COVID-19 a pandemic. The outbreak has resulted in a high number of fatalities and caused an adverse impact on the livelihood of the people and the economy worldwide. Our Directors are of the view that the recent outbreak of COVID-19 worldwide has had the following effect on our business, results of operations and financial condition: . Product sales. As of the date of this prospectus, we did not experience any material cancellation of orders, with respect to all of our products, either from our customers or our suppliers. Sales of our outdoor recreation products, such as air mattress and camping lanterns, decreased to US$3.6 million for the six months ended June 30, 2020 from US$6.2 million in the corresponding period due to reduced outdoor and travel activity. However, sales of outdoor recreation products only accounted for a small portion of our total revenue, and sales of the rest of our products all recorded strong growth in the first half of 2020. The COVID-19 outbreak did not have any material adverse impact on the selling price of our other products.
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. Supply chain. Governments across the world have taken various measures to manage cases and reduce potential spread and impact of infection. In the PRC, the operations of our suppliers were suspended in February 2020, as their employees were not able to return to work due to the strict travel restriction and mandatory quarantine measures. From February 2020 to March 2020, our top five suppliers experienced suspension of operation between seven to 35 days based on information they provided to us. As a result, we experienced corresponding delays in product delivery by these suppliers. Most of our top five suppliers resumed operation in late February 2020. . Production. We manufactured a small portion of our products at our Dongguan Production Base during the Track Record Period. Due to the COVID-19 outbreak, our employees in the Dongguan Production Base were not able to return to work as expected and thus our production capacity was negatively affected for 10 days in February 2020. Our revenue contributable to products produced at our Dongguan Production Base decreased to approximately US$2.3 million in the first half of 2020 from approximately US$3.2 million in the first half of 2019. As the quarantine measures in China were lifted, substantially all of our employees in China have returned to work, and our production has resumed normal operation. . Logistics and fulfillment. For our Amazon orders, because Amazon prioritized shipments of medical supplies, household staples and other high-demand products, our inbound shipment to Amazon was temporarily disabled for approximately three weeks between mid-March and early April 2020. As a result, our shipment value based on contract price (without deducting further discounts and rebates) to Amazon under the Vendor Central program decreased by approximately 57.4% and 10.1%, respectively, in March 2020 and April 2020 as compared to that in February 2020. Since then, Amazon has endeavored to restore its fulfillment capacity by increasing workforce. After the inbound shipment to Amazon resumed in mid-April 2020, our shipment value based on contract price (without deducting further discounts and rebates) to Amazon under the Vendor Central program increased by approximately 46.9% and 52.1%, respectively, in May 2020 and June 2020 as compared to that in February 2020. Our sales (calculated based on orders received from our customers) in the United States under the Seller Central program were not materially and adversely impacted by the temporary suspension of inbound shipment to Amazon, as we maintained inventories in Amazon’s warehouses that were sufficient for orders placed by our customers during the temporary suspension period. As a result, sales orders in the United States under the Seller Central program remained relatively stable in March2020ascomparedtothatinFebruary2020.InthesixmonthsendedJune30, 2020, our average inventory turnover days remained relatively stable as compared to our average inventory turnover days in 2017, 2018 and 2019. As of the date of this prospectus, Amazon’s fulfillment services had generally resumed normal operation. . Expansion plan. The COVID-19 outbreak may have negative impact to our expansion plan. We canceled or suspended business trips to visit potential new markets as a result of the mandatory quarantine measures and reduction of international flights. In addition, due to the strengthened travel restrictions, traveling overseas may incur additional costs and take a longer time. As such, our geographic expansion is slightly affected. According to the Frost & Sullivan Report, due to the COVID-19 pandemic, consumer behavior was significantly influenced as demonstrated by higher ratio of online retail sales to total retail sales. Since the COVID-19 pandemic, offline retail sales of small home appliance has been significantly affected, but online retail sales have accelerated. Our revenue and gross profit, which was largely generated from online sales, increased from approximately US$75.3 million and US$29.2 million for the six months ended June 30, 2019 to approximately US$129.3 million and US$61.8 million for the six months ended June 30, 2020, respectively. Based on our unaudited management accounts for the nine months ended September 30, 2020, we experienced a significant increase in revenue, gross profit and net profit as compared to the same period in 2019, mainly because customers spent more time shopping online and their demand for home products increased. However, the impact of COVID-19 pandemic on customer’s shopping preference is one-off in nature and may not sustain when the COVID-19 pandemic becomes under control. The gross profit margin for the nine months ended September 30, 2020 also increased as compared to that in the same period in 2019, primarily driven by the increased sales of our key products, which are generally more profitable.
– 12 – SUMMARY
In the worst case scenario where we are forced to reduce or suspend a substantial part of its business operations, due to the COVID-19 pandemic, we estimate that our existing financial resources (including cash and bank balances) as of June 30, 2020 could satisfy our necessary expenses for at least 20 months from June 30, 2020 based on certain assumptions. Key assumptions for the estimates include: (i) we will not generate any revenue due to overall suspension of business; (ii) we will incur expenses to maintain our operations at a minimum level, primarily our estimated monthly fixed costs (including staff costs based on the minimum wage level required by local laws and regulations and rental costs); (iii) the settlement of account receivables and payables will follow historical settlement patterns; (iv) we will use the immediate cash and deposits as of June 30, 2020; (v) we will repay the short-term bank loans as of June 30, 2020 and no further bank facilities available; (vi) the expansion plan will be suspended; (vii) the 10% of the proceeds from the Global Offering is allocated for general business operations and working capital; (viii) no further dividend will be declared and paid; and (ix) there will be no material changes in the near future that would significantly affect the aforementioned key assumptions. Such extreme situation may or may not occur. The abovementioned analysis is for illustrative purpose only and our Directors currently assess that the likelihood of such situation is remote. In response to the COVID- 19 outbreak, we have implemented a contingency plan and have adopted enhanced hygiene and precautionary measures across our offices worldwide. In addition, we are in contact with multiple logistic companies for product deliveries to ensure delivery on time. We also adopted measures to increase our sales on other e-commerce marketplaces to diversify our sales channels in case Amazon’s operations are interrupted by the COVID-19 outbreak. As such, our Directors are of the view that the COVID-19 outbreak did not have any material adverse impact on our business operation and financial position as of the date of this prospectus. NO MATERIAL ADVERSE CHANGE Our Directors further confirm that there has been no event, or any material adverse change in our financial or trading position or prospects since June 30, 2020 and up to the date of this prospectus, which would have materially affected the information presented in our consolidated financial statements included in the Accountants’ Report set forth in Appendix I to this prospectus. SUMMARY OF MATERIAL RISK FACTORS Our business and the Global Offering involve certain risks as set out in the section headed ‘‘Risk Factors’’ in this prospectus. You should read that section in its entirety carefully before you decide to invest in our Shares. Some of the major risks we face include: (i) disruption of our relationship and unfavorable changes in terms of our arrangement with Amazon could have a material adverse effect on our business and results of operations; (ii) we face various types of competition and may be unable to compete effectively in relevant markets; (iii) our continued growth depends on our research and development capabilities and our research and development efforts may not be successful; (iv) maintaining the trusted brand image of our products is critical to our success, and any failure to do so could severely damage our reputation and brand, which would have a material adverse effect on our business, financial condition and results of operations; and (v) the Sino-U.S. trade war and other trade or import protection policies may materially and adversely affect our business.
– 13 – DEFINITIONS
In this prospectus, unless the context otherwise requires, the following words and expressions shall have the following meanings:
‘‘Adiman Netherlands’’ Adiman B.V., a limited liability company incorporated in the Netherlands on January 4, 2016 and an indirect wholly-owned subsidiary of our Company
‘‘Accountants’ Report’’ the accountants’ report set out in Appendix I to this prospectus
‘‘affiliate(s)’’ with respect to any specific person, any other person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified person
‘‘Annuity Trust I’’ Lin Yang Annuity Trust I, an irrevocable grantor retained annuity trust with a term of two years established by Ms. Yang, of which North Point Trust Company L.L.C. is the trustee for the benefit of Family Trust I
‘‘Annuity Trust II’’ Lin Yang Annuity Trust II, an irrevocable grantor retained annuity trust with a term of three years established by Ms. Yang, of which North Point Trust Company L.L.C. is the trustee for the benefit of Family Trust II
‘‘Annuity Trust III’’ Lin Yang Annuity Trust III, an irrevocable grantor retained annuity trust with a term of two years established by Ms. Yang, of which North Point Trust Company L.L.C. is the trustee for the benefit of Family Trust I
‘‘Annuity Trust IV’’ Lin Yang Annuity Trust IV, an irrevocable grantor retained annuity trust with a term of three years established by Ms. Yang, of which North Point Trust Company L.L.C. is the trustee for the benefit of Family Trust II
‘‘Annuity Trusts’’ Annuity Trust I, Annuity Trust II, Annuity Trust III and Annuity Trust IV
‘‘Application Form(s)’’ WHITE Application Form(s), YELLOW Application Form(s) and GREEN Application Form(s), or where the context so requires, any of them which is used in relation to the Hong Kong Public Offering
‘‘Arceus BVI’’ Arceus Co., Ltd, a limited liability company incorporated in the BVI on January 17, 2019, which is directly wholly owned by Mr. Yang Hai, and one of our Controlling Shareholders
– 14 – DEFINITIONS
‘‘Arcsync BVI’’ Arcsync Co., Ltd, a limited liability company incorporated in the BVI on February 27, 2019 and a direct wholly-owned subsidiary of our Company
‘‘Arovast US’’ Arovast Corporation, a general stock corporation incorporated in the United States on October 20, 2016 and an indirect wholly-owned subsidiary of our Company
‘‘Articles’’ or ‘‘Articles of the amended and restated articles of association of our Association’’ Company conditionally adopted on December 1, 2020 and effective on the Listing Date, as amended or supplemented from time to time, a summary of which is set out in Appendix III to this prospectus
‘‘associate(s)’’ has the meaning ascribed to it under the Listing Rules
‘‘Atekcity US’’ Atekcity Corporation, a general stock corporation incorporated in the United States on July 3, 2012 and an indirect wholly- owned subsidiary of our Company
‘‘Audit Committee’’ the audit committee of our Board
‘‘BOCT’’ Bank of Communications Trustee Limited, an Independent Third Party appointed by our Company to act as the trustee of the Share Award Trust
‘‘Board’’ the board of Directors
‘‘BNP’’ BNP Paribas Securities (Asia) Limited, a licensed corporation under the SFO and permitted to carry out Type 1 (dealing in securities), Type 2 (dealing in future contracts), Type 4 (advising on securities) and Type 6 (advising on corporate finance) of the regulated activity as defined under the SFO, acting as joint sponsor to the Listing
‘‘business day’’ a day (other than a Saturday, Sunday or public holiday) on which licensed banks in Hong Kong are generally open for normal banking business
‘‘BVI’’ the British Virgin Islands
‘‘CAGR’’ compound annual growth rate
– 15 – DEFINITIONS
‘‘Capitalization Issue’’ the issue of 841,052,169 Shares to be made upon capitalization of an amount of HK$8,410,521.69 standing to the credit of the share premium account of our Company which is set forth in the section headed ‘‘Statutory and General Information—A. Further Information about our Company and its Subsidiaries— 3. Written Resolutions of all the Shareholders passed on December 1, 2020’’ in Appendix IV to this prospectus
‘‘Cayman Companies Law’’ or the Companies Law, Cap 22 (Law 3 of 1961, as consolidated ‘‘Companies Law’’ and revised) of the Cayman Islands, as amended, modified and supplemented from time to time
‘‘Caerus BVI’’ Caerus Co., Ltd, a limited liability company incorporated in the BVI on January 17, 2019, which is wholly owned by Mr. Yang Yuzheng, and one of our Controlling Shareholders
‘‘CCASS’’ the Central Clearing and Settlement System established and operated by HKSCC
‘‘CCASS Clearing Participant’’ a person admitted to participate in CCASS as a direct clearing participant or general clearing participant
‘‘CCASS Custodian Participant’’ a person admitted to participate in CCASS as a custodian participant
‘‘CCASS Investor Participant’’ a person admitted to participate in CCASS as an investor participant who may be an individual or joint individuals or a corporation
‘‘CCASS Operational Procedures’’ the operational procedures of HKSCC in relation to CCASS, containing the practices, procedures and administrative requirements relating to the operations and functions of CCASS, as from time to time in force
‘‘CCASS Participants’’ collectively, a CCASS Clearing Participant, a CCASS Custodian Participant or a CCASS Investor Participant
‘‘Chen Wangcai BVI’’ Chen Wangcai Holdings Limited, a limited liability company incorporated in the BVI on February 27, 2019, which is wholly owned by an Independent Third Party
– 16 – DEFINITIONS
‘‘Chengdu Xiaodu’’ Chengdu City Xiaodu Information Technology Company Limited (成都市曉都信息科技有限公司), a limited liability company established in the PRC on October 30, 2015, which was deregistered on July 15, 2020 and ceased to be a subsidiary of our Company
‘‘China’’ or ‘‘PRC’’ the People’s Republic of China, but for the purpose of this prospectus only and except where the context requires otherwise, references in this prospectus to ‘‘China’’ or ‘‘PRC’’ do not include Hong Kong, the Macau Special Administrative Region and Taiwan
‘‘Chongqing Xiaodao’’ Chongqing Xiaodao Information Technology Company Limited (重慶曉道信息科技有限公司), a limited liability company established in the PRC on April 8, 2015 and an indirect wholly-owned subsidiary of our Company
‘‘close associate(s)’’ has the meaning ascribed to it under the Listing Rules
‘‘Companies Ordinance’’ the Companies Ordinance (Chapter 622 of the Laws of Hong Kong), as amended, modified and supplemented from time to time
‘‘Companies (Winding Up and the Companies (Winding Up and Miscellaneous Provisions) Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong), as Ordinance’’ amended, modified and supplemented from time to time
‘‘Company’’ or ‘‘our Company’’ Vesync Co., Ltd, an exempted company with limited liability incorporated in the Cayman Islands on January 9, 2019, and registered as a non-Hong Kong company under Part 16 of the Companies Ordinance on June 15, 2020
‘‘connected person(s)’’ has the meaning ascribed to it under the Listing Rules
‘‘Controlling Shareholders’’ has the meaning ascribed to it under the Listing Rules and, in the context of this prospectus, refers to Karis I LLC, Karis II LLC,CaerusBVI,ArceusBVI,NorthPointTrustCompany L.L.C., Ms. Yang, Mr. Yang Yuzheng and Mr. Yang Hai
‘‘core connected person(s)’’ has the meaning ascribed to it under the Listing Rules
‘‘Corporate Governance Code’’ the Corporate Governance Code and Corporate Governance Report as set in Appendix 14 to the Listing Rules, as amended, supplemented or otherwise modified from time to time
– 17 – DEFINITIONS
‘‘Cosori US’’ Cosori Corporation, a general stock corporation incorporated in the United States on September 8, 2015 and an indirect wholly-owned subsidiary of our Company
‘‘COVID-19’’ the disease caused by severe acute respiratory syndrome coronavirus 2
‘‘Deed of Indemnity’’ the deed of indemnity dated December 1, 2020 entered into by Karis I LLC, Karis II LLC, Caerus BVI, Arceus BVI, Ms. Yang, Mr. Yang Yuzheng and Mr. Yang Hai in favor of our Company (for itself and as trustee for each of its subsidiaries) to provide certain indemnities, further information on which is set forth in the section headed ‘‘Statutory and General Information—D. Other Information—3. Estate Duty, Tax and Other Indemnity’’ in Appendix IV to this prospectus
‘‘Director(s)’’ the director(s) of our Company
‘‘Dongguan Production Base’’ our own production facility located in Dongguan, Guangdong Province in the PRC to manufacture our products
‘‘Dongguan Zhilun’’ Dongguan City Zhilun Electronic Technology Company Limited (東莞巿直侖電子科技有限公司), a limited liability company established in the PRC on February 14, 2017 and an indirect wholly-owned subsidiary of our Company
‘‘Ecomine HK’’ Ecomine Co., Limited, a limited liability company incorporated in Hong Kong on March 25, 2019 and an indirect wholly-owned subsidiary of our Company
‘‘Etekcity Germany’’ Etekcity GmbH, a limited liability company incorporated in Germany on November 16, 2017 and an indirect wholly-owned subsidiary of our Company
‘‘Etekcity Japan’’ Etekcity Company Limited (Etekcity 株式會社), a joint stock company (kabushiki kaisha) established in Japan on January 28, 2019 and an indirect wholly-owned subsidiary of our Company
– 18 – DEFINITIONS
‘‘Etekcity US’’ Etekcity Corporation, a general stock corporation incorporated in the United States on December 5, 2011 and an indirect wholly-owned subsidiary of our Company
‘‘Etekcity Macau’’ Etekcity Company Limited (易特科城有限公司), a limited liability company incorporated in Macau on February 21, 2019 and an indirect wholly-owned subsidiary of our Company
‘‘EU’’ the European Union
‘‘EUR’’ Euros, the lawful currency of the member states of EU
‘‘eWhite Form(s)’’ the application form(s) for the Hong Kong Offer Shares to be issued in the applicant’s own name by submitting applications online through the designated website of eWhite Form at www.ewhiteform.com.hk
‘‘eWhite Form Service Provider’’ the eWhite Form service provider designated by our Company as specified on the designated website at www.ewhiteform.com.hk
‘‘Extreme Conditions’’ extreme conditions caused by a super typhoon as announced by the Government of Hong Kong
‘‘Family Trust I’’ Lin Yang Family Trust I, an irrevocable trust established by Ms. Yang as both the settlor and trustee for the benefit of any children born to or adopted by Ms. Yang and their respective issue
‘‘Family Trust II’’ Lin Yang Family Trust II, an irrevocable trust established by Ms. Yang as both the settlor and trustee for the benefit of Mr. RyanXu,beingMs.Yang’s child, during his lifetime, and any charitable organizations to be subsequently determined by the independent trustee (if any) at its discretion upon its appointment
‘‘Family Trusts’’ Family Trust I and Family Trust II
‘‘Frost & Sullivan’’ Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., an Independent Third Party and an independent market research expert
‘‘Frost & Sullivan Report’’ the industry report prepared by Frost & Sullivan and commissioned by our Company, the content of which is quoted in this prospectus
– 19 – DEFINITIONS
‘‘General Rules of CCASS’’ the terms and conditions regulating the use of CCASS, as may be amended or modified from time to time and where the context so permits, shall include the CCASS Operational Procedures
‘‘Global Offering’’ the Hong Kong Public Offering and the International Offering
‘‘Gongjin BVI’’ The Gongjin Limited, a limited liability company incorporated in the BVI on January 17, 2019, which is wholly owned by Ms. Jiang Junxiu (江均秀) (a director of Yoowo HK)
‘‘GREEN Application Form(s)’’ the application form(s) to be completed by the eWhite Form Service Provider
‘‘Group’’, ‘‘our Group’’, ‘‘we’’ or our Company and its subsidiaries or, where the context ‘‘us’’ otherwise requires, in respect of the period before our Company becoming the holding company of our present subsidiaries, the present subsidiaries of our Company and the businesses carried on by them or their predecessors (as the case may be)
‘‘HL Y’’ The HL Y Limited (千百業鴻樂園貿易有限公司), a limited liability company incorporated in Hong Kong on January 13, 2012, which is wholly owned by Mr. Yang Yuzheng, one of our Controlling Shareholders
‘‘HKFRSs’’ Hong Kong Financial Reporting Standards, which collectively include Hong Kong Accounting Standards, amendments and related interpretations promulgated by the Hong Kong Institute of Certified Public Accountants
‘‘HKSCC’’ Hong Kong Securities Clearing Company Limited, a wholly- owned subsidiary of Hong Kong Exchanges and Clearing Limited
‘‘HKSCC Nominees’’ HKSCC Nominees Limited, a wholly-owned subsidiary of HKSCC
‘‘HK$’’ or ‘‘HK dollars’’ or Hong Kong dollars and cents, the lawful currency of Hong ‘‘cents’’ Kong
‘‘Hong Kong’’ or ‘‘HK’’ the Hong Kong Special Administrative Region of the PRC
– 20 – DEFINITIONS
‘‘Hong Kong Offer Shares’’ the 28,100,000 Shares being initially offered by our Company for subscription at the Offer Price pursuant to the Hong Kong Public Offering, subject to reallocation as described in the section headed ‘‘Structure of the Global Offering’’ in this prospectus
‘‘Hong Kong Public Offering’’ the offering by our Company of the Hong Kong Offer Shares for subscription by the public in Hong Kong for cash at the Offer Price, on and subject to the terms and conditions described in this prospectus and the Application Forms
‘‘Hong Kong Share Registrar’’ Boardroom Share Registrars (HK) Limited
‘‘Hong Kong Underwriters’’ the underwriters of the Hong Kong Public Offering listed in the section headed ‘‘Underwriting—Hong Kong Underwriters’’ in this prospectus
‘‘Hong Kong Underwriting the conditional underwriting agreement dated December 7, Agreement’’ 2020 in relation to the Hong Kong Public Offering entered into among our Company, BNP Paribas Securities (Asia) Limited, Innovax Capital Limited, Innovax Securities Limited, Karis I LLC, Karis II LLC, Caerus Co., Ltd, Arceus Co., Ltd, Yang Lin, Yang Yuzheng, Yang Hai, Chen Zhaojun and the Hong Kong Underwriters
‘‘Independent Third Party(ies)’’ individual(s) or company(ies) who is(are) not a connected person(s) of our Company within the meaning ascribed under the Listing Rules
‘‘Innovax Capital’’ Innovax Capital Limited, a licensed corporation under the SFO to carry on Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities, acting as a Joint Sponsor of the Global Offering
‘‘Innovax Securities’’ Innovax Securities Limited, a licensed corporation under the SFO to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities, being a Joint Global Coordinator, a Joint Bookrunner and a Joint Lead Manager
– 21 – DEFINITIONS
‘‘International Offer Shares’’ the 252,900,000 Shares expected to be initially offered by our Company for subscription pursuant to the International Offering, representing 90% of the initial number of the Offer Shares, subject to re-allocation and the Over-allotment Option as described in the section headed ‘‘Structure of the Global Offering’’ in this prospectus
‘‘International Offering’’ the conditional placing of the International Offer Shares at Offer Price outside the United States in offshore transactions in accordance with Regulation S and in the United States to QIBs only in reliance on Rule 144A or any other available exemption from registration under the U.S. Securities Act, as described in the section headed ‘‘Structure of the Global Offering’’ in this prospectus
‘‘International Underwriters’’ the underwriters of the International Offering, who are expected to enter into the International Underwriting Agreement
‘‘International Underwriting the conditional international underwriting agreement relating to Agreement’’ the International Offering and expected to be entered into among our Company, BNP Paribas Securities (Asia) Limited, Innovax Capital Limited, Innovax Securities Limited, Karis I LLC, Karis II LLC, Caerus Co., Ltd, Arceus Co., Ltd, Yang Lin, Yang Yuzheng, Yang Hai, Chen Zhaojun and the International Underwriters on or about the Price Determination Date
‘‘Joint Bookrunners’’ and BNP Paribas Securities (Asia) Limited, Innovax Securities ‘‘Joint Lead Managers’’ Limited, Haitong International Securities Company Limited, China Industrial Securities International Capital Limited, UOB Kay Hian (Hong Kong) Limited and CMBC Securities Company Limited
‘‘Joint Sponsors’’ the joint sponsors of the listing of the Shares on the Main Board of the Stock Exchange, being BNP Paribas Securities (Asia) Limited and Innovax Capital Limited
‘‘Joint Global Coordinators’’ BNP Paribas Securities (Asia) Limited and Innovax Securities Limited
‘‘Karis I LLC’’ Karis I LLC, a limited liability company incorporated in the United States on March 21, 2019, which is wholly owned by North Point Trust Company L.L.C., the trustee of each of the Annuity Trusts, and one of our Controlling Shareholders
– 22 – DEFINITIONS
‘‘Karis II LLC’’ Karis II LLC, a limited liability company incorporated in the United States on March 21, 2019, which is wholly owned by North Point Trust Company L.L.C., the trustee of each of the Annuity Trusts, and one of our Controlling Shareholders
‘‘Latest Practicable Date’’ November 29, 2020, being the latest practicable date prior to the printing of this prospectus for ascertaining certain information referred to in this prospectus
‘‘L&HYUS’’ L&H Y Trading Inc (formerly known as Oriental Handicrafts Inc), a general stock corporation incorporated in the United States on October 3, 2006 and an indirect wholly-owned subsidiary of our Company
‘‘Listing’’ listing of the Shares on the Main Board of the Stock Exchange
‘‘Listing Committee’’ the listing sub-committee of the board of directors of the Stock Exchange
‘‘Listing Date’’ the date on which dealings of the Shares on the Main Board of the Stock Exchange first commence, which is expected to be on or around December 18, 2020
‘‘Listing Rules’’ the Rules Governing the Listing of Securities on the Stock Exchange, as amended, supplemented or otherwise modified from time to time
‘‘Macau’’ the Macau Special Administrative Region of the PRC
‘‘Main Board’’ the stock exchange (excluding the option market) operated by the Stock Exchange which is independent from and operated in parallel with GEM
‘‘Memorandum’’ or the amended and restated memorandum of association of our ‘‘Memorandum of Association’’ Company, a summary of which is set out in Appendix III to this prospectus, and as amended from time to time
‘‘MOP’’ Macau Pataca, the lawful currency of Macau
‘‘Ms. Yang’’ Ms. Yang Lin (楊琳), an executive Director, our chairperson, chief executive officer, one of our Controlling Shareholders, daughter of Mr. Yang Yuzheng and sister of Mr. Yang Hai
‘‘Mr. Yang Yuzheng’’ Mr. Yang Yuzheng (楊毓正), a non-executive Director, one of our Controlling Shareholders, father of Ms. Yang and Mr. Yang Hai
– 23 – DEFINITIONS
‘‘Mr. Yang Hai’’ Mr. Yang Hai (楊海), an executive Director, our vice president, one of our Controlling Shareholders, son of Mr. Yang Yuzheng and brother of Ms. Yang
‘‘Nomination Committee’’ the nomination committee of the Board established by the Board
‘‘Offer Price’’ the final price per Offer Share in Hong Kong dollars (exclusive of brokerage, SFC transaction levy and the Stock Exchange trading fee) under the Global Offering which is expected to be determined as further described in the section headed ‘‘Structure of the Global Offering’’ in this prospectus
‘‘Offer Shares’’ the Hong Kong Offer Shares and the International Offer Shares, together with, where relevant, any additional Shares to be issued pursuant to the exercise of the Over-allotment Option
‘‘Over-allotment Option’’ the option to be granted by our Company to the International Underwriters exercisable by the Joint Global Coordinators (for themselves and on behalf of the International Underwriters), pursuant to which our Company may be required to allot and issue up to 42,150,000 additional new Shares, representing 15% of the Shares initially available under the Global Offering at the Offer Price, to cover over-allocations in the International Offering (if any) as further described in the section headed ‘‘Structure of the Global Offering’’ in this prospectus
‘‘PRC Legal Advisers’’ Jingtian & Gongcheng, a qualified PRC law firm as the PRC legal advisers to our Company for the Listing
‘‘Price Determination Agreement’’ the agreement to be entered into between the Joint Global Coordinators (for themselves and on behalf of the Underwriters) and our Company on the Price Determination Date to fix and record the Offer Price
‘‘Price Determination Date’’ the date, expected to be on or about December 11, 2020, and in any event not later than December 17, 2020, on which the Offer Price is fixed for the purpose of the Global Offering
– 24 – DEFINITIONS
‘‘Pre-IPO Share Award Scheme’’ the pre-IPO share award scheme adopted by our Company on June 16, 2020 for the benefit of our employees, the principal terms of which are summarized in the section headed ‘‘Statutory and General Information—D. Other Information— 1. Pre-IPO Share Award Scheme’’ in Appendix IV to this prospectus
‘‘Qualified Institutional Buyers’’ qualified institutional buyers as defined in Rule 144A or ‘‘QIBs’’
‘‘Regulation S’’ Regulation S under the U.S. Securities Act
‘‘Remuneration Committee’’ the remuneration committee of the Board
‘‘Renminbi’’ or ‘‘RMB’’ Renminbi, the lawful currency of the PRC
‘‘Reorganization’’ the reorganization of our Group in preparation for the Listing, details of which are set out in the section headed ‘‘History, Reorganization and Corporate Structure’’ in this prospectus
‘‘Rongyi Shanghai’’ Rongyi (Shanghai) Information Technology Company Limited (容懿(上海)信息科技有限公司), a limited liability company establishedinthePRConMarch 17, 2015 and an indirect wholly-owned subsidiary of our Company
‘‘Rule 144A’’ Rule 144A under the U.S. Securities Act
‘‘SAFE’’ State Administration of Foreign Exchange of the PRC (中華人 民共和國國家外匯管理局), the China governmental agency responsible for matters relating to foreign exchange administration, including local branches, when applicable
‘‘SFC’’ the Securities and Futures Commission of Hong Kong
‘‘SFO’’ the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, modified and supplemented from time to time
‘‘Share Award Trust’’ a discretionary trust established on June 16, 2020 with our Company as the settlor and BOCT as the trustee, the details of which are summarized in the section headed ‘‘History, Reorganization and Corporate Structure—Reorganization—(G) Adoption of the Pre-IPO Share Award Scheme and allotment of Shares to BOCT’’ in this prospectus
‘‘Shareholder(s)’’ holder(s) of the Share(s)
– 25 – DEFINITIONS
‘‘Share(s)’’ the ordinary share(s) of nominal value of HK$0.01 each in the share capital of our Company
‘‘Share Option Scheme’’ the share option scheme conditionally adopted by our Shareholders on December 1, 2020, the principal terms of which are summarized in the section headed ‘‘Statutory and General Information—D. Other Information—2. Share Option Scheme’’ in Appendix IV to this prospectus
‘‘Shenzhen Chenbei’’ Shenzhen City Chenbei Technology Company Limited (深圳巿 晨北科技有限公司) (formerly known as Shenzhen City Maoshenhe Import and Export Trading Company Limited (深 圳市茂申和進出口貿易有限公司)), a limited liability company established in the PRC on February 27, 2013 and an indirect wholly-owned subsidiary of our Company
‘‘Shenzhen Dedu’’ Shenzhen City Dedu Technology Company Limited (深圳市得 度科技有限公司), a limited liability company established in the PRC on January 20, 2016, which was deregistered on May 20, 2019 and ceased to be a subsidiary of our Company
‘‘Shenzhen Zhilun’’ Shenzhen City Zhilun Technology Company Limited (深圳市 直輪科技有限公司), a limited liability company established in the PRC on November 20, 2015, which was deregistered on May 30, 2019 and ceased to be a subsidiary of our Company
‘‘Stabilizing Manager’’ BNP Paribas Securities (Asia) Limited
‘‘Stock Borrowing Agreement’’ a stock borrowing agreement expected to be entered into on or about the Price Determination Date between Caerus BVI and the Stabilizing Manager pursuant to which Caerus BVI will agree to lend up to 42,150,000 Shares to the Stabilizing Manager on the terms set forth therein
‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited
‘‘subsidiary(ies)’’ has the meaning ascribed to it under the Listing Rules
‘‘substantial shareholder(s)’’ has the meaning ascribed to it under the Listing Rules
‘‘Takeovers Code’’ The Codes on Takeovers and Mergers and Share Buy-backs, as amended, modified and supplemented from time to time
‘‘Track Record Period’’ the three years ended December 31, 2019 and the six months ended June 30, 2020
– 26 – DEFINITIONS
‘‘Underwriters’’ the Hong Kong Underwriters and the International Underwriters
‘‘Underwriting Agreements’’ the Hong Kong Underwriting Agreement and the International Underwriting Agreement
‘‘United States’’ and ‘‘U.S.’’ the United States of America
‘‘U.S. Securities Act’’ the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder
‘‘U.S. dollars’’ United States dollars, the lawful currency of the United States
‘‘VeSync’’ our software application, available for iOS and Android devices, which is designed to provide our users with an easy- to-use, flexible experience that connects our users to control all their compatible smart devices
‘‘Vesync US’’ Vesync Corporation, a limited liability company incorporated in the United States on April 1, 2015 and an indirect wholly- owned subsidiary of our Company
‘‘Vitasync BVI’’ Vitasync Co., Ltd, a limited liability company incorporated in the BVI on February 27, 2019 and a direct wholly-owned subsidiary of our Company
‘‘WFOE’’ Shenzhen City Chenbei Management Consulting Company Limited (深圳市晨北管理諮詢有限公司), a limited liability company established in the PRC on April 26, 2019 and an indirect wholly-owned subsidiary of our Company
‘‘WHITE Application Form(s)’’ the application form(s) for the Hong Kong Offer Shares for use by the public who require(s) such Hong Kong Offer Shares to be issued in the applicant’s/applicants’ own name(s)
‘‘YELLOW Application the application form(s) for the Hong Kong Offer Shares for Form(s)’’ use by the public who require(s) such Hong Kong Offer Shares to be deposited directly into CCASS
‘‘Yoowo HK’’ Yoowo Co., Ltd (香港融易信息技術有限公司), a limited liability company incorporated in Hong Kong on September 23, 2015 and an indirect wholly-owned subsidiary of our Company
‘‘%’’ per cent
– 27 – DEFINITIONS
The English names of the PRC entities mentioned in this prospectus are translations of their Chinese names. If there is any inconsistency, the Chinese names shall prevail.
Certain amounts and percentage figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.
– 28 – GLOSSARY OF TECHNICAL TERMS
This glossary contains explanations of certain terms used in this prospectus in connection with our Group and our business. The terms and their meanings may not correspond to standard industry meanings or usage of these terms.
‘‘Apple Health’’ a health informatics mobile app developed by Apple that provides a central repository for health and fitness data on iPhone and Apple Watch
‘‘activated devices’’ refers to the smart devices being activated on our VeSync app
‘‘Amazon Alexa’’ virtual assistant developed by Amazon to enable users to control smart devices by using voice commands
‘‘Google Assistant’’ Virtual assistant developed by Google to enable users to access a voice activated virtual helper that is connected to the internet
‘‘IoT’’ or ‘‘Internet of Things’’ the connection of devices (any devices) to the internet using embedded software and sensors to communicate, collect and exchange data with one another
‘‘LED’’ an electronic device that lights up when electricity is passed through it
‘‘PCB’’ printed circuit board, a board with electronic circuits connecting various electronic components
‘‘PCBA’’ printed circuit board assembly, the board after all the components and parts have been soldered and installed on the PCB and now can accomplish the electronic function it was designed for
‘‘Retail Sales Value’’ equals the result of ((online wholesale revenue x (1+estimated online channel markup rate)) x (1+VAT rate) + online retail revenue x (1+VAT rate)) x adjusting factor
‘‘SEO’’ or ‘‘Search Engine a way to improve traffic to a web site by using keywords and Optimization’’ phrases that are unique to a company or product
‘‘Seller Central’’ refers to the seller program on Amazon, where retail customers purchase products through Amazon e-commerce marketplace directly from the seller
– 29 – GLOSSARY OF TECHNICAL TERMS
‘‘Smart home device’’ refers to a convenient home automation system comprising of smart home devices which can be automatically controlled remotely from any internet-connected places using a mobile or other networked device
‘‘Vendor Central’’ refers to the seller program on Amazon, where Amazon makes a bulk purchase order for sellers’ products which Amazon then sells to its customers through Amazon e-commerce marketplace under its own account
‘‘WiFi’’ the name of a wireless networking technology that uses radio waves to provide wireless high-speed internet and network connections
– 30 – FORWARD-LOOKING STATEMENTS
Our Company has included in this prospectus forward-looking statements that are not historical facts, but relate to its intentions, beliefs, expectations or predictions for future event. These forward-looking statements are contained principally in the sections headed ‘‘Summary’’, ‘‘Risk Factors’’, ‘‘Industry Overview’’, ‘‘Business’’,and‘‘Financial Information’’, which are, by their nature, subject to risks and uncertainties.
In some cases, our Company uses the words ‘‘aim’’, ‘‘anticipate’’, ‘‘believe’’, ‘‘continue’’, ‘‘could’’, ‘‘expect’’, ‘‘intend’’, ‘‘may’’, ‘‘plan’’, ‘‘potential’’, ‘‘predict’’, ‘‘project’’, ‘‘propose’’, ‘‘seek’’, ‘‘should’’, ‘‘will’’, ‘‘would’’, ‘‘consider’’, ‘‘estimate’’, ‘‘going forward’’ and similar expressions or statements and the negative of these words to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to:
. our business strategies, plans of operations and our operation and business prospect;
. our capital expenditure and funding plans;
. general economic conditions;
. capital market development;
. the future developments and competitive environment in our industry;
. our financial condition;
. certain statements in the section headed ‘‘Financial Information’’ in this prospectus with respect to trends in prices, volumes and operations;
. margins, overall market trends, risk management and exchange rates;
. the regulatory environment of our industry in general; and
. other statements in this prospectus that are not historical fact.
These forward-looking statements are subject to risks, uncertainties and assumptions, some of which are beyond the control of our Company. In addition, these forward-looking statements reflect the current views of our Company with respect to future events and are not a guarantee of future performance.
Additional factors that could cause actual performance or achievements to differ materially include, but are not limited to, those discussed under the section headed ‘‘Risk Factors’’ and elsewhere in this prospectus.
– 31 – RISK FACTORS
An investment in our Shares involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our Shares. The following is a description of what we consider to be our material risks. Any of the following risks could materially and adversely affect our business, financial condition, and results of operations. The market price of our Shares could significantly decrease due to any of these risks, and you may lose all or part of your investment.
These factors are contingencies that may or may not occur, and we are not in a position to express a view on the likelihood of any such contingency occurring. The information given is as of the Latest Practicable Date unless otherwise stated, will not be updated after the date hereof, and is subject to the cautionary statements in ‘‘Forward-looking Statements’’ in this prospectus.
RISKS RELATING TO OUR BUSINESS AND INDUSTRY
Disruption of our relationship and unfavorable changes in terms of our arrangement with Amazon could have a material adverse effect on our business and results of operations.
In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, our revenue generated from Amazon’s Seller Central program amounted to approximately US$77.5 million, US$102.4 million, US$83.2 million, US$43.7 million and US$45.6 million, respectively, representing approximately 91.0%, 70.7%, 48.4%, 58.1% and 35.3% of our total revenue, respectively; and our revenue generated from Amazon’s Vendor Central program amounted to approximately US$7.2 million, US$41.4 million, US$87.3 million, US$30.9 million and US$79.1 million, respectively, representing approximately 8.4%, 28.6%, 50.8%, 41.0% and 61.2% of our total revenue, respectively, for the same periods. Amazon as our bulk purchase customer was our largest customer during the Track Record Period and will continue to contribute a substantial majority of our total revenue in the foreseeable future. As such, our profitability, performance and financial results rely on, among other things, the continued strong business relationship between our Group and Amazon. For details, please refer to the paragraph headed ‘‘Business—Our Relationship with Amazon’’ in this prospectus.
We cannot assure you that we will be able to maintain strong business relationship with Amazon or there will not be unfavorable changes in our current arrangements. We have entered into framework agreements with Amazon in respect of Seller Central program and Vendor Central program, respectively. Under our framework agreements with Amazon, either party can terminate the retail business relationship through the Seller Central program by serving notice at any time, and terminate the business relationship through the Vendor Central program by serving 60 days’ prior written notice. There is no assurance that Amazon will not terminate the agreements with us or there will not be any unfavorable changes in our current arrangements, such as a substantial increase in service fee charged by Amazon in respect of retail sales through its Seller Central program or a substantial reduction of purchase orders from Amazon through its Vendor Central program. In particular, as our sales under the Vendor Central program increased during the Track Record Period, Amazon, as our largest bulk purchase customer, may have increasing bargaining power. In the case that Amazon increases the rebates and discounts from the bulk purchase price with us or amend the terms of such program to make them unfavorable to us, the profitability of our products may be materially and adversely affected.
– 32 – RISK FACTORS
Moreover, Amazon constantly updates its policies without prior notice to us. Changes in Amazon’s policies may require us to change our routine operation, which may result in an increase of our costs and expenses. For example, in March 2020, Amazon prioritized shipments of medical supplies, household staples and other high-demand products in response to the COVID-19 development. Inbound shipment creation to Amazon was temporarily disabled for approximately three weeks from late March to early April 2020. Such change in Amazon’s logistic policy slightly delayed our product delivery to our customers. We cannot assure you that Amazon will not adopt new policies or change existing policies that may be materially adverse to us.
In addition, Amazon has the discretion to suspend a seller’s account and withhold sales proceeds for a period of time under certain circumstances. During the Track Record Period, our accounts under the Seller Central program were suspended three times due to administrative reasons or minor listing violations. Such account suspension lasted for four and five days in 2017, respectively, and 31 days in 2019, which resulted in an estimated loss of revenue of approximately US$0.2 million, US$0.1 million and US$1.0 million, respectively. Among these suspensions, one of our Amazon accounts in Europe was suspended for 31 days from May to June 2019, as we created product detailed page with invalid variations. Amazon allows sellers to display product variations with different attributes, such as size and color, under one product detailed page. We displayed a different product model, exceeding the allowed attributes, under a similar product detailed page due to our misunderstanding of variation rules. To avoid future misunderstanding of Amazon’s rules and requirements, we subscribed services from account managers and arranged staff training to enhance staff’s understanding. Upon deletion of the invalid product variation, our account was restored. Our Vendor Central account did not have any suspension record. If Amazon suspends our accounts again in the future for an extended period of time or withholds our sales proceeds, our business, financial condition and results of operations will be materially and adversely affected.
Amazon has promulgated code of conducts on vendors. Such policy requires the vendors to act fairly and honestly on Amazon to ensure a safe buying and selling experience. Pursuant to the code of conducts, vendors must (i) provide accurate information to Amazon and its customers at all times; (ii) act fairly and not misuse Amazon’s features or services; (iii) not attempt to damage or abuse another seller, their listings or ratings; (iv) not attempt to influence customers’ ratings, feedback, and reviews; (v) not send unsolicited or inappropriate communications; (vi) not contact customers except through Amazon’s authorized channels; (vii) not attempt to circumvent Amazon’s sales process; and (viii) not operate more than one account on Amazon without legitimate business need. During the Track Record Period, we were in compliance with Amazon’s code of conducts in all material aspects. We cannot assure you that we will continue to comply with the code of conducts at all times in the future. Any such violation may lead to Amazon’s action against our accounts, such as cancellation of listings, suspension or forfeiture of payments, and removal of selling privileges, which may materially and adversely affect our business, financial condition and results of operations.
Further, as we are expanding our sales channels to reduce our reliance on Amazon, we cannot assure you that such expansion will not affect our business relationship with Amazon. If that happens, and if we cannot locate an alternative online marketplace with a comparable sales network
– 33 – RISK FACTORS and/or other customers to recoup the loss of sales in a timely manner and/or on comparable commercial terms, our business operations, financial results and profitability may be adversely affected.
Moreover, we rely on the brand awareness and market share of Amazon. If Amazon fails to maintain its market share or brand popularity, the retail sales of our products through Amazon and the demand from Amazon for our products could be adversely affected. The stability of operations and business strategy of Amazon, which are beyond our control, will also affect us. Any material disruption to their operations, or any changes to its business strategy that are unfavorable to our current arrangements with Amazon could adversely affect our sales volumes, profitability and results of operations.
We face various types of competition and may be unable to compete effectively in relevant markets.
We offer small home appliances and smart home devices. Our products compete in highly competitive markets that include intense price competition, frequent introduction of new products, short product life cycles, rapid adoption of product advancements and diverse preferences of consumers.
We compete with other vendors in various aspects such as brand recognition, product design, product mix, price, technology, customer service and breadth of retail and bulk purchase networks. The markets in which we operate present competitive threats both from existing market players with well-known brands, and from new entrants. Some of our competitors have greater experience, brand recognition, product breadth and distribution channels than us. We also see competition from companies who use lower prices, alternative distribution or other means to provide more attractive solutions to customers. Thus, we may not compete successfully against our competitors.
In addition, we may compete with Amazon who also sell small home appliance products under its own brand AmazonBasics. See ‘‘Business — Our Relationship with Amazon — Competition with AmazonBasics’’ for details. Amazon may expand its product portfolio under AmazonBasics, or change AmazonBasics’ target customers to be similar as ours. As Amazon may have greater brand recognition, such changes may materially and adversely affect our sales on Amazon and reduce our market share.
Lastly, we may compete with our subcontractors. We cannot assure you that our subcontractors will not engage in similar businesses with us, including but not limited to bypassing us and directly engaging with Amazon to sell similar products that imitate our products’ design or function. Any of such issues with our subcontractors may materially and adversely affect our business, financial condition and results of operations.
Our competition is increasing as the technology and markets mature. Current competitors and new entrants may seek to develop new product offerings, technologies or capabilities that could render many of our products obsolete or less competitive. In addition, our competitors may attract our current and potential customers to favor their products and therefore reduce our sales volume. The occurrence of any of these circumstances may hinder our growth and our ability to compete and reduce our market share. Further, the markets of certain of our products are relatively saturated. We may not grow as quickly as we used to, or as we expected to. Failure to maintain our growth rate could materially and adversely affect our business, results of operations, financial condition and prospects.
– 34 – RISK FACTORS
Our continued growth depends on our research and development capabilities and our research and development effort may not be successful.
Our ability to compete successfully in the small home appliance and smart home device markets depends heavily on our capability to continuously introduce innovative new or enhanced products and technologies, which in turn depends on a number of factors, such as our timely and successful research and development efforts. Our research and development efforts involve uncertainties and may not yield benefits to the extent we expect, or at all.
In addition, even if our research and development efforts are successful, we may not be able to apply these newly developed technologies to products that will be accepted by the market or apply them in a timely manner to take advantage of the opportunities presented in the market. Due to the highly competitive nature of the industries in which we operate, we must continuously introduce new products to attract and retain customers. In addition, rapid technology development and advancements may render our products outdated or obsolete. During the Track Record Period, while we were able to apply most of our newly developed technologies to our products, we chose not to apply certain technologies to our products due to cost concern, marketing reasons and technical limitation to achieve mass production. We cannot assure you that we will be able to develop, introduce and commercialize new products and technologies to the market in a timely manner,oratall.Failuretodoso,orfailuretostay abreast of the latest technologies, could materially and adversely impact our business operations, prospects and financial performance, as we may not be able to maintain our competitive advantages.
We may from time to time launch new product categories, which could subject us to additional risks and challenges. As we may not have sufficient experience and relevant customer data for these new product categories, it may be difficult for us to anticipate and respond to customer demands and preferences. For instance, we might misjudge customer demands, resulting in excessive inventories and possible inventory write-down. We might also experience higher return rates on new product categories, receive more customer complaints, or face costly product liability claims, potentially harming our brand, reputation and financial performance. Further, we may not be able to negotiate favorable terms with suppliers for our new products, for which we may need to price aggressively to gain market share or remain competitive in the new categories. Therefore, it may be difficult for us to achieve profitability in the new product categories or realize profit margin, if any, which could adversely affect our overall profitability and results of operations.
Maintaining the trusted brand image of our products is critical to our success, and any failure to do so could severely damage our reputation and brand, which would have a material adverse effect on our business, financial condition and results of operations.
Since our inception, we built our brand names ‘‘Levoit,’’ ‘‘Etekcity’’ and ‘‘Cosori’’ leveraging our core competencies. Our brands received recognition from retail customers on Amazon. For details, see ‘‘Business—Awards and Certifications.’’ Any loss of trust in our products could harm the value of our brands, which could materially reduce our revenue and profitability. Our ability to maintain our position as a trusted brand for small home appliances and smart home devices depends on various factors, such as continued offering of quality and innovative products to customers, as well as increasing brand awareness through marketing and brand promotion activities.
– 35 – RISK FACTORS
In particular, the maintenance of our reputation and our brand image depends on the reviews from, and satisfaction of, our customers. Any reviews commented on the e-commerce marketplaces where our products are listed or user perception regarding the defective or unsatisfactory experience of our products, even if factually incorrect or based on isolated incidents, could damage our reputation, diminish the value of our brand, undermine the trust and credibility we have established and have a negative impact on our ability to attract new consumers or retain our current consumers. Additionally, we may fail to provide adequate customer service, which could reduce customers’ confidence in our brand. For products sold through Amazon’s Seller Central program, while we provide some customer service directly to our retail customers, our agreement with Amazon provides that Amazon shall have sole discretion on customer service issues such as packaging, handling and shipment, customer returns, and refunds. Such policy could limit our flexibility in providing customer service to customers, which in turn could harm our reputation and business.
Our customers may also post about our products on social media. Any unfavorable publicity regarding, for example, our privacy practices, product changes, product quality, litigation or regulatory activity, or the actions of our business partners or our consumers, could adversely affect our reputation. Such negative publicity also could have an adverse effect on the size, engagement and loyalty of our consumer base and result in decreased revenue, which could adversely affect our business and financial results. Similarly, because we are active in engaging with customers and responding to feedback on social media, in the event our public comments were cast in a negative light, this could cause damage to our reputation, diminish brand value, and undermine trust and credibility with customers and potential customers.
If we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our products, it may be difficult to maintain and grow our customer base, and our business and growth prospects may be materially and adversely affected.
The Sino-U.S. trade war and other trade or import protection policies may materially and adversely affect our business.
A Sino-U.S. trade war has developed in recent years between the United States and the PRC, under which our products exported from the PRC to the United States may subject to high tariff rates. See ‘‘Business—Sino–U.S. Trade War—Background of Sino–U.S. Trade War.’’ While the two countries have reached the Phase I Agreement, it remains to be seen whether the Phase I Agreement will be abided by both governments and successfully reduce trade tensions. If either government violates the Phase I Agreement, it is likely that enforcement actions will be taken and trade tensions will escalate. Furthermore, additional concessions are needed to reach a comprehensive resolution of the trade war. The roadmap to the comprehensive resolution remains unclear, and the lasting impact the trade war may have on the U.S. economy, the Chinese economy and the industries in which we operate remains uncertain.
As a result of the Sino-U.S. trade war, a number of our products, including but not limited to air purifiers, WiFi outlets and multi-meters, when selling from the PRC to the United States, were subject to additional tariff of up to 25%. In September 2018, the United States Trade Representative initiated an exclusion process, under which companies may submit request for tariff exclusion of certain products. The product exclusion, once obtained, would apply from the original date of the
– 36 – RISK FACTORS additional duties and expire one year from the publication of the notice of product exclusion. Among our products subject to additional tariffs, some are included in the product exclusion list and enjoy exemptions from additional tariffs, such as thermometers, multi-meters and air purifiers, the exemptions enjoyed by which expired or will expire on July 31, 2020, October 1, 2020 and December 31, 2020, respectively. As a result, our customs duties incurred increased from US$1.2 million in 2017 to US$4.9 million in 2018 and further to US$5.5 million in 2019, and our customs duties incurred decreased from US$2.9 million in the first half of 2019 to US$2.2 million in the first half of 2020; and in 2019 and the six months ended June 30, 2020, we recorded tax reimbursement in the amount of US$2.3 million and US$0.1 million, respectively. It is uncertain whether any further tariff measures will be taken and whether the tariff exclusion process remain available in the future. Any further trade restrictions imposed by the United States on small home appliances and smart home devices could significantly increase the import prices of our products manufactured in the PRC, and thus make our product less competitive. In addition, if the tariff exclusion cannot be renewed or extended, we may not receive tax reimbursement in the future. As a result, our business, financial condition and results of operations could be materially and adversely affected and it is possible that we may even record a net loss for one or more fiscal periods.
In addition, we sell our products to other countries. Changes to the trade or investment policies, treaties or tariffs in where we operate could adversely affect our international and cross- border operations, our financial condition and results of operations. In the event that any of these countries impose trade sanctions, import restrictions or extra customs duties on the products we sell, our business and operations may be materially and adversely affected.
Our business and financial position may be adversely affected if we are not able to continue servicing the North America market effectively or if there is any adverse change in the macro- economic situation or economic downturn in North America.
We have historically relied heavily on the North America market. During the Track Record Period, North America was our largest sales market. In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, revenue arising from sales to North America amounted to approximately US$73.3 million, US$121.0 million, US$148.6 million, US$64.0 million and US$109.7 million, respectively, representing approximately 86.1%, 83.6%, 86.4%, 85.0% and 84.8% of our total revenue, respectively, during the corresponding period.
However, we cannot assure you that we will be able to continue to maintain our sales volume in the North America in the future. We believe that our geographical sales contribution is expected to, in the near term, remain focused significantly on the North America market. In the event that there are significant changes in consumers’ spending patterns and if we are unable to respond effectively to the North America market or offer competitive prices to our customers in North America, our business and financial performance could be adversely affected. Our operating results are heavily dependent on the macro-economic situations of North America. Macro-economic
– 37 – RISK FACTORS factors, such as changes in global or local economic and political conditions, general market sentiment, the effect of epidemic or natural disasters, changes in the regulatory environment, fluctuations in interest rates, consumer preferences, and employment levels, may affect the overall performance of the economies of North America and may cause significant changes in consumers’ spending patterns or our costs of doing business.
We endeavor to develop new sales channels and our efforts to develop new sales channels may not be successful.
During the Track Record Period, substantially all of our revenue was generated from or through Amazon. In 2017, 2018 and 2019 and for the six months ended June 30, 2020, we generated revenue of approximately US$84.7 million, US$143.8 million, US$170.5 million and US$124.7 million, respectively, from Amazon, representing approximately 99.4%, 99.3%, 99.2% and 96.5%, respectively, of our total revenue. To achieve further growth and reduce our reliance on Amazon, we have been making efforts to expand our sales channels. See ‘‘Business—Our Strategies—Expand geographic coverage and sales channels leveraging our brand recognition.’’
Expansion into new sales channels, in which we have limited brand recognition and operating experience, may present operating and marketing challenges for us. New sales channels may have different competitors, regulatory environment and consumer preference as compared to our existing sales channels. Expanding into new sales channels requires capital investment and experienced personnel. We may not have sufficient capital to diversify our sales channels effectively. In addition, we may find it difficult to hire, train and retain qualified employees who are familiar with the new sales channels.
In addition, customers in new sales channels are likely to be unfamiliar with our brands and products, and we may need to build or increase brand awareness in the new sales channels by increasing investments in advertising and promotional activities. As a result, we may increase our product price to cover the additional cost, which in turn could affect the viabilities of these new operations and our overall profitability.
Additionally, our expansion plans could strain our managerial, operational and financial resources. Our ability to manage future growth will depend on our ability to continue to implement and improve operational, financial and management systems on a timely basis and to expand, train, motivate and manage our workforce. We cannot assure you that our personnel, systems, procedures and controls will be adequate to support our future growth. If we are not able to make further investments in the development of new sales channels, our business and future growth may be adversely affected.
Our future success depends on our key management and our ability to continue to recruit, retain and motivate highly skilled personnel.
Our future success is significantly dependent upon the continued service of our key management, in particular, Ms. Yang, our founder, chairperson, chief executive officer and executive Director, who has extensive experience in small home appliance and smart home device industry. Ms. Yang is responsible for planning our development strategies, setting the direction of our operation and overall business management. If one or more of our key management team
– 38 – RISK FACTORS members are unable to continue in their current position or perform their responsibilities, we may be unable to locate suitable and qualified replacement for them. As a result, our business may be disrupted and our financial condition and results of operation may be materially adversely affected.
The size and scope of business also require us to hire and retain a wide range of capable and highly skilled personnel who can adapt to a dynamic, competitive and challenging business environment. We will need to continue to attract and retain experienced and highly skilled personnel at all levels, as we expand our business and operations. We will also need to recruit and retain talent to support our research and development initiatives as part of our strategies to develop more smart home products and develop our Vesync app into an IoT platform. Competition for suitable talent in our industry is intense. Competition for these highly skilled personnel could cause us to offer higher compensation and other benefits to attract and retain them. Even if we were to offer higher compensation and other benefits, there can be no assurance that these highly skilled personnel will choose to join or continue to work for us. Any failure to attract or retain highly skillful personnel could severely disrupt our business and growth.
We rely on subcontractors to manufacture a substantial portion of our products. If products produced by our subcontractors are not satisfactory or we encounter issues with them, our business and results of operations could be materially and adversely affected.
During the Track Record Period, we outsourced the production of a substantial portion of our products to subcontractors. Such products are manufactured in the factories of our subcontractors with our technical supervision, and the final products are sold under the ‘‘Levoit,’’ ‘‘Etekcity’’ and ‘‘Cosori’’ brands. In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, we incurred sub-contracting cost included in cost of sales in the amount of US$25.6 million, US$49.4 million, US$70.9 million, US$28.0 million and US$49.4 million, respectively. We select our subcontractors based on a number of criteria, and all of our subcontractors are subject to annual evaluation. See ‘‘Business—Outsourcing and Production—Outsourcing to Subcontractors’’ for details. However, we cannot assure you that the products manufactured by any of our subcontractors will be delivered to us in a timely manner or will be of satisfactory quality. Any defect in the products manufactured by our subcontractors could subject us to product liability or damage our reputation and reduce demand for our products. Furthermore, we cannot ensure that our subcontractors will fully comply with the applicable laws and regulations, such as labor and environmental laws, and our business and brand image may be damaged by such non-compliance or negative publicity thereof.
We may experience operational difficulties with our subcontractors, including reductions in the availability of production capacity, failure to comply with our product specifications, insufficient quality control, failure to meet our production deadlines, increases in manufacturing costs and longer lead time. Our subcontractors may also experience disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, raw material shortages, cost increases, violation of environmental, health or safety laws and regulations, or any outbreak of epidemics or pandemics, such as the outbreak of COVID-19 in 2020. Therefore, we cannot assure you that our subcontractors will deliver products to us in a timely manner.
– 39 – RISK FACTORS
In addition, there is no assurance that our subcontractors will continue to work with us on similar terms or at all in the future, or that they will have sufficient resources to meet our demand at all times. If the performance of our subcontractors is not satisfactory, or our subcontractors decide to substantially reduce the production capacity available to us, to increase the prices of products, or to terminate their business relationships with us, we may need to find replacement subcontractors or take other remedial actions, which could increase the cost and lengthen the production time of our finished products. Furthermore, although our agreements with our subcontractors contain confidentiality obligations, and we have adopted security protocols to protect knowhow and our technologies for manufacturing our products from leakage, or from being copied or reverse-engineered, we cannot guarantee the effectiveness of these efforts and, any leakage or plagiary of our knowhow and technologies could be detrimental to our business prospects and results of operations.
Our business operations may be affected by the outbreak of COVID-19.
Towards the end of 2019, a respiratory illness caused by a highly infectious novel coronavirus was identified. The WHO later named it COVID-19. WHO is closely monitoring and evaluating the situation. On January 30, 2020, the WHO declared the outbreak of COVID-19 a Public Health Emergency of International Concern, or the PHEIC. In March 2020, the WHO characterized the outbreak of COVID-19 a pandemic. See ‘‘Business—Effects of the COVID-19 Outbreak.’’
The outbreak, which may result in a high number of fatalities, is likely to have an adverse impact on the livelihood of people worldwide and the global economy. These events could impact our operations in the PRC, Europe and United States. For example, there was a temporary disruption in our supply chain in February 2020 due to the operation suspension of our suppliers in the PRC. Although our suppliers in the PRC have now resumed normal operation, we cannot assure you that such disruption and suspension will not happen again. The daily operation of our offices and Dongguan Production Base had been affected by the COVID-19 epidemic for a short period. Further, our operations could be disrupted if any of our employees or employees of our business partners, such as our subcontractors, suppliers and logistics companies, were suspected of contracting an epidemic disease, since this could require us or our business partners to quarantine some or all of these employees or disinfect the facilities used for our operations. Any disruption in the operation of our logistics business partners may materially and adversely affect our operation as we may not be able to maintain sufficient inventory in the United States and Europe and we may not be able to deliver products to our customers in a timely manner. Suspension of our suppliers’ operations, closure of our production, or disruption of our logistics would severely disrupt our operations and have a material adverse effect on our business, financial condition and results of operations. See ‘‘Business—Effects of the COVID-19 Outbreak.’’ It also remains uncertain as to when the outbreak of COVID-19 will be contained. In the event that the outbreak of COVID-19 is not effectively controlled within a short timeframe, our business operations and financial condition
– 40 – RISK FACTORS may be materially and adversely affected as a result of the changes in the outlook for the consumer market, any slowdown in economic growth, negative business sentiment or other factors that we cannot foresee.
Our delivery and return policies may adversely affect our results of operations.
We generally allow our retail customers to return products within 30 days after receipt. Amazon is also entitled to return damaged or defective products we sold to them through the Vendor Central program. In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, the total sales of products returned to us amounted to US$2.3 million, US$4.0 million, US$3.6 million, US$1.8 million and US$3.4 million, respectively, representing 2.7%, 2.8%, 2.1%, 2.3% and 2.6%, respectively, of our total revenue. In addition, we separately agreed to provide an allowance for damaged or defective products to Amazon at a stipulated rate, which were deducted directly from our revenue during the Track Record Period. Our customers may also be entitled by law or regulation to have their product replaced for specific types of defects or quality issues. We may also from time to time be required by law to adopt or amend return and exchange policies. These delivery and return policies improve consumers’ shopping experience and promote customer loyalty,whichinturnhelpusacquireandretainconsumers. However, these policies also subject us to additional costs and expenses which we may not recoup from customers. If our delivery and return policies are misused by a significant number of end customers, our costs may increase significantly and our results of operations may be materially and adversely affected. Conversely, if we make those policies more restrictive to reduce cost and expense, our consumers may be dissatisfied, which may result in loss of existing consumers or failure to acquire new consumers at a desirable pace, which may materially and adversely affect our business financial condition and results of operations.
Any failure in our quality control systems could harm our business and lead to claims if our products are found to be defective, and we may be subject to product liability claims from time to time.
We focus on the quality of our products as the product quality and safety are essential to the success of our business. The quality of our products is dependent on the effectiveness of our quality control system, which in turn depends on a number of factors, including the design of the system, our familiarity with the applicable quality requirements, the quality control training given to our employees, and our ability to ensure that our employees and our contractors adhere to our quality control policies and guidelines. Any failure of our quality control system could result in the production of substandard products, and expose us to product liability claims, and government scrutiny or investigations. Defects or other product quality issues can also occur as a result of improper handling in transportation, storage or consumer level. The consumers of our products may have the right to bring torts actions and we may also be liable for any damages caused by defects of our products. We may also be required by regulators in the places we do business to recall defective or otherwise objectionable products, and a successful claim against us in respect of our products or a material recall of our products may result in (i) legal costs incurred in connection with such claim or other adverse allegations or rectifying such defects; (ii) deterioration of our brand and corporate image; and (iii) material adverse effect on our sales, operating results and financial condition. In addition, any product liability claims against us, regardless of whether the
– 41 – RISK FACTORS claims have merit, could consume the time and attention of our management, which could cause us to incur substantial costs and lead to diversions of our resources. During the Track Record Period, we experienced two product liability legal proceedings, which had already been settled without acknowledging defect with an aggregate settlement amount of US$451,000. In addition, we received letters from attorneys representing four pressure cooker customers inquiring relevant documents for the pressure cookers. As of the Latest Practicable Date, we did not receive any additional inquires or claims from these four customers. For details, see ‘‘Business—Legal Proceedings and Compliance—Legal Proceedings—Product liability legal proceedings.’’ There is no assurance that we would not be named as a defendant in a lawsuit or proceedings brought by consumers in respect of our products in the future. We have been, and may continue to be, subject to project liability claims from time to time.
We currently maintain product liability insurance, but we may not be able to obtain such insurance on acceptable terms in the future, or at all, and this insurance may not provide adequate coverage against potential claims. A product liability claim brought against us in excess of our available insurance coverage could have a material adverse effect on our business and financial condition.
We may be involved in legal proceedings and claims in relation to product liability, which may adversely affect our financial condition, divert management attention and harm our reputation.
The manufacturing and sale of our products subjects us to potential product liability claims if our products are proven to fail or have failed to meet product safety laws and regulations, or cause or have caused injuries. If we are unsuccessful in defending product liability claims, we may be subject to substantial damages to compensate the claimants. We have in the past encountered product liability claims in the United States. See ‘‘Business—Legal Proceedings and Compliance— Legal Proceedings—Product liability legal proceedings’’ and ‘‘—Any failure in our quality control systems could harm our business and lead to claims if our products are found to be defective, and we may be subject to product liability claim from time to time.’’ Thereisnoassurancethatwewill not encounter any product liability claims in the future. Any claim, dispute and legal proceeding brought against us, with or without merit, could result in substantial costs and diversion of resources, and if we are unsuccessful, could materially harm our reputation.
We may be exposed to legal proceedings and claims in relation to intellectual property infringement or misappropriation, which may have a material adverse effect on our business, financial condition, results of operations and prospects.
We may be exposed to intellectual property rights infringement or misappropriation legal proceedings and claims by third parties when we develop and use our own technology and know- how. We may also be subject to litigation involving claims of patent infringement or violation of other intellectual property rights of third parties. In 2017, a third party brought a lawsuit against us for patent infringement. We settled the case with plaintiff in an amount of US$225,000 in 2018. For details, see ‘‘Business—Legal Proceedings and Compliance—Legal Proceedings—Patent infringement disputes.’’ We settled the case with the third party, and the case was dismissed.
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The defense against any of these claims would be both costly and time-consuming, and could significantly divert the efforts and resources of our management and technical personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties or redesign our products, or subject us to injunctions prohibiting the development and sale of our products or the use of technologies. To the extent that licenses are not available to us on commercially reasonable terms or at all, we may be required to expend considerable time and resources developing alternative technologies, sales of our products may be delayed or suspended, or we may be forced to develop our products with reduced features or functionalities. Protracted litigation could also result in our customers or potential customers deferring, reducing or canceling their purchases of our products. In addition, we could face disruptions to our business operations as well as damage to our reputation as a result of such claims, and our business, financial condition, results of operations and prospects could be materially and adversely affected.
Further, if our competitors or other persons send notices of intellectual property infringement to e-commerce platforms, such as Amazon, we will be exposed to risks of delisting of our products from such e-commerce platforms. In 2019, a third party camping lanterns manufacturer alleged that our camping lanterns infringed its patent and sent a ‘‘notice of infringement’’ to Amazon, which resulted in a delisting of our relevant products on Amazon. In July 2019, we filed a patent suit in a California court against such third party, requesting the third party to withdraw its ‘‘notice of infringement’’ and for compensatory damages. As of the Latest Practicable Date, the listing of our camping lanterns was restored. We settled the case with the third party and the case was dismissed. For details, see ‘‘Business—Legal Proceedings and Compliance—Legal Proceedings—Patent infringement disputes.’’ However, we cannot assure you that similar situations will not occur again in the future. Our potential loss could include, but are not limited to, loss of revenue, decline in market share and reputational damage, which could have a material adverse effect on our business, results of operations and financial condition.
Our multinational operations may be adversely affected if we failed to comply with laws and regulations of various jurisdictions where we operate, for which could be costly and time- consuming.
We primarily operate in the PRC and the United States, have subsidiaries in Germany, Netherlands, Japan, Hong Kong and Macau, and sell products to customers in the United States, Canada, United Kingdom, Germany, France, Spain, Italy and Japan, among others. As we continue our global expansion, we will compete with companies who have an established local presence or are more familiar with local regulatory and business practices in that country, which may give them a competitive advantage over us.
We are subject to laws and regulations of various jurisdictions where we operate. Multiple aspects of our business will be adversely affected if we fail to ensure compliance with those laws and regulations. These include, but are not limited to regulation and standards encompassing the development, production, and sales of our products, labor laws, privacy laws and regulations, restrictions on foreign investments, foreign exchange control, and import and export requirements, as well as political instability or changes in our tax treatment.
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For example, a small portion of our products, such as smart fitness scales, blood pressure monitors, acupoint therapy apparatus with accessories, oximeters, massagers, foot massagers and dental scalers, are required to be registered under medical device regulations in various jurisdictions such as the United States federal and state regulators, member states of the European Union and Japan. Hence, sales of some new products, and upgrade of existing products, may require registration, which could be costly and time-consuming, and might in turn delay the launch of our new products or product upgrades.
Failure to comply with applicable regulatory requirements regarding, for example, promoting, manufacturing or distributing our products, may subject us to a variety of administrative or judicial actions. Further, as one of our business strategies is to further upgrade our product mix and expand our product portfolio, any delay in the launch of or upgrade of our products may hinder our growth of our Company and could have a material adverse effect on our business, financial condition, and results of operations.
In addition, we are required to comply with extensive rules and regulations in jurisdictions we operate regarding tax such as customs duty, sales tax, value-added tax and income tax. Failure to fully comply with tax rules and regulations in the jurisdictions we operate would subject us to certain surcharges and other penalties or liabilities. We may receive tax enquiries from tax authorities from time to time. In August 2020, Etekcity US received a letter from the tax authority in Germany (the ‘‘German Tax Authority’’) requesting Etekcity US to provide supplemental information in relation to the German value-added tax between 2015 and 2019. As of the Latest Practicable Date, we have engaged tax consultant in the Germany to handle the inquiry and are preparing the relevant information requested by the German Tax Authority. We incurred surcharges in relation to customs duty, sales tax, value-added tax and income tax amounted to US$0.6 million, US$0.5 million, US$1.0 million, US$0.2 million and US$1.2 million for the year ended December 31, 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, respectively, mainly due to adjustments in customs duties, late payment of sales tax and late filing of income tax and value- added tax. For details, see ‘‘Financial Information—Principal Components of Consolidated Statements of Profit or Loss—Other expenses.’’
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We have obtained patents for our proprietary technology and registered our trademarks. For details, please refer to the section headed ‘‘Appendix IV—Statutory and General Information—B. Further Information about our Business—2. Intellectual Property of our Group’’. We regard our trademarks, copyrights, patents, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and werelyonacombinationofintellectual property laws and contractual arrangements, including entering into confidentiality agreements with our employees and non-compete agreements with our management team, to protect our proprietary rights. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. We may become a target of counterfeiting and intellectual property theft activity.
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It is often difficult to register, maintain and enforce intellectual property rights in the PRC. 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. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in PRC.
Preventing 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. There is no assurance that we will prevail in such litigation, and even if we do prevail, we may not obtain a meaningful recovery. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in maintaining, protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
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, technologies or designs and/or may not prevent others from developing competing products, technologies or designs. We cannot predict the validity and enforceability of our patents and other intellectual property with certainty. Furthermore, there can be no assurance that our patent applications will be approved, that any issued patents will adequately protect our intellectual property, or that such patents will not be challenged by third parties or found by a judicial authority to be invalid or unenforceable.
We collect, store, process and use personal information and other customer data, which subjects us to governmental regulations and other legal obligations related to privacy, information security, and data protection, and any security breaches or any actual or perceived failure to comply with such legal obligations could harm our reputation and business.
Our smart home products can be configured and controlled through our mobile phone app, VeSync, which requires user registration. To foster customer loyalty, we also actively engage our customers who share and discuss their feedback and user experiences with our products through e- commerce operators’ marketplaces, our social media platforms and VeSync app. We have also built our intelligent cloud infrastructure in 2015 in the VeSync app mainly for personal information storage. As a result, we will have access to certain personal information and other customer data. Collection, storage, processing and use of personal information and other customer data subjects us to governmental regulations and other legal obligations in the United States, the European Union, and other relevant markets, related to privacy, information security and data protection.
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We are committed to protecting our customer data. We have adopted security policies and measures, including encryption technology, to protect our proprietary data and customer information. However, companies that collect and retain sensitive and confidential information are under increasing attack by cybercriminals around the world. IoT products, being connected to the internet, are particularly vulnerable to cyberattack. While we implement cybersecurity measures within our products, services, operations and systems, our cybersecurity measures may not detect, prevent or control all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, Trojan horses, malicious software, break-ins, phishing attacks, third-party manipulation, security breaches, employee misconduct or negligence or other attacks, risks, data leakage and similar disruptions that may jeopardize the security of data stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems and our VeSync app, misappropriation of information or data, deletion or modification of user information, or a denial-of-service or other interruption to our business operations. As techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until after they are launched against us or our third-party service providers, there can be no assurance thatwewillbeabletoanticipate,orimplement adequate measures to protect against, these attacks. A cybersecurity incident could lead to unauthorized access, copying, or other misuse of personal data about our customers, often known as a data breach. The compromised information may include, for example, account information or information about how our consumers use our products. It could also, under certain circumstances, lead to customers’ products and/or their smart home functions failing to function, not functioning as designed, or exhibiting other unanticipated behavior. Further, while we implement measures to prevent insider theft including confidentiality agreements and monitoring of IT usage, we may be unable to prevent employees or contractors from misappropriating personal information relating to our customers and selling it or putting it to some other unauthorized use. Customers may be entitled to notice of that data breach, and may be entitled to receive, or expect, compensation or services such as credit monitoring. Such data breaches may also expose us to regulatory investigations, fines and penalties, and may also harm our credibility with customers.
Our e-commerce marketplace partners and our other business partners could also be a source of security risk to us in the event of a failure of their own products, components, networks, security systems, and infrastructure. In addition, we cannot be certain that advances in criminal capabilities, new discoveries in the field of cryptography, or other developments will not cause a compromise or breach of the technology protecting the networks that access our products and services. Such an event could not only disrupt our operations, but could also result in unfavorable publicity and therefore materially and adversely affect the market’s perception of the security and reliability of our services and our credibility and reputation with our customers, which may lead to customer dissatisfaction and could result in lost sales and increased customer revenue attrition. Further, changes in regulations relating to transfers of personal data may impact our growth.
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We operate in the emerging and evolving IoT-enabled smart home device market, which may develop more slowly or differently than we expect. If the IoT-enabled smart home device market does not grow as we expect, or if we cannot expand our products and services to meet consumer demands, we may not attract and retain customers, which may in turn affect our competitiveness.
Our revenue generated from IoT-enabled smart home devices in 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020 was approximately US$5.2 million, US$10.0 million, US$13.0 million, US$4.2 million and US$14.9 million, respectively, accounting for approximately 6.2%, 6.9%, 7.6%, 5.6% and 11.5%, respectively, of our total revenue for the same years. As the IoT-enabled smart home device market around the world has experienced rapid growth in recent years, especially in the PRC and United States where we mainly operate, we make it a strategy to further evolve into an integrated home IoT platform which connects all our smart home devices through mobile app integration. We plan to build a new IoT platform carrying a larger user base, process complex data and provide users with a more personalized and safer smart experience. However, the IoT-enabled smart home market’s growth rate may decrease due to uncertainties with respect to macro-economy around the world, disposable income of consumers, pace of development of technologies, the barriers to acceptance of IoT technology and products (such as data privacy considerations), and other factors. Furthermore, the IoT-enabled smart home device market is constantly evolving, and it is uncertain whether our products and services will achieve and sustain market acceptance. It is possible that standards will develop around platforms other than our planned IoT platform, or platforms which are currently compatible with some of our devices, such as Amazon Alexa, Google Assistant, and Apple Health, any of which may make it harder to achieve our strategy of maximizing lifetime customer value by providing a unified experience for their smart devices. Our ability to expand the sales of our IoT-enabled smart home devices to a broader consumer base depends on several factors, including (i) our ability to deliver quality products to attract and maintain customers, (ii) our ability to continuously research and develop new products to satisfy consumer needs, (iii) our ability to use diversified distribution channels to reach our target customers, and (iv) the capability of our after-sales support to address any concern from the users. If we are unsuccessful in developing and marketing our IoT-enabled smart home devices to consumers, or if these consumers do not perceive or value the benefits of our IoT-enabled smart home devices, the market for our IoT-enabled smart home devices and services may not continue to develop or may develop more slowly than we expect, either of which would adversely affect our profitability and growth prospects.
If we are unable to conduct our marketing activities cost-effectively, our results of operations and financial condition may be materially and adversely affected.
We have incurred expenses on a variety of different marketing and advertising efforts designed to enhance our brand recognition and increase sales of our products. For details, please refer to the section headed ‘‘Business—Marketing and Promotion’’ in this prospectus. Our marketing and advertising activities may not achieve the desired promotional effects and may not result in the levels of product sales that we anticipate. We incurred approximately US$6.0 million, US$11.1 million, US$14.6 million, US$5.4 million and US$5.5 million of marketing and advertising expenses for the year ended December 31, 2017, 2018 and 2019 and for the six months
– 47 – RISK FACTORS ended June 30, 2019 and 2020, respectively. We expect to recruit and expand our sales and marketing team and enhance our sales and marketing efforts in markets where we are expanding or increasing our presence, which may or may not yield the anticipated benefits. We expect our sales and marketing expenses to increase along with our expansion.
Additionally, we mainly use the online marketing strategies such as social media or online advertisement products available on e-commerce marketplaces. However, we cannot assure you that the internet could be as an effective medium to promote compared to traditional print and broadcast media, or other media that may be developed from time to time. Our ability to increase revenue and profitability from advertising may be adversely impacted by a number of factors, many of which are beyond our control, such as increased competition and potential upward adjustment of online advertising prices and difficulties in acquiring and retaining advertisers.
If we fail to successfully adapt our VeSync app to consumer requirements or emerging industry standards, or if we fail to maintain the VeSync app under normal operation, our business and prospects may be materially and adversely affected.
In 2015, we developed and launched our own VeSync app, available for iOS and Android devices. Most of our smart devices are only fully functional when used with our VeSync app. For our business to be successful, we will need to design, develop, promote and operate new products that will be compatible with the VeSync app. We cannot assure you that the consumers will not encounter any difficulties with the installation of VeSync app for their mobile devices or configuration of devices using the app, or that, VeSync app would function smoothly at all times. There can be no assurance that we will be able to detect and fix all issues and defects in VeSync app. Failure to identify issues and defects may reduce customers’ satisfaction in our software and products, which could result in decreases in sales of our products and harm to our reputation. Any changes to these mobile operating systems that degrade or impede its proper function, could adversely affect usage of our services. In order to deliver high quality services, it is also important that our VeSync app works well across a range of networks, mobile devices and standards that we do not control. As new devices are released or updated, we may encounter issues and defects in developing and upgrading our VeSync app for use on mobile devices and we may need to devote significant resources to the creation, support and maintenance of our VeSync app, and we may not be successful in doing so. There is no assurance that we will be able to provide full functionality of the VeSync app and connected devices for all devices and customers.
The proper functioning of e-commerce marketplaces of our business partners is essential to our business, and any failure to maintain the satisfactory performance of those website and systems could materially and adversely affect our business and reputation.
We sell our products mainly through global e-commerce marketplaces, such as Amazon, which enables us to efficiently sell our products to retail customers. In 2017, 2018, 2019 and six months ended June 30, 2019 and 2020, our revenue generated through the Seller Central and Vendor Central programs of Amazon in aggregate amounted to approximately US$84.7 million, US$143.8 million, US$170.5 million, US$74.6 million and US$124.7 million, respectively, representing approximately 99.4%, 99.3%, 99.2%, 99.1% and 96.5% of our total revenue, respectively. Thus, the satisfactory performance, reliability and availability of those e-commerce marketplaces are critical
– 48 – RISK FACTORS to our success and our ability to attract and retain customers and provide quality customer service. In addition, we also rely on e-commerce marketplaces, such as Amazon, to collect payment and deliver products. Any system interruption caused by telecommunication failures, computer viruses, hacking or other attempts to harm the systems that result in the unavailability or slowdown of those e-commerce marketplaces or reduce their order fulfillment performance could reduce our sales volume. In addition, those e-commerce marketplaces may experience surges in online traffic and orders associated with promotional activities and holiday seasons, such as during the Black Friday or Christmas, which can put additional demands on those e-commerce marketplace at specific times. If our e-commerce marketplaces do not function properly, it could cause system disruptions and slow response times, affecting data transmission, which in turn could materially and adversely affect our business, financial condition and results of operations. The proper functioning of our websites is essential to our business, and any failure to maintain the satisfactory performance of those websites and associated systems could materially and adversely affect our business and reputation.
We commenced selling our products under the ‘‘Etekcity,’’ ‘‘Levoit’’ and ‘‘Cosori’’ brands via our own websites in 2015, 2018 and 2018, respectively, and we have also been using these websites to display our products under the relevant brands. We must continue to upgrade and improve our own websites to support our business growth, and failure to do so could impede our growth. However, we cannot assure you that we will be successful in executing these system upgrades and improvement strategies on our own websites. In particular, our systems may experience interruptions during upgrades, or the new technologies or infrastructure may not integrate properly with existing systems, or there may be delays before full integration is possible.
We may not be able to maintain rapid growth compared to the Track Record Period.
During the Track Record Period, our revenue grew from US$85.2 million in 2017 to US$144.8 million in 2018, and further to US$171.9 million in 2019, representing a CAGR of 42.0%. In addition, our revenue grew from US$75.3 million for the six months ended June 30, 2019 to US$129.3 million for the six months ended June 20, 2020. Our net profit increased from US$2.0 million for the six months ended June 30, 2019 to US$22.5 million for the six months ended June 30, 2020. The growth of our revenue and net profit for the six months ended June 30, 2020 was primarily because (i) consumers spent more time shopping online during the outbreak of COVID-19 and (ii) their demands for home products increased, primarily attributable to the increase in consumer’s awareness in maintaining a healthy home environment and better life quality accelerated by the COVID-19 pandemic. However, the impact of COVID-19 pandemic on customer’s shopping preference is one-off in nature and may not sustain when the COVID-19 pandemic becomes under control.
Our results of operations in the past may not be indicative of our performance in the future. Although we experienced rapid revenue and profit growth during the Track Record Period, we cannotassureyouthatwecansustainsuchgrowthinthefuture.Tomaintainourrapidgrowth,we plan to implement a number of business strategies for the purpose of strengthening our market position in the small home appliance and smart home device industry. See ‘‘Business—Our Strategies.’’ The implementation of these new business strategies has its own inherent risks, and such business strategies may or may not be successfully implemented or that such business strategies may not result in the desirable outcome expected by us. We also may not have the experience to implement our business strategies. Failure to implement our strategies may adversely affect our financial condition and results of operation.
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Our insurance coverage may not be sufficient to cover significant losses resulting from the operation of our business.
We maintain various insurances including property insurance covering risks of physical loss or damage to the inventory of our products and fixed assets, general liability insurance (including product liability) and transportation and logistics insurance covering the products delivered by third party logistic companies. In the event that we suffer a loss or incur any liability in an amount that exceeds our insurance coverage, or in a situation where no insurance proceeds are paid due for example, to exclusions or other policy terms, we may have to pay out of our own resources for any uninsured financial or other losses, damages and liabilities, litigation or business disruption.
We may be adversely affected by any significant disruption to the warehouses where we store our products.
We primarily store our products in warehouses operated by us or Amazon. As of the Latest Practicable Date, we operated a total of four warehouses located in (i) Dongguan, Guangdong Province, the PRC; (ii) Shenzhen, Guangdong Province, the PRC; (iii) Anaheim, California, the United States; and (iv) Itzehoe, Germany. Amazon’s warehouses are located globally. Any significant downtime arising from major and unexpected repairs or servicing of any of these warehouses that result in major disruptions to our operations could cause us to be unable to store our products for an extended period and require us to make significant unanticipated capital expenditures and/or delay our delivery of products. Though we currently maintain insurance to cover our inventory loss and damages, the coverage may not be sufficient and the delay in delivery may not be recoverable under our existing insurance policies, and prolonged business disruptions could result in a loss of end customers. If any one or more of the above risks were to materialize, our financial condition and results of operations may be adversely affected. The warehouses where we store our products are also subject to a number of risks, such as fires, floods, explosions, natural disasters, third-party interference, disruptions in power supply or power outages, war, terrorism and communal unrest, which could lead to a significant disruption to our operations or result in significant damages to our warehouses or inventories. These hazards could also result in personal injury or wrongful death claims and other damage to our warehouses. These disruptions may materially and adversely affect our business, financial condition and results of operations.
We may be adversely affected by any significant disruption of performance of third party service providers.
During the Track Record Period, we outsourced certain services to third parties, such as outsourcing the delivery of our products to several third party logistics providers for transportation from our production facilities or warehouse to the port for exporting, international shipping and transportation to the customers. The services provided by the third party service providers could be interrupted for various reasons beyond our control, including adverse weather conditions, natural disasters, social unrests and epidemics or pandemics such as the outbreak of COVID-19 in 2020.
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There can be no assurance that we can continue or extend relationships with our current third party service providers on terms acceptable to us, or that we will be able to establish relationships with new third party service providers or courier companies to ensure timely and cost-efficient delivery services. If we are unable to maintain or develop good relationships with third party service providers, it may inhibit our ability to deliver products in sufficient quantities, on a timely basis, to our customers. Purchase price on service rates may fluctuate according to our agreements with third party service providers. We cannot guarantee that no interruptions would occur which could materially and adversely affect our business, prospects or results of operations. In addition, as we do not have any direct control over these third party service providers, we cannot guarantee their quality of services.
Failure to maintain optimal inventory level could increase our inventory holding costs or cause us to lose sales, either of which could have a material adverse effect on our business, financial condition and results of operations.
Maintaining optimal inventory level is critical to the success of our business. As of December 31, 2017, 2018 and 2019 and June 30, 2020, the balance of our inventories accounted for approximately 69.2%, 55.5%, 43.8% and 45.0%, respectively, of our total current assets. In 2017, 2018, 2019 and the six months ended June 30, 2020, our average inventory turnover days were 101, 97, 102 and 96, respectively. We review the condition of our inventories and make provision for obsolete and slow-moving inventory items. As of December 31, 2017, 2018 and 2019 and June 30, 2020, we made provision for inventories of approximately US$0.2 million, US$0.6 million, US$1.2 million and US$2.2 million, respectively. We are exposed to inventory risks as a result of a variety of factors beyond our control, including changing consumption trends and customer preferences, launches of competing products, disruptions to international and local shipping, and economic and political factors such as the Sino-U.S. trade war.
Moreover, for stocking purposes, we generally estimate demand for the products we sell ahead of the actual time of sale. We cannot assure you that we can accurately predict trends and events and maintain adequate levels of inventory at all times. An unexpected decrease in the market demand for the products we sell could lead to excessive inventory, and we may be forced to offer discounts or conduct promotional activities to dispose of slow-moving inventory, sometimes below cost, which in turn may adversely affect our business, financial condition and results of operations. On the other hand, inventory under-stock may cause us to miss out on sales and our business, financial condition, results of operations and operating cash flows may also be adversely affected.
Our financial position is affected by our ability to collect trade receivables in a timely manner and to otherwise obtain adequate financing to fund our operations.
We face credit and liquidity risks attributable to our trade receivables due from our customers. We, on average, offer a credit term of no more than 90 days to our customers. In 2017, 2018, 2019 and the six months ended June 30, 2020, our average trade receivables turnover days were 48, 24, 45 and 40, respectively. There is no assurance that our customers, including Amazon, will pay us on time or at all or whether any of them will fall into financial difficulties, thereby affecting their ability to pay us. If any of our customers fail to pay us on time or at all, our financial condition will be materially adversely affected, which will in turn affect our business operations. As of
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December 31, 2017, 2018 and 2019 and June 30, 2020, our trade receivables were US$1.6 million, US$3.9 million, US$17.9 million and US$18.6 million, respectively. The increasing trend in our trade receivables as of December 31, 2017, 2018 and 2019 and June 30, 2020 was mainly attributable to increase in revenue generated through the Vendor Central program during the Track Record Period. As of December 31, 2017, 2018 and 2019 and June 30, 2020, we made loss allowance for impairment of trade receivables of US$0.5 million, US$0.6 million, US$0.4 million and US$0.7 million, respectively. If we are unable to collect payments from customers or experience a prolonged delay in receiving such payments, our cash flow position and our ability to meet our working capital requirements may be adversely affected.
We had net cash used in operating activities in 2017, 2019 and the six months ended June 30, 2019 , respectively.
We experienced net operating cash outflow during the Track Record Period. In 2017 and 2019 and the six months ended June 30, 2019, we had negative net operating cash flow of approximately US$5.4 million, US$1.3 million and US$4.5 million, respectively. Please refer to ‘‘Financial Information—Liquidity and Capital Resources—Net cash flows from/(used in) operating activities’’ in this prospectus for further information. Although we seek to effectively manage our working capital, we cannot assure you that we will be able to match the timing and amounts of our operating cash inflows with the timing and amounts of our payment obligations and other cash outflows.
During the Track Record Period, we mainly relied on internal resources generated from our operations, including proceeds from the sales of products and capital contribution from shareholders. We also relied on external financing, such as bank loans and other borrowings. Negative operating cash flow may require us to obtain sufficient additional financing to meet out financing needs and obligations and to support our expansion plans. In the event that we are unable to generate sufficient cash flow for our operations or otherwise unable to obtain sufficient external funds to finance our business, our liquidity and financial condition may be materially and adversely affected and we may not be able to expand our business. We cannot assure you that we will have sufficient cash from other sources to fund our operations. If we resort to other financing activities, we will incur additional financing costs, and we cannot guarantee that we will be able to obtain financing on terms acceptable to us, or at all. Moreover, the level of our indebtedness and the amount of our interest payments could further limit our ability to obtain the necessary financing or obtain favorable terms for our working capital. Such limitations could reduce our competitiveness and increase our exposure and sensitivity to adverse economic and industry conditions, which could materially adversely affect our financial condition and results of operations.
We may not be able to receive PRC tax preferential treatment in the future, which could have an impact on our financial results.
We enjoy certain PRC tax preferential treatment in the PRC. Under Notice on Increasing the Ratio of the Additional Deduction of Research and Development Expenses (關於提高研究開發費用 稅前加計扣除比例的通知), we enjoyed additional tax deduction for our research and development expenses. In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, tax deduction allowance for research and development costs amounted to US$208,000, US$316,000, US$731,000,
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US$278,000 and US$328,000, respectively. In addition, our subsidiary Shenzhen Chenbei obtained the High and New Technology Enterprise Certificate (高新技術企業證書) in 2018 and, since then, enjoyed PRC tax preferential treatment at a reduced rate of 15% for 2018, 2019 and 2020. In addition, our subsidiary, Chongqing Xiaodao, is currently entitled to preferential income tax treatment for qualified small and micro-sized enterprise, with a tax rate of 5% for the taxable income less than or equal to RMB1,000,000 and a preferential income tax rate of 10% for the taxable income between RMB1,000,000 and RMB3,000,000. Such PRC tax preferential treatment on Chongqing Xiaodao will expire on December 31, 2021 so long as it continues to qualify as a small and micro-sized enterprise. In 2017, 2018 and 2019, our tax savings attributable to PRC tax preferential treatments amounted to US$7,000, US$568,000 and US$459,000, among which US$7,000, US$54,000 and US$53,000 was tax savings attributable to PRC tax preferential treatment for Chongqing Xiaodao, respectively. In the six months ended June 30, 2019 and 2020, our total tax savings attributable to PRC tax preferential treatment amounted to US$92,000 and US$335,000, respectively. In the event that Shenzhen Chenbei fails to renew the High and New Technology Enterprise Certificate, it would not be able to enjoy the relevant tax preferential treatment. In addition, The PRC government may eliminate or reduce the preferential tax treatment in the future. Any such adverse policy changes may reduce our profitability. As a result, our business, financial condition and results of operation could be materially and adversely affected.
There are uncertainties about the recoverability of our deferred tax assets, which could adversely affect our results of operations.
We recorded deferred tax assets of US$2.1 million, US$2.3 million, US$2.8 million and US$2.9 million, respectively, as of December 31, 2017, 2018 and 2019 and June 30, 2020. Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. We periodically assess the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning strategies. In particular, deferred tax assets can only be recognized to the extent that it is probable that future taxable profit will be available against which the unused tax credits can be utilized. However, there is no assurance that our expectation of future earnings could be accurate due to factors beyond our control, such as general economic conditions and negative development of the regulatory environment, in which case, we may not be able to recover our deferred tax assets which thereby could have an adverse effect on our results of operations.
Our indebtedness increased during the Track Record Period and we may incur additional indebtedness in the future. The increased level of indebtedness could adversely affect our financial health and our ability to generate sufficient cash to satisfy our outstanding and future debt obligations.
We have incurred, and will continue to incur, indebtedness to fund our ongoing operations and expansions. As of December 31, 2017, 2018 and 2019 and June 30, 2020, our interest-bearing bank andotherborrowingsamountedtoUS$8.2million, US$14.0 million, US$18.4 million and US$6.3 million, respectively. In addition, substantially all of our interest-bearing bank and other borrowings in 2018 and 2019 are current portion of long-term bank loans and other borrowings.
Our indebtedness could have important consequences to you. For example, it could:
. limit our ability to satisfy our obligations under bank and other borrowings;
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. increase our vulnerability to adverse general economic and industry conditions;
. require us to dedicate a substantial portion of our cash flow from operations to repaying our indebtedness, thereby reducing the availability of our cash flow to fund working capital and for other general corporate purposes;
. limit our flexibility in planning for or reacting to changes in our businesses and the industry in which we operate;
. place us at a competitive disadvantage compared to our competitors that have less debt; and
. increase the cost of additional financing.
We cannot assure you that we will be able to obtain adequate financing to fund our operations. Apart from bank borrowings, historically we have borrowed money from certain related parties and employees, which may not be available in the future. Should we fail to obtain external financing on reasonable terms, or at all, our operation and expansion may be adversely affected and disrupted.
In addition, our ability to generate sufficient cash to satisfy our outstanding and future debt obligations will depend upon our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond our control. If we are unable to repay our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as selling assets, restructuring or refinancing our indebtedness or seeking equity capital. These strategies may not be instituted on satisfactory terms, if at all.
We are subject to risks associated with foreign exchange rate fluctuations.
Our consolidated financial results are affected by currency exchange rate fluctuations. We mainly conduct our operations in the United States and the PRC and all of our products are manufactured in the PRC during the Track Record Period for international sales to countries including, without limitation, the United States, Canada, the United Kingdom, Germany, France, Spain, Italy, and Japan. Fluctuations in the value of U.S. dollars against local currencies could affect our results of operations and financial condition. We seek to limit our foreign currency exposure by trying to minimize our net foreign currency position. Most of our sales are denominated in U.S. dollars, with the remaining mainly denominated in currencies of the countries to which we sell our products. We pay our subcontractors and suppliers (including those located in the PRC) mainly in U.S. dollars and Renminbi. As some of our cost of sales incurred in China are denominated in Renminbi, our cost of sales in U.S. dollar terms is affected by fluctuations of the U.S. dollar against Renminbi. A depreciation of the U.S. dollar against Renminbi generally has a negative impact on our gross profit.
Our financial information is presented in U.S. dollars. In connection with the preparation of our financial information, the results of operations of subsidiaries, which are initially prepared in their respective local functional currencies, such as the Renminbi and Euro, are translated into U.S.
– 54 – RISK FACTORS dollars. As a result, changes in the exchange rate between our functional currencies, particularly Renminbi as one of our major operating currencies, and the U.S. dollar could materially impact our reported results of operations and distort period to period comparisons. In particular, to the extent that foreign currency-denominated (i.e., non-U.S. dollar) monetary assets do not equal the amount of our foreign currency-denominated monetary liabilities, foreign currency gains or losses could arise and materially impact our financial statements. We recorded a currency exchange loss of US$60,000 and US$63,000 in 2017 and the six months ended June 30, 2020, respectively, and a currency exchange gain of US$58,000 and US$0.4 million in 2018 and 2019, respectively. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations.
Some of our transfer pricing arrangements may be subject to scrutiny by the relevant tax authorities in the PRC, United States, Hong Kong and Europe and additional tax may be imposed which may reduce our revenue and adversely affect our business, financial condition and results of operation.
Under the laws and regulations in the PRC, Hong Kong, Europe and United States, arrangements and transactions among related parties may be subject to audit or challenge by the relevant tax authorities. See ‘‘Regulatory Overview’’ and ‘‘Business—Transfer Pricing Arrangements’’ for details. We could face material and adverse tax consequences if the relevant tax authorities determine that the certain inter-company transactions of us do not represent arm’s-length negotiations and consequently adjust any of those entities’ income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, increase our tax liabilities. If we fail to rectify such incident within the limited timeframe required by the relevant tax authorities, the relevant tax authorities may impose late payment interest or surcharge and other penalties on us for any unpaid taxes. In addition, a transfer pricing arrangement may give rise to tax recoverable in certain jurisdictions as a result of tax adjustments. There is no assurance that we could successfully recover the tax recoverable from the relevant tax authorities. Our business, financial condition and results of operation may therefore be materially and adversely affected.
Taxation authorities could challenge our allocation of taxable income which could increase our consolidated tax liability
During the Track Record Period, we have carried out certain intra-group transactions. Please see ‘‘Business—Transfer Pricing Arrangements’’ for details. We expect that the transfer pricing arrangements will continue in the foreseeable future. We have determined transfer pricing arrangement that we believe are the same as the arrangement that would be charged by unrelated third parties on an arms’ length basis.
However, there is no assurance that tax authorities reviewing such arrangements would agree that we are in compliance with transfer pricing related laws and regulations, or such laws and regulations will not be modified. In the event that an authority of any relevant jurisdiction determines that the transfer prices were not on an arms’ length basis that affect taxable income, such authority could require our relevant subsidiaries to re-determine the transfer prices and thereby reallocate revenue, deduct costs and expenses or adjust taxable income of the relevant subsidiary in
– 55 – RISK FACTORS order to accurately reflect the taxable income. Any such reallocation or adjustment could result in higher overall tax liability for us, which may adversely affect our business, financial condition and results of operations.
We may be subject to additional contributions of social insurance and housing provident funds and late payments and fines imposed by relevant governmental authorities.
We did not make adequate contributions to the relevant social insurance and housing provident funds for certain employees of four PRC subsidiaries during the Track Record Period. In 2017, 2018, 2019 and the six months ended June 30, 2020, we made provisions of US$0.2 million, US$0.3 million, US$0.3 million and US$0.1 million, respectively, for the insufficient contributions of social insurance and housing provident funds. For details, see ‘‘Business—Legal Proceedings and Compliance—Non-compliance.’’ According to the applicable PRC laws and regulations, we are obligated to make contributions to the social insurance and housing provident funds according to the prescribed percentage and contribution base. The relevant governmental authority may require a company that fails to pay its portion of social insurance funds contributions to make the outstanding contribution within a given period and may impose on the company an additional late payment fee at a daily rate of 0.05% of the outstanding contribution from the due date, and if the company fails to do so, may impose a fine on the company ranging from one to three times of the total amount of the unsubscribed contribution. In addition, the relevant governmental authority may require the company to make the unsubscribed contribution of housing provident fund within a given period. If the relevant employees lodge a complaint before the relevant labor authorities, we may be required to pay the amount in full in arrears and pay penalties for the delay. If we are required to make additional payments in relation to such social insurance and housing provident funds contributions, our operating expenses will increase, which could consequently adversely affect our financial condition and results of operations.
Dividends declared in the past may not be indicative of our dividend policy in the future.
For the year ended December 31, 2017, 2018 and 2019, dividends of nil, US$0.6 million and nil, respectively, were recognized as distribution by our Group to our then shareholders. In June 2020, our Group declared a dividend of approximately US$4.2 million, which has been distributed out of share premium account of our Company and settled in cash. Any dividend declared by us will have to be approved by our Board and the amount of any dividend will depend on various factors, including, without limitation, our operating results, financial condition, future prospects and other factors which our Board may determine as important. Accordingly, our historical dividends are not indicative of our future dividend distribution policy. Potential investors should be aware that the amount of dividends paid previously should not be used as a reference or basis upon which future dividends are determined.
Our operating results could be materially harmed if there is a substantial change in consumer preference and behavior towards online sales.
During the Track Record Period, a substantial portion of our revenue is derived from online sales. According the Frost & Sullivan Report, the global market size of e-commerce has grown rapidlyfromapproximatelyUS$1.7trillionin2015toUS$3.8trillionin2019withaCAGRof
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23.1%. However, we cannot assure you the e-commerce market will continue to grow or there will not be any substantial change in consumer preferences or behaviors towards online sales. If our consumers’ preferences and behaviors towards online sales change significantly, our business, financial position and results of operations could be materially and adversely affected.
Occurrence of epidemics, acts of war, terrorists attacks and natural disasters could affect our Group’sbusiness.
Any outbreak of epidemics or occurrence of any natural disaster, which may lead to serious disruption to the public in the affected areas, may have a material and adverse effect on our business, results of operations and financial performance. In recent years, there have been outbreaks of epidemics or pandemics in the PRC and globally. Our results of operations could be adversely affected to the extent that the outbreak disrupts our operations and/or harms the Chinese and Global economy in general and the small home appliance and smart home device industry in particular. For example, some regions in the PRC, including the cities where we operate, are under the threat of flood, earthquake, sandstorm, snowstorm, fire, drought, or epidemics such as the Severe Acute Respiratory Syndrome, or SARS, the H5N1 avian flu, the human swine flu, also known as Influenza A (H1N1), or, most recently, the novel coronavirus COVID-19. In addition, Acts of war and terrorist attacks may cause damage or disruption to our Group, our Group’s employees, our markets, our customers and our suppliers, any of which could materially impact our Group’s sales, the procurement of products, overall results of operations and financial conditions. As a whole, any such events may cause our Group’s business to suffer in ways that our Group cannot anticipate.
Any interruption in the operations of our production facilities may have a material adverse effect on our business and operating results.
During the Track Record Period, we manufactured a portion of our products at our Dongguan Production Base. Smooth and consistent daily operations of our production facilities are crucial to our business. Regular repair and maintenance programs for our production facilities are scheduled by our production departments to ensure that our production facilities are in good condition. Although we have implemented regular repair and maintenance programs, there is no assurance that we will have been able to discover all the faults and defects whenever they exist or occur so as to execute repair works or take appropriate measures before any harm is caused to our plant, staff or production. Furthermore, we cannot assure you that there will be no sudden malfunctions or halts of daily operations at our production facilities due to any natural disasters, power shortage or malicious human acts. In addition, our Dongguan Production Base is located on a piece of collectively-owned land (集體建設用地). The assignment of its land use right to the Lessor has not complied with the applicable requirements for transfer of collectively-owned land and the Lessor has not obtained the building ownership certificate for the Leased Property. As advised by our PRC Legal Adviser, the Lessor may be ordered to return the illegally occupied land and the Leased Property may be rectified or demolished. Therefore, we may be forced to vacate our Dongguan Production Base. See ‘‘Business—Our Dongguan Production Base.’’ A prolonged disruption in the operations of our production facilities due to any of the above reason may adversely affect our business, financial condition and operating results.
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RISKS RELATING TO THE PRC
We are subject to stringent environmental and workplace safety laws and regulations and we may incur substantial costs in complying with such laws and regulations and may be subject to potential liability
We are subject to various national and local PRC environmental laws and regulations which impose standards on the emission and treatment of pollutants created during our production process, and are required to obtain environmental protection assessment approval and acceptance from the relevant PRC governmental authorities for the operation of production facilities periodically.
As the PRC is experiencing substantial issues with environmental pollution, environmental laws and regulations may become more stringent over time. As a result, we may need to incur more costs and devote more resources to comply with these laws and regulations. Furthermore, future changes in the scope, application and interpretation of these laws, regulations and approvals may limit or restrict the production capacity or increase the costs in connection with the installation of additional pollution control or safety improvement equipment or other related expenses substantially, and thus adversely affect our business. In addition, failure to comply with these laws and regulations could result in fines, penalties, clean-up costs or liabilities arising out of third-party civilorcriminalclaims.
Changes in political and economic policies of the PRC government could have an adverse effect on the overall economic growth of the PRC, which could increase our manufacturing costs and adversely affect our competitive position
Our production process and most of our business operations are conducted in the PRC. Accordingly, our business, financial condition, operating results and prospects are affected significantly by economic, political and legal developments in the PRC. The PRC economy differs from the economies of most developed countries in many respects, including the degree of government involvement, the level of development, the growth rate, the control of foreign exchange, access to financing, and the allocation of resources.
While the PRC economy has grown significantly in the past 30 years, the growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and operating results may be adversely and materially affected by government control over capital investments or changes in tax regulations that may be applicable to us.
The PRC economy has been transitioning from a planned economy to a more market oriented economy. However, the PRC government still exercises significant control over the economic growth of the PRC through the allocation of resources, controlling payment of foreign currency- denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Furthermore, as the PRC economy has become increasingly linked with the global economy, the PRC is affected in various respects by downturns and recessions of major economies around the world. Any adverse change in the economic conditions in the PRC, in
– 58 – RISK FACTORS policies of the PRC government or in laws and regulations in the PRC, could have an adverse effect on the overall economic growth of the PRC and market demand for our products and our competitive position.
We may be subject to fines due to the lack of registration of our leases.
Pursuant to the Administrative Measures for Commodity Housing Leasing (商品房屋租賃管理 辦法), parties to a lease agreement are required to file the lease agreements for registration and obtain property leasing filing certificates for their leases. As of the Latest Practicable Date, we entered into 14 leases as tenant mainly for our office premises, warehouse and production base in the PRC. As of the Latest Practicable Date, we failed to register 14 lease agreements as the tenant. The failure to register the lease agreements does not affect the validity of the lease agreements under the relevant PRC laws and regulations. However, there can be no assurance that legal disputes or conflicts concerning such leases and tenancies will not arise in the future. In addition, as advised by our PRC Legal Advisers, we may be required by relevant governmental authorities to file the lease agreements for registration and may be subject to a fine for non-registration within the prescribed time limit, which may range from RMB1,000 to RMB10,000 per lease agreement. The occurrence of any of the above disputes or the imposition of the above fines could require us to make additional efforts and/or incur additional expenses, any of which could materially and adversely impact our business, financial condition and results of operations. The registration of these lease agreements to which we are a party may require additional steps to be taken by the respective other parties to the lease agreement which may be beyond our control. There can be no assurance that the landlords to our lease agreements will be cooperative and that we can complete the registration of these lease agreements and any other lease agreements that we may enter into in the future.
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of the Global Offering to make loans or additional capital contributions to our PRC subsidiaries, which could adversely affect our liquidity and our ability to fund and expand our business.
Some funds we transfer to our PRC subsidiaries, such as a shareholder loan, is subject to approval by or registration with relevant PRC governmental authorities. In addition, any foreign loan procured by our PRC subsidiaries is required to be registered of its foreign loan contract with SAFE or its local branches, and our PRC subsidiaries may not procure loans which exceed the difference between its registered capital and its total investment amount as approved or filed by MOFCOM or its local branches. Any medium or long term loan to be provided by us to our consolidated affiliated entity must be approved by SAFE or its local branches. We may not obtain these government approvals or complete such registrations on a timely basis, if at all, with respect to future foreign loans by us to our PRC subsidiaries.
On March 30, 2015, the SAFE promulgated the Circular on Reform of the Administrative Method of the Settlement of Foreign Currency Capital by Foreign-invested Enterprises《 ( 關於改革 外商投資企業外匯資本金結匯管理方式的通知》)(the‘‘Circular 19’’) which became effective on June 1, 2015. The Circular 19 provides greater flexibility to FIEs in converting foreign exchange in their capital account into Renminbi, and in particular, it provides that FIEs are allowed to use their
– 59 – RISK FACTORS converted Renminbi to make equity investments in the PRC after performing relevant procedures as stipulated in it. Under the Circular 19, FIEs may choose to convert any amount of foreign exchange in their capital account into Renminbi according to their actual business needs. The converted Renminbi will be kept in a designated account and if an FIE needs to make further payment from such account, it still needs to provide supporting documents and go through the review process with the banks. FIEs are still required to use the converted RMB within their approved business scope.
Currently, according to the Circular of SAFE on Further Promoting Cross-border Trade and Investment Facilitation《 ( 國家外匯管理局關於進一步促進跨境貿易投資便利化的通知》), which was implemented on October 23, 2019, apart from foreign-invested enterprises engaged in investment business, foreign-invested enterprises engaged in other businesses are also permitted to make domestic equity investments with their capital funds under the condition that the negative list is not violated and the relevant domestic investment projects are true and complied with.
Since SAFE may promulgate regulations for administration of the payment and settlement of foreign currency capital of foreign invested enterprise, and the regulations and practice of administration of the payment and settlement of foreign currency capital of foreign invested enterprise may be different from time to time, these regulations may significantly limit our ability to convert, transfer and use the net proceeds from the Global Offering and any offering of additional equity securities in the PRC, which may adversely affect our business, financial condition and results of operations.
Uncertainties with respect to the Chinese legal system could have an adverse effect on our business.
The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation since then has significantly enhanced the protections afforded to various forms of foreign investments in China. We conduct our business primarily through our subsidiaries established in China. These subsidiaries are generally subject to laws and regulations applicable to foreign investment in China. However, the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us.
In addition, some regulatory requirements issued by certain PRC governmental authorities may not be consistently applied. For example, we may have to resort to administrative and court proceedings to enforce the legal protection that we enjoy by labor contract. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory 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 with our business partners and customers.
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Such uncertainties, including the inability to enforce our contracts, together with any development or interpretation of PRC law that is adverse to us, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the more developed countries. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.
Companies having business in the PRC may have a chance to be classified as a ‘‘resident enterprise’’ for PRC enterprise income tax purposes, and such classification could result in unfavorable tax consequences to us and our non-PRC Shareholders.
According to the PRC Enterprise Income Tax Law《 ( 中華人民共和國企業所得稅法》)(the ‘‘PRC EIT Law’’) which was promulgated by the State Taxation Administration (‘‘SAT’’)on March 16, 2007 and effective on January 1, 2008 and amended on February 24, 2017, enterprises established under the laws of jurisdictions other than the PRC may nevertheless be considered as PRC tax resident enterprises for tax purposes if these enterprises have their ‘‘de facto management body’’ within the PRC. Under the supplementary rules for the PRC EIT Law, the term ‘‘de facto management body’’ is defined as a body which substantially manages, or has control over the business, personnel, finance and assets, etc. of an enterprise. Since we are conducting business in the PRC through our PRC subsidiaries and some of the members of our management team continue to be located in the PRC after the effective date of the PRC EIT Law and as we expect them to continue to be located in the PRC for the foreseeable future, we may be considered as a PRC resident enterprise by the PRC tax authorities and therefore be subject to the EIT at the rate of 25% on our worldwide income. If we are considered by the PRC tax authorities as a PRC tax resident enterprise under the PRC tax regime, our business, financial condition and operating results may be materially and adversely affected.
PRC tax laws on dividend distribution may adversely affect our operating results and dividends payable by us to our foreign investors and gains on the sale of our Shares may be subject to withholding taxes under PRC tax laws.
Under the PRC EIT Law, a withholding income tax at the rate of 20.0% is applicable to dividends derived from sources within China paid by foreign-invested enterprises to their non-PRC parent companies. However, pursuant to the implementation rules of the PRC EIT Law reduced withholding income tax rate of 10.0% shall be applicable in such cases. In addition, due to the Arrangement between Mainland China and Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Prevention of Fiscal Evasion With Respect to Taxes On Income 《( 內地和香港特別行政區關於對所得避免雙重徵稅和防止偷漏稅的安排》), promulgated by the SAT and Hong Kong Special Administrative Region on August 21, 2006 (the ‘‘Hong Kong Tax Treaty’’), a company incorporated in Hong Kong will be subject to withholding income tax at a rate of 5.0% on dividends it receives from its PRC subsidiaries if it holds a 25.0% or more interest in that particular PRC subsidiaries, or 10.0% if it holds less than a 25.0% interest in that subsidiaries. With respect to dividends, the SAT promulgated the Notice on Certain Issues of
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‘‘Beneficial Owners’’ under Tax Treaty《 ( 國家稅務總局關於稅收協定中「受益所有人」有關問題 的公告》)onFebruary3,2018(the‘‘Notice 9’’), which provides that conduit companies, which are established for the purpose of evading or reducing tax, or transferring or accumulating profit, may not be recognized as beneficial owners and thus will not be entitled to the above-mentioned reduced income tax rate of 5% under the Hong Kong Tax Treaty. It is unclear at this early stage whether the Notice 9 applies to dividends from our PRC subsidiaries paid to us through our Hong Kong subsidiary. It is possible however, that under the Notice 9, the Hong Kong subsidiary would not be considered as the ‘‘beneficial owner’’ of any such dividends, and that such dividends would as a result be subject to income tax withholding at the rate of 10.0% rather than the favorable 5.0% rate applicable under the Hong Kong Tax Treaty.
In addition, due to ambiguities in the PRC EIT Law and its implementation rules, a withholding tax at the rate of 10.0% may also be applicable to dividends payable to investors (excluding individual natural persons) that are non-resident enterprises to the extent such dividends are sourced within China. Similarly, any gain realized on the transfer of our Shares by such investors is also subject to a withholding tax at the rate of 10.0% if such gain is regarded as income derived from sources within China. If we are considered a resident enterprise in China, it is unclear whether the dividends we pay with respect to our Shares would be treated as income derived from sources within China and be subject to PRC income tax. If we are required under the PRC EIT Law to withhold PRC income tax on our dividends payable to our foreign Shareholders, or if you are required to pay PRC income tax on the transfer of the Shares, the value of your investment in our Shares may be materially and adversely affected.
RISKS RELATING TO THE GLOBAL OFFERING
There has been no prior public market for the Shares and their liquidity and market prices following the Global Offering may be volatile.
Prior to the Global Offering, there was no public market for our Shares. The initial issue price range for our Shares was the result of negotiations among us and the Joint Global Coordinators on behalf of the Underwriters, and the Offer Price may differ significantly from the market price for our Shares following the Global Offering. We have applied for the listing of, and permission to deal in, our Shares on the Stock Exchange. A listing on the Stock Exchange, however, does not guarantee that an active and liquid public trading market for our Shares will develop or, if it does develop, will be sustained following the Global Offering or that the market price of our Shares will not decline following the Global Offering. Furthermore, the market price and trading volume of our Shares may be volatile and may result in substantial losses for investors purchasing the Offer Shares in the Global Offering. Factors such as the following may affect the market price and trading volume at which our Shares will trade:
. actual or anticipated fluctuations in our results of operations;
. announcements of new initiatives by us or our competitors;
. changes in management or other key personnel of us or of our competitors;
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. announcements of competitive developments, acquisitions or strategic alliances in our industry;
. changes in earnings estimates or recommendations by financial analysts;
. potential litigation or regulatory investigations;
. changes in laws, regulations and policies affecting our industries;
. general market conditions or other developments affecting us or our industries;
. the operating and stock price performance of other companies, other industries and other events or factors beyond our control; and
. release of lock-up or other transfer restrictions on our outstanding Shares or sales or perceived sales of additional Shares by us or other Shareholders.
You should note that the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our Shares.
Shareholders’ equity interests may be diluted.
We may need to raise additional funds in the future to finance, inter alia, expansion or new developments relating to our existing operations or new acquisitions. If additional funds are raised through the issue of new equity and equity-linked securities of our Company other than on a pro- rata basis to the existing Shareholders, the percentage ownership of the Shareholders in our Company may be reduced and Shareholders may experience dilution in their percentage shareholdings in our Company. In addition, any such new securities may have preferred rights, options or pre-emptive rights that make them more valuable than or senior to the Shares.
– 63 – RISK FACTORS
Future sale of Shares in the public market (or perception or speculation that such sales may occur) could materially and adversely affect the prevailing market price of the Shares.
The market price of the Offer Shares could decline as a result of future sale of substantial amount of Shares or other securities relating to the Shares in the public market or the issuance of new Shares or other securities, or the perception or speculation that such sales or issuances may occur. Future sale of substantial amounts of our securities, including any future offerings, or the perception that such sales are likely to occur, may also materially and adversely affect our ability to raisecapitalinthefutureatatimeandatapricewedeemtobeappropriate.
While the Shares held by our Controlling Shareholders are subject to a lock-up period, details of which are set out in the section headed ‘‘Underwriting—Underwriting Arrangements and Expenses—Undertakings to the Stock Exchange—Undertaking by our Controlling Shareholders and ‘‘—Undertakings Pursuant to the Hong Kong Underwriting Agreement’’ in this prospectus, we are not in a position to give any assurances that they will not dispose of any Shares during the relevant periods. If any of their undertakings are waived or breached, or after the restrictions lapse, any future sales of a substantial number of our Shares or the perception or speculation that these sales may occur, may materially and adversely affect the prevailing market price of our Shares.
The interests of our Controlling Shareholders may differ from those of other Shareholders.
The interests of our Controlling Shareholders may differ from the interests of other Shareholders. If the interests of our Controlling Shareholders conflict with the interests of other Shareholders, or if our Controlling Shareholders cause our business to pursue strategic objectives that conflict with the interests of other Shareholders, you could be disadvantaged by the actions that our Controlling Shareholders choose to cause us to pursue. Our Controlling Shareholders could have significant influence in determining the outcome of any corporate transaction or other matters submitted to the Shareholders for approval, such as mergers, acquisitions and disposal of all of our assets, election of directors, and other significant corporate actions. Our Controlling Shareholders have no obligation to consider the interests of our Company or the interests of other Shareholders.
There may be a dilutive effect on the earnings per Share associated with the Share Option Scheme and an impact on future earnings.
We have conditionally adopted the Share Option Scheme. For details of the Share Option Scheme, please refer to section headed ‘‘Statutory and General Information—D. Other Information—2. Share Option Scheme’’ in Appendix IV to this prospectus. The issue of any options which may be granted under the Share Option Scheme in the future will result in an increase in the number of Shares in issue and may result in the dilution of the percentage of ownership of our Shareholders, the earnings per Share and net asset value per Share.
– 64 – RISK FACTORS
RISKS RELATING TO INFORMATION CONTAINED IN THIS PROSPECTUS
Certain statistics and facts in this prospectus have come from various government official publications whose reliability cannot be assumed or assured.
This prospectus includes certain statistics and facts extracted in whole or in part from various publicly available government official sources and publications or from the Frost & Sullivan Report or other sources. We believe that the sources of these statistics and facts are appropriate and we have taken reasonable care in extracting and reproducing such statistics and facts from their respective sources. We have no reason to believe that such statistics and facts are false or misleading in any material respect or that any fact has been omitted that would render such statistics and facts false or misleading in any material respect. These statistics and facts have not yet been independently verified by our Company, the Joint Sponsors, the Joint Global Coordinators, the Underwriters, their respective directors and advisers or any other parties involved in the Global Offering. In addition, the information contained in the Frost & Sullivan Report was derived by means of, inter alia, desk research, client consultation and interviewing with key stakeholders and industry experts, which includes information that is not publicly available. Therefore, we make no representation as to the accuracy or completeness of these statistics and facts, as such these statistics and facts should not be unduly relied upon.
Forward-looking statements contained in this prospectus are subject to risks and uncertainties.
This prospectus contains certain statements and information that are ‘‘forward-looking’’ and uses forward-looking terminologies such as ‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘may’’, ‘‘ought to’’, ‘‘should’’ or ‘‘will’’ or similar terms. Those statements include, among other things, the discussion of our growth strategy and expectations concerning our future operations, liquidity and capital resources. Investors of the Shares are cautioned that reliance on any forward-looking statements involves risks and uncertainties and that any or all of those assumptions could prove to be inaccurate and as a result, the forward-looking statements based on those assumptions could also be incorrect. The uncertainties in this regard include, but are not limited to, those identified in this section, many of which are not within our control. In light of these and other uncertainties, the inclusion of forward-looking statements in this prospectus should not be regarded as representations by our Company that our plans or objectives will be achieved and investors should not place undue reliance on such forward-looking statements. Our Company does not undertake any obligation to update publicly or release any revisions of any forward- looking statements, whether as a result of new information, future events or otherwise. Please refer to the section headed ‘‘Forward-looking Statements’’ in this prospectus for further details.
– 65 – RISK FACTORS
Investors should read this entire prospectus carefully, and we cannot assure you that any information contained in press articles or other media coverage regarding us and the Global Offering is appropriate, accurate, complete or reliable. You should not consider any particular statements in this prospectus or in published media reports without carefully considering the risks and other information contained in this Prospectus.
Prior to the publication of this prospectus, there might have been press articles and/or media coverage regarding us and the Global Offering which might include certain financial information, financial projections, and other information about us which were not disclosed in this prospectus. Such information might not be sourced from or authorized by us, the Joint Sponsors, the Joint Global Coordinators, the Underwriters, their respective directors and advisers or any other parties involved in the Global Offering, hence none of these parties accept any responsibility for the accuracy or completeness of such information or the fairness or appropriateness of any forecasts, views or opinions expressed by the press articles and/or other media coverage regarding us and the Global Offering. We cannot guarantee and make no representation as to the appropriateness, accuracy, completeness or reliability of any such information. Accordingly, prospective investors are cautioned to make their investment decisions based solely on the information contained in this prospectus and should not rely on any other information.
– 66 – WAIVER FROM STRICT COMPLIANCE WITH THE LISTING RULES
Our Company has sought the following waiver from strict compliance with the relevant provisions of the Listing Rules.
MANAGEMENT PRESENCE
Pursuant to Rule 8.12 of the Listing Rules, an issuer must have a sufficient management presence in Hong Kong. This normally means that at least two of the executive Directors must be ordinarily resident in Hong Kong. Given that our management, business and operation are principally located, managed and conducted in the United States and the PRC and all of our executive Directors are not ordinarily resident in Hong Kong, it would be practically difficult and commercially unfeasible for us to either relocate two of our executive Directors to Hong Kong or to appoint two additional executive Directors who are ordinarily resident in Hong Kong in order to comply with the requirements under Rule 8.12 of the Listing Rules.
Accordingly, our Company has applied to the Stock Exchange for, and the Stock Exchange has granted, a waiver from compliance with the requirements under Rule 8.12 of the Listing Rules on the following conditions:
(a) our Company will appoint two authorized representatives pursuant to Rule 3.05 of the Listing Rules, namely, Ms. Yang, an executive Director and Ms. Zhang Xiao (張瀟), our Company’s company secretary, who will act as Company’s principal channel of communication with the Stock Exchange. Ms. Zhang Xiao is ordinarily resident in Hong Kong. Each of the authorized representatives will be available to meet with the Stock Exchange in Hong Kong within a reasonable time frame upon the request of the Stock Exchange and will be readily contactable by telephone, facsimile and email. Each of the two authorized representatives is authorized by our Board to communicate on behalf of our Company with the Stock Exchange. Our Company has been registered as a non-Hong Kong company under Part 16 of the Companies Ordinance, and Ms. Zhang Xiao has been authorized to accept service of legal process and notice in Hong Kong on behalf of our Company;
(b) each of our Company’s authorized representatives has means to contact all members of our Board (including the independent non-executive Directors) and of the senior management team promptly at all times as and when the Stock Exchange wishes to contact them or any of them for any matters. To enhance the communication between the Stock Exchange, the authorized representatives and our Directors, our Company will implement a number of policies whereby (i) each Director shall provide his/her mobile phone numbers, office phone numbers, fax numbers and email addresses to the authorized representatives; (ii) in the event that such Director expects to travel and be out of office, he/she shall provide the phone number of the place of his/her accommodation to the authorized representatives; and (iii) all our Directors and authorized representatives will provide their respective mobile phone numbers, office phone numbers, fax numbers and email addresses to the Stock Exchange. We shall promptly inform the Stock Exchange of any changes to the contact details of the authorized representatives of our Company and our Directors;
– 67 – WAIVER FROM STRICT COMPLIANCE WITH THE LISTING RULES
(c) Innovax Capital Limited has been appointed as our Company’s compliance adviser, pursuant to Rule 3A.19 of the Listing Rules, to provide our Company with professional advice on continuing obligations under the Listing Rules, and to act at all times, in addition to the two authorized representatives of our Company, as our Company’s additional channel of communication with the Stock Exchange for the period commencing on the Listing Date and ending on the date on which our Company complies with Rule 13.46 of the Listing Rules and publishes its annual report in respect of its first full financial year commencing after the Listing Date. The contact person of the compliance adviser will be fully available to answer enquiries from the Stock Exchange;
(d) each of our Directors (including independent non-executive Directors) who is not ordinarily resident in Hong Kong has confirmed that they possess or can apply for valid travel documents to visit Hong Kong and would be able to meet with the Stock Exchange in Hong Kong upon reasonable notice; and
(e) our Company will also appoint other professional advisers (including its legal advisers in Hong Kong) after the Listing to assist our Company in addressing any enquiries which may be raised by the Stock Exchange and to ensure that there will be prompt and effective communication with the Stock Exchange.
– 68 – INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
DIRECTORS’ RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS
This prospectus, for which our Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the Securities and Futures (Stock Market Listing) Rules (Chapter 571V of the Laws of Hong Kong) and the Listing Rules for the purpose of giving informationwithregardtoourGroup.OurDirectors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this prospectus is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this prospectus misleading.
INFORMATION ON THE GLOBAL OFFERING
This prospectus is published solely in connection with the Hong Kong Public Offering, which forms part of the Global Offering. For applicants in the Hong Kong Public Offering, this prospectus and the Application Forms set out the terms and conditions of the Hong Kong Public Offering.
The Hong Kong Offer Shares are offered solely on the basis of the information contained and representations made in this prospectus and the Application Forms and on the terms and subject to the conditions set out herein and therein. No person is authorized to give any information in connection with the Global Offering or to make any representation not contained in this prospectus and the relevant Application Forms, and any information or representation not contained herein and therein must not be relied upon as having been authorized by our Company, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Underwriters, any of their respective directors, officers, agents, employees or advisers or any other parties involved in the Global Offering.
Details of the structure of the Global Offering, including its conditions, are set out in the section headed ‘‘Structure of the Global Offering’’ in this prospectus, and the procedures for applying for Hong Kong Offer Shares are set out in the section headed ‘‘How to Apply for Hong Kong Offer Shares’’ in this prospectus and in the relevant Application Forms.
UNDERWRITING
The listing of, and permission to deal in, the Shares on the Stock Exchange is sponsored by the Joint Sponsors and the Global Offering is managed by the Joint Global Coordinators. The Hong Kong Public Offering is fully underwritten by the Hong Kong Underwriters pursuant to the Hong Kong Underwriting Agreement and the International Offering is expected to be fully underwritten by the International Underwriters pursuant to the International Underwriting Agreement and are subject to our Company and the Joint Global Coordinators (for themselves and on behalf of the Underwriters) agreeing on the Offer Price.
Further details about the Underwriters and the underwriting arrangements are set out in the section headed ‘‘Underwriting’’ in this prospectus.
– 69 – INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
OVER-ALLOTMENT OPTION AND STABILIZATION
Details of the arrangements relating to the Over-allotment Option and stabilization are set out in the sections headed ‘‘Underwriting’’ and ‘‘Structure of the Global Offering’’ in this prospectus.
DETERMINATION OF THE OFFER PRICE
The Offer Shares are being offered at the Offer Price which is expected to be determined by our Company and the Joint Global Coordinators (for themselves and on behalf of the Underwriters) on the Price Determination Date. If our Company and the Joint Global Coordinators (for themselves and on behalf of the Underwriters) are unable to reach an agreement on the Offer Price by Thursday, December 17, 2020, the Global Offering will not become unconditional and will lapse.
RESTRICTIONS ON OFFER AND SALE OF THE OFFER SHARES
Each person acquiring the Hong Kong Offer Shares under the Hong Kong Public Offering will be required to, or be deemed by his/her acquisition of the Offer Shares to, confirm that he/she is aware of the restrictions on offers and sales of the Offer Shares described in this prospectus and the relevant Application Forms.
No action has been taken to permit a public offering of the Offer Shares or the distribution of this prospectus in any jurisdiction other than Hong Kong. Accordingly, without limitation to the following, this prospectus may not be used for the purpose of, and does not constitute, an offer or invitation in any jurisdiction or in any circumstances in which such an offer or invitation is not authorized or to any person to whom it is unlawful to make such an offer or invitation. The distribution of this prospectus and the offering and sales of the Offer Shares in other jurisdictions are subject to restrictions and may not be made except as permitted under the applicable securities laws of such jurisdictions pursuant to registration with or authorization by the relevant securities regulatory authorities or an exemption therefrom.
APPLICATION FOR LISTING ON THE STOCK EXCHANGE
Our Company has applied to the Stock Exchange for the granting of the approval for the listing of, and permission to deal in, the Shares in issue and to be issued pursuant to the Global Offering (including the additional Shares which may be issued pursuant to the exercise of the Over- allotment Option), any Shares to be issued under the Capitalization Issue, and any Shares which may be issued upon exercise of any option granted or may be granted under the Share Option
– 70 – INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
Scheme. Save as disclosed in this prospectus, no part of the share or loan capital of our Company is listed on or dealt in on any other stock exchange and no such listing or permission to list is being or proposed to be sought in the near future.
SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS
Subject to the granting of listing of, and permission to deal in, our Shares on the Stock Exchange and our Company’s compliance with the stock admission requirements of HKSCC, the Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the Shares on the Stock Exchange or any other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second trading date after any trading date.
All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.
All necessary arrangements have been made for the Shares to be admitted into CCASS.
Investors should seek the advice of their stockbroker or other professional adviser for details of the settlement arrangements and how such arrangements will affect your rights and interests as such arrangements may affect your rights and interests.
HONG KONG BRANCH REGISTER AND STAMP DUTY
Our Company’s principal register of members will be maintained by our principal share registrar, Conyers Trust Company (Cayman) Limited, in the Cayman Islands and our Company’s Hong Kong register of members will be maintained by our Hong Kong Share Registrar, Boardroom Share Registrars (HK) Limited, in Hong Kong.
All Offer Shares will be registered on the Hong Kong register of members of our Company in Hong Kong, and only securities registered on the Hong Kong register of members may be traded on the Stock Exchange unless the Stock Exchange otherwise agrees. Dealings in the Shares registered on our Hong Kong register of members will be subject to Hong Kong stamp duty.
PROFESSIONAL TAX ADVICE RECOMMENDED
Potential investors in the Global Offering are recommended to consult their professional advisers if they are in any doubt as to the taxation implications of subscribing for, purchasing or holding of and dealing in the Offer Shares. None of our Company, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and the Underwriters, any of their respective directors, officers, agents, employees, advisers or any other parties involved in the Global Offering accepts responsibility for any tax effects on, or liabilities of, any person resulting from the subscription for, purchase, holding or disposal of, dealing in or the exercise of any rights in relation to, the Shares.
– 71 – INFORMATION ABOUT THIS PROSPECTUS AND THE GLOBAL OFFERING
COMMENCEMENT OF DEALINGS IN THE SHARES
Dealings in the Shares on the Stock Exchange are expected to commence on Friday, December 18, 2020. The Shares will be traded in board lots of 1,000 Shares each.
LANGUAGE
If there is any inconsistency between this prospectus and the Chinese translation of this prospectus, this prospectus shall prevail.
EXCHANGE RATE CONVERSION
Unless otherwise specified and for the purpose of this prospectus, this prospectus includes translations among certain amounts denominated in Renminbi, Hong Kong dollars and U.S. dollars. Unless otherwise indicated, (i) the translation between U.S. dollar and Hong Kong dollar was made at the rate of HK$7.7525 to US$1.00, and (ii) the translation between Renminbi and U.S. dollars was made at the rate of RMB6.5755 to US$1.00. No representation is made that any amounts in one currency can be or could have been converted at the above rate or any other rates or at all.
ROUNDING
Certain amounts and percentage figures included in this prospectus have been subject to rounding adjustments; accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.
– 72 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
DIRECTORS
Name Address Nationality
Executive Directors
Yang Lin (楊琳)...... 25Brookstone Chinese Irvine CA 92604 United States
Yang Hai (楊海)...... Room3104,Building10 Chinese Donghai Yinwan 3GuilanRoad Chancheng District Foshan City Guangdong Province PRC
Chen Zhaojun (陳兆軍)..... 5/F,BlockF3,TCLInternationalECity Chinese 1001 Zhongshan Park Road Nanshan District Shenzhen City Guangdong Province PRC
Non-executive Director
Yang Yuzheng (楊毓正)..... Room6-1,Unit1,BuildingB Chinese Suzhou Road Yangguang Shui’An Community Zunyi City Guizhou Province PRC
– 73 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Name Address Nationality
Independent non-executive Directors
Fong Wo, Felix (方和)...... FlatD,9/F Chinese Repulse Bay Towers 119A Repulse Bay Road Repulse Bay Hong Kong
Gu Jiong (顧炯) ...... A28-2,JianianVilla Chinese No. 3333 Hongmei Road Minhang District Shanghai PRC
Tan Wen (檀文) ...... Room601,Building12 Singaporean Xiangmei Garden Lane 1650, Jinxiu Road Pudong District Shanghai PRC
For further information regarding our Directors, please refer to the section headed ‘‘Directors and Senior Management’’ in this prospectus.
– 74 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
PARTIES INVOLVED IN THE GLOBAL OFFERING
Joint Sponsors ...... BNP Paribas Securities (Asia) Limited 63/F, Two International Finance Centre 8 Finance Street Central Hong Kong
Innovax Capital Limited Room 2002 20/F, Chinachem Century Tower 178 Gloucester Road Wanchai Hong Kong
Joint Global Coordinators ...... BNP Paribas Securities (Asia) Limited 63/F, Two International Finance Centre 8 Finance Street Central Hong Kong
Innovax Securities Limited Unit A-C 20/F, Neich Tower 128 Gloucester Road Wanchai Hong Kong
Joint Bookrunners and BNP Paribas Securities (Asia) Limited Joint Lead Managers...... 63/F, Two International Finance Centre 8 Finance Street Central Hong Kong
Innovax Securities Limited Unit A–C 20/F, Neich Tower 128 Gloucester Road Wanchai Hong Kong
– 75 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Haitong International Securities Company Limited 22/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong
China Industrial Securities International Capital Limited 7/F, Three Exchange Square 8 Connaught Place, Central Hong Kong
UOB Kay Hian (Hong Kong) Limited 6/F, Harcourt House 39 Gloucester Road Hong Kong
CMBC Securities Company Limited 45/F., One Exchange Square 8 Connaught Place, Central Hong Kong
Legal Advisers to our Company ... As to Hong Kong law: Jingtian & Gongcheng LLP Suites 3203–3207 32/F, Edinburgh Tower The Landmark 15 Queen’s Road Central Hong Kong
Mr. Tse Siu Chung Dixon 14/F, Tower One Lippo Centre Queensway Admiralty Hong Kong Barrister-at-law of Hong Kong
– 76 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
As to PRC law: Jingtian & Gongcheng 45/F, K. Wah Centre 1010 Huaihai Road (M) Xuhui District Shanghai City PRC
As to German law: Gleiss Lutz Hootz Hirsch PartmbB Rechtsanwälte, Steuerberater Taunusanlage 11 60329 Frankfurt Germany
As to Netherlands law: Rutgers Posch Visée Endedijk N.V. Herengracht 466, 1017 CA Amsterdam P.O. Box 10896 1001 EW Amsterdam The Netherlands
As to United States law: Nixon Peabody LLP One Embarcadero Center, 18th Floor San Francisco, CA 94111 United States
As to Japan law: Mori Hamada & Matsumoto Marunouchi Park Building 2-6-1 Marunouchi Chiyoda-ku Tokyo 100-8222 Japan
– 77 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
As to Macau law: Rato, Ling, Lei & Cortés — Advogados Av. da Amizade, Macau Landmark Office Tower 23 Macau
As to Canada law: Gowling WLG (Canada) LLP 50 Queen Street North, Suite 1020 PO Box 2248, Kitchener Ontario N2H 6M2 Canada
As to Cayman Islands law: Conyers Dill & Pearman Cricket Square Hutchins Drive PO Box 2681 Grand Cayman KY1-1111 Cayman Islands
Legal Advisers to the Joint Sponsors As to Hong Kong and U.S. law: and the Underwriters ...... Sidley Austin 39/F, Two Int’l Finance Centre Central Hong Kong
As to PRC law: JunHe LLP 26/F HKRI Centre One HKRI Taikoo Hui, 288 Shimen Road (No.1) Shanghai PRC
Auditors and reporting accountants Ernst & Young Certified Public Accountants and Registered Public Interest Entity Auditor 22/F, CITIC Tower 1 Tim Mei Avenue Central Hong Kong
– 78 – DIRECTORS AND PARTIES INVOLVED IN THE GLOBAL OFFERING
Industry consultant ...... Frost & Sullivan (Beijing) Inc., Shanghai Branch Co. 1018, Tower B 500 Yunjin Road Shanghai PRC
Internal control consultant ...... BT Corporate Governance Limited 2/F, 625 King’sRoad North Point Hong Kong
Receiving bank ...... DBSBank(HongKong)Limited 11/F, The Center 99 Queen’s Road Central Hong Kong
– 79 – CORPORATE INFORMATION
Registered office in the Cayman Cricket Square Islands ...... Hutchins Drive PO Box 2681 Grand Cayman KY1-1111 Cayman Islands
Principal place of business Building C, Suite A in the United States...... Phase I of the Anaheim Concourse 1202 N. Miller Street Anaheim, California 92806 United States
Principal place of business Room 402 and 501–502, Block F3 in the PRC ...... TCL International E City 1001 Zhongshan Park Road Nanshan District Shenzhen City Guangdong Province PRC
Principal place of business 40th Floor, Sunlight Tower in Hong Kong ...... No. 248 Queen’sRoadEast Wanchai Hong Kong
Company’s website address...... www.vesync.com (the information contained on this website does not form part of this prospectus)
Company secretary ...... Ms.ZhangXiao(張瀟) 40th Floor, Sunlight Tower No. 248 Queen’sRoadEast Wanchai Hong Kong (an associate member of The Hong Kong Institute of Chartered Secretaries and The Chartered Governance Institute)
– 80 – CORPORATE INFORMATION
Authorized Representatives Ms. Yang Lin (楊琳) (for the purpose of 25 Brookstone the Listing Rules) ...... Irvine CA 92604 United States
Ms. Zhang Xiao (張瀟) 40th Floor, Sunlight Tower No. 248 Queen’sRoadEast Wanchai Hong Kong
Audit Committee ...... Mr.GuJiong(顧炯) (Chairman) Mr.FongWo,Felix(方和) Mr. Tan Wen (檀文)
Remuneration Committee ...... Mr.FongWo,Felix(方和) (Chairman) Mr. Gu Jiong (顧炯) Mr. Tan Wen (檀文) Ms. Yang Lin (楊琳) Mr. Yang Hai (楊海)
Nomination Committee...... Ms.YangLin(楊琳) (Chairperson) Mr. Gu Jiong (顧炯) Mr.FongWo,Felix(方和) Mr. Tan Wen (檀文) Mr. Yang Hai (楊海)
Cayman Islands principal Conyers Trust Company (Cayman) Limited share registrar and transfer office Cricket Square Hutchins Drive PO Box 2681 Grand Cayman KY1-1111 Cayman Islands
Hong Kong Share Registrar and Boardroom Share Registrars (HK) Limited transfer office ...... 2103B, 21/F 148 Electric Road North Point Hong Kong
– 81 – CORPORATE INFORMATION
Compliance adviser ...... Innovax Capital Limited Room 2002, 20/F Chinachem Century Tower 178 Gloucester Road Wanchai Hong Kong
Principal banks ...... CTBC Bank Corp. (USA) 801S. Figueroa St., Suite 2300 Los Angeles, CA 90017 United States
Hang Seng Bank Limited 83 Des Voeux Road Central Hong Kong
China Guangfa Bank Co Ltd Shenzhen Caifugang Branch 1/F & 3/F, Caifugang Building Baoyuan Road, Bao’an CBD Shenzhen City PRC
– 82 – INDUSTRY OVERVIEW
This section contains information which is derived from official government publications and industry sources as well as a commissioned report from Frost & Sullivan. We believe that the information has been derived from appropriate sources and we have taken reasonable care in extracting and reproducing the information. We have no reason to believe that the information is false or misleading in any material respect or that any fact has been omitted that would render the information false or misleading. The information has not been independently verified by us, the Joint Sponsors, the Joint Bookrunners, the Joint Lead Managers, the Underwriters, or any of their affiliates or advisers, nor any other party involved in the Global Offering except for Frost & Sullivan and no representation is given as to its accuracy.
SOURCE OF INFORMATION
We commissioned Frost & Sullivan, an independent market researcher and consultant, to produce a report on the global small home appliance and smart home device markets for the period from 2015 to 2024, at a fee of RMB800,000. Frost & Sullivan is an independent global consulting firm founded in 1961. It offers industry research, market strategies and provides growth consulting and corporate training. Its industry coverage includes automotive and transportation, chemicals, materials and food, commercial aviation, consumer products, energy and power systems, environment and building technologies, healthcare, industrial automation and electronics, industrial and machinery, and technology, media and telecom. The Frost & Sullivan Report includes information on data of global e-commerce market and global small home appliance and smart home device markets. Frost & Sullivan has conducted detailed primary research which involved discussing the status of the industry with certain leading industry participants. Frost & Sullivan has also conducted secondary research which involved reviewing company reports, independent research reports and data based on its own research database. Frost & Sullivan has obtained the figures for the estimated total market size from historical data analysis plotted against macroeconomic data as well as considered certain industry key drivers. In preparing the Frost & Sullivan Report, Frost & Sullivan has adopted a market engineering forecasting methodology which integrates several forecasting techniques with its market engineering measurement-based system. It relies on the expertise of its analyst team in integrating the critical market elements investigated during the research phase of the Frost & Sullivan Report. These elements include: expert-opinion forecasting methodology, integration of market drivers and restraints, integration with the market challenges, integration of the market engineering measurement trends and integration of econometric variables. The basis and assumptions for the projections in the Frost & Sullivan Report include: (i) the social, economic and political environment is likely to remain stable in the forecast period, which ensures the stable and healthy development of the global small home appliance and smart home device markets; and (ii) the related industry key drivers are likely to drive the global small home appliance and smart home device markets in the forecast period, such as the sustainable growth of macro economy, technology advancement on IoT networks, and increasing demands for the superior automation home experience, etc.
Our Directors, after taking reasonable care, are of the view that there has been no adverse change in the market information since the date of the Frost & Sullivan Report which may qualify, contradict or have an impact on the information in this section.
– 83 – INDUSTRY OVERVIEW
GLOBAL E-COMMERCE MARKET OVERVIEW Market size of E-commerce (Global), 2015–2024E
Driven by the continuous increase of mobile Internet and third-party payment penetration, consumers are able to order purchases online without limitation of time and places. The global market size of e-commerce has grown rapidly fromapproximatelyUS$1.7trillionin2015to US$3.8 trillion in 2019 with a CAGR of 23.1%. With the adoption of logistics with highly integrated transportation, warehouse management solution and efficiency delivery, e-commerce giants are expected to provide their customers with more enjoyable and efficient online shopping experience, further stimulating the development of e-commerce industry worldwide. In the future, the global e-commerce market is expected to experience a further growth. By 2024, the market size is estimated to reach approximately US$7.0 trillion, with a CAGR of 11.7% from 2020 to 2024. Market size of E-commerce (U.S.), 2015–2024E
As one of the largest e-commerce markets worldwide, smartphone and mobile payment penetration are keys to the rapid development of the U.S. e-commerce industry from 2015 to 2019. For the past five years, the market size of e-commerce market in the U.S. increased from approximately US$380.4 billion to US$659.5 billion with a CAGR of 14.7% from 2015 to 2019. During the same period, the penetration rate increased from 8.0% to 12.2%. With the retail giants in the United States such as Amazon, Walmart and The Home Depot continuously improving their logistics and completing their online shopping experience, the market size of e-commerce market in the United States is estimated to reach approximately US$1,150.5 billion by 2024 with a CAGR of 11.3% from 2020 to 2024. The penetration rate is expected to reach 18.4% by 2024.
2015–2019 2020E–2024E CAGR 14.7% 11.3% US$ billion % 1,200 1,150.5 100.0 1,047.6 1,100 90.0 945.9 1,000 80.0 900 844.9 800 749.0 70.0 700 659.5 60.0 574.2 600 505.3 50.0 500 435.8 380.4 40.0 400 16.1% 17.3% 18.4% 30.0 300 12.2% 13.5% 14.8% 8.0% 9.0% 10.0% 11.0% 200 20.0 100 10.0 0 0.0 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E
Market size of E-commerce Penetration Rate
Note: The market size refers to the total retail sales value of U.S. e-commerce industry. The penetration rate refers to the percentage of e-commerce trading value of total retail sales value of consumer goods.
Source: Frost & Sullivan Analysis and Estimate
Leading E-commerce Platforms (U.S.)
GMV in U.S. at Company the end of 2019 Market Share (US$ billion)
Amazon...... ~380.0 ~58.0% Ebay...... ~40.0 ~6.0% Walmart...... ~25.0 ~4.0%
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The U.S. e-commerce market is highly concentrated with the top three companies accounting for approximately 68.0%, and the largest player Amazon accounting for approximately 58.0%, of the total market size of the U.S. e-commerce market in 2019. This dynamic has remained so for some time and is unlikely to change significantly in the future. Therefore, Amazon is one of the most critical e-commerce platforms for manufactures and brand owners to conduct their online retail. It is beneficial to Amazon to have more sellers/vendors offer quality products in its marketplace. In contrast to Amazon, second-ranked eBay primarily provides a marketplace for sales between individual customers. Market size of E-commerce (Europe), 2015–2024E Driven by continuous increase of internet and mobile internet penetration in Europe, the market size of e-commerce market in Europe has grown rapidly form approximately US$447.1 billion in 2015 to US$598.5 billion in 2019 with a CAGR of 7.6%. By 2024, the figure is estimated to reach approximately US$834.3 billion, representing a CAGR of 6.8% from 2020 to 2024.
Note: The market size refers to the total retail sales value of Europe e-commerce industry
Source: Frost & Sullivan Analysis and Estimate OVERVIEW OF SMALL HOME APPLIANCE MARKET Definition and Classification Home appliance refers to the type of electrical machines that assist in household functions, such as cooking, cleaning and food preservation. In practice, home appliance is categorized into three categories, namely major appliance, the selected kitchen appliance and small appliance. Major appliance comprises all types of air conditioners, refrigerators and washing machines. The selected kitchen appliance includes dishwashers, water purifiers, range hoods, gas hobs, sterilizer cabinets and water heaters. Small home appliances refer to semi-portable or portable machines, basically used on platforms such as counter-tops and table tops to perform certain home tasks. In general, small home appliances could be further categorized into four segments, namely food preparation appliance, small cooking appliances, small home environment appliances and personal care appliances.
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Themarketsizeofsmallhomeappliancemarketrefers to the retail sales of four sub-segments, namely small cooking appliance, food preparation appliance, small home environment appliance and personal care appliance. The market players are small home appliances brand owners.
Home Appliance
Selected Kitchen Major Appliance Small Appliance Appliance Air Conditioner Dishwashers Refrigerator Water Purifiers Washing Machine Small Home Range Hoods Small Cooking Food Preparation Personal Care Environment Gas Hobs Appliance Appliance Appliance Appliance Sterilizer Cabinets Water Heaters Rice Cookers Soymilk Makers Vacuum Cleaners Hair Dryers Pressure Cookers Blenders Robot Vacuum Cleaners Electric Shavers Induction Cooktops Juice Extractors Air Purifiers Irons Ceramic Electric Stewpots Food Processors Steam Mops Upright Steams Fryers Humidifiers Others Ovens Electric Radiators Microwaves Electric Fans Kettles Irons Coffee Machine Upright Steams
Retail Sales Value of Small Home Appliance Market (Global), 2015–2024E The retail sales value of small home appliances has experienced steady growth from US$81.9 billion in 2015 to US$106.5 billion in 2019, representing a CAGR of 6.8%. The distribution channels of the small home appliances include self-operated stores, e-commerce platforms, supermarkets, specialty stores and large retailers. Attributable to the increasing internet penetration, particularly on mobile terminal, as well as the favorable nature of internet such as unlimited geographic coverage, inclusivity and promptness, e-commerce platforms have become one of the most significant distribution channels in the past years from global perspective. Brand owners place emphasis on the operation of e-commerce platforms not only to expand business horizontally but also to collect multi-dimensional customers’ data to further understand their habits and needs. Meanwhile, traditional offline brick-and-mortar retail stores including self-operated stores, supermarkets, specialty stores and large retailers constitute the foundation and extensive network for market players. In the foreseeable future, small home appliance brand owners are expected to closely collaborate with existing distributors to expand their coverage and also gain visibility into real-time inventory and sales data while improving point-of-sale and channel relationships.
Source: Frost & Sullivan Analysis and Estimate
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Retail Sales Value of Small Home Appliance Market (U.S.), 2015–2024E The U.S. small home appliance market has experienced a steady growth from US$22,047.7 million in 2015 to US$26,361.7 million in 2019 with a CAGR of 4.6%. During the same period, the home environment appliances and personal care appliances grow at a CAGR of 6.1% and 5.1% respectively, reached US$8,384.6 million and US$8,919.3 million in 2019, respectively. Breakdown by categories (U.S.), 2015–2024E
Source: Frost & Sullivan Analysis and Estimate
Note: The market size refers to the sum of retail sales value of small cooking appliances, food preparation appliances, small home environment appliances, and personal care appliances generated from online and offline channels.
Breakdown by Distribution Channel (U.S.), 2015–2024E
US$ million 35,000
30,000
25,000
20,000
15,000
10,000
5,000 CAGR
0 2015– 2020E– 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2019 2024E
Online 3,267.2 3,655.9 4,088.8 4,441.5 4,948.4 5,282.2 5,717.1 6,229.2 6,820.6 7,501.9 10.9% 9.2%
Offline 18,780.5 19,311.7 20,150.9 20,598.7 21,413.3 21,706.2 22,384.2 23,210.3 24,236.9 25,503.4 3.3% 4.1%
Total 22,047.7 22,967.6 24,239.7 25,040.2 26,361.7 26,988.4 28,101.4 29,439.4 31,057.5 33,005.3 4.6% 5.2%
Note: The market size refers to the sum of retail sales value of small cooking appliances, food preparation appliance, small home environment appliances, and personal care appliances generated from online and offline channels. Source: Frost & Sullivan Analysis and Estimate
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The projection of the future growth of online sales of small home appliance in U.S. is based on the year on year growth rate of the past five years of the industry and the assumption that market players are expected to keep developing their online sales channel every year. The projection also takes the opinion from Frost & Sullivan based on its primary research into consideration. Small Cooking Appliances (U.S.)
With brand owners continuously introducing high end small cooking appliances, the increase in retail sales is primarily driven by increase of average price per unit. From 2015 to 2019, the retail sales value increased from US$4,217.1 million to US$4,755.3 million and from 62.1 million units to 69.0 million units, respectively. The retail sales value and retail sales volume of small cooking appliances are expected to reach US$5,409.2 million and 76.5 million units in 2024, respectively, with a CAGR of 3.1% and 2.4% from 2020 to 2024, respectively. Food Preparation Appliances (U.S.)
The retail sales value and volume of food preparation appliances via online distribution channels have experienced a drastic increase. From 2015 to 2019, the online retail sales value and volume increased from US$528.7 million to US$827.2 million and from 8.2 million units to 12.2 million units, respectively. During the same period, the total retail sales value and volume of food preparation appliances increased from US$3,887.4 million to US$4,302.4 million and from 53.1 million units to 56.6 million units, respectively. The retail sales value and retail sales volume of food preparation appliances are expected to reach US$4,758.8 million and 61.1 million units in 2024, respectively, with a CAGR of 2.3% and 1.8% from 2020 to 2024, respectively. Small Home Environment Appliances (U.S.)
Rising concerns about indoor and outdoor air pollution, especially during winter season across the United States and increasing incidences of airborne diseases and wildfire pollution coupled with growing awareness about ramifications of air pollution on cognitive abilities, apart from causing lung diseases, are the other key factors expected to boost sales of small home environment appliances in the US. From 2015 to 2019, the retail sales value and volume increased from US$6.6 billiontoUS$8.4billionandfrom82.8millionunits to 96.1 million units, respectively. The retail sales value and retail sales volume of small home environment appliances are expected to reach US$11.0 billion and 113.6 million units in 2024, respectively, with a CAGR of 6.2% and 3.8% from 2020 to 2024, respectively.
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CAGR 2015–2019 2020E–2024E 2015–2019 2020E–2024E 2015–2019 2020E–2024E Total Retail Sales Value 3.0% 3.1% 2.6% 2.3% 6.1% 6.2% Online Retail Sales Value 8.1% 7.9% 11.8% 8.9% 11.1% 9.3% Offline Retail Sales Value 2.2% 1.9% 0.9% 0.3% 5.4% 5.7%
US$ million US$ million US$ billion 5,409.2 11.0 5,500.0 5,000.0 4,758.8 11.0 5,000.0 4,755.3 4,302.4 10.0 1,158.0 4,500.0 1.6 4,500.0 9.0 8.4 809.4 4,000.0 827.2 1,258.3 4,000.0 8.0 3,500.0 1.1 3,500.0 3,000.0 7.0 3,000.0 6.0 2,500.0 2,500.0 5.0 2,000.0 2,000.0 3,946.0 4,251.2 3,475.2 3,500.5 4.0 7.3 9.3 1,500.0 1,500.0 3.0 1,000.0 1,000.0 2.0 500.0 500.0 1.0 0.0 0.0 0.0 2019 2024E 2019 2024E 2019 2024E Small Cooking Food Preparation Small Home Environmental Appliances Appliances Appliances Online Offline
Notes: Total retail sales value refers to the sum of retail sales value of small cooking appliances, food preparation appliances and small home environment appliances, respectively, generated through online and offline channels. GLOBAL SMART HOME DEVICES MARKET OVERVIEW Smart home devices are defined as the suite of devices, appliances, systems that connect onto a common network and could be controlled independently and remotely, which effectively provide high-end and customized home automation experience. With technological advances in voice control and artificial intelligence, the intelligent assistant is now a viable control center for the connected home. Tech giants and startup attackers have developed solutions delivered through both existing devices and new, stand-alone products. Market Size of Smart Home Device Market (Global), 2015–2024E
Attributable to the cumulative effect of rising income level and sustainable growth of demands for high-quality home automation experience, the market size of global smart home device market has recorded rapid growth at CAGR of 18.1% between 2015 and 2019, increasing from approximately US$107.1 billion to approximately US$208.6 billion. In the following years, the continuous technology advance achieved in the IoT networks and the mature application of related technologies like standard wireless communication protocols, natural language process and machine learning jointly enhance the function performance of smart home devices. The future of the smart home device market looks attractive with opportunities in the home safety and security, appliance, entertainment, lighting, healthcare, and kitchen applications. The major growth drivers of this market include but not limited to the increasing awareness related to safety and security, increasing consumer needs for simplicity and personalized experience, and the growing adoption of cloud- based technologies. The global market size of smart home device market is forecasted to reach approximately US$313.8 billion by 2024, yielding a CAGR of 9.2% between 2020 and 2024. Market Size of Smart Home Device Market (U.S.), 2015–2024E
Compared with the countries which just started to explore the monetization of smart home products, American market has upgraded its business strategy shifting from device-first towards solution-first to cover the entire industry. And the purpose is to provide high-end and comfortable integrated smart home solutions to consumers, which is not easy to be achieved by singular products. In this case, the market size of smart home device market in the U.S. experienced rapid
– 89 – INDUSTRY OVERVIEW growth at CAGR of 19.6% between 2015 and 2019, increasing from approximately US$40.3 billion to approximately US$82.5 billion and accounting for approximately 39.5% of global smart home device market in 2019. Along with the increasing adoption of integrated smart home solutions based on diversified application scenarios and the enhancement of product performance, the market size of smart home device market in the U.S. is forecasted to reach approximately US$156.9 billion by 2024, yielding a CAGR of 15.2% between 2020 and 2024. The U.S. smart home device market is projected to account for approximately 50.0% of the global smart home device market in 2024.
CAGR 2015–2019 2020E–2024E Market Size of Smart Home Devices Market 19.6% 15.2% US$ billion % 156.9 160 100.0 137.2 140 90.0 119.3 80.0 120 103.3 70.0 100 89.2 82.5 50.0% 60.0 70.6 44.6% 47.2% 80 40.4% 42.4% 50.0 37.6% 39.3% 38.5% 38.7% 39.5% 60 40.0 40.3 51.2 60.3 30.0 40 20.0 20 10.0 0 0.0 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E Market Size of Smart Home Device Market Percentage in Global Smart Home Device Market
Note: The market size refers to the sum of retail sales value of smart home devices.
Source: Frost & Sullivan Analysis and Estimate Market Driver Analysis of Global Small Home Appliance and Smart Home Device Market Development of online sales channel The development of online sales channels has boosted retail sales value of small home appliances in the United States over the past years. Attributable to the increasing internet penetration and the adoption of mobile devices such as smartphones and tablets, consumers now rely more on digital channels to compare and purchase products. The online shopping experience remains a stable trend, along with better logistics infrastructure and improvements in payment platforms. More and more consumers are opting for e-commerce marketplace due to the convenience, variety access of products and services, and competitive pricing. As a variety of e- commerce players kept upgrading their marketplaces to conduct better interaction with consumers, customers’ expectation of online shopping experiences on e-commerce marketplaces is on the rise. E-commerce marketplace integrates well with social media marketing for the kitchen and small home appliance market, where the purchase link is often posted on social media pages, allowing customers to purchase with just a few clicks. Small home appliances are popular online among consumers because of high product standardization and low average selling price. In particular, most of the leading US retailers have begun operating their online platforms/websites to capture such growth. Companies are expected to further develop omni-channels to create seamless customer experiences in the future. Rise of Smart Technology Smart technology in cooking and home environment appliances are starting to appeal and show its values to consumers. Manufacturers are introducing next-generation appliances that take convenience and time saving to unprecedented levels. The rise in the use of connectivity, as a
– 90 – INDUSTRY OVERVIEW differentiating feature, wireless technologies such as Wi-Fi and Bluetooth can be used in or accessed by smartphones and tablets. But the inclusion of these technologies embedded in cooking and home environment appliances, for example, smart electric kettles allows consumers to use, control, and monitor the kettle from distance by checking their smartphones and tablets. In addition, the future upgrade and framework in 5G network infrastructure further establish a positive outlook for smart technology. With better broadband and internet penetration, it is expected smart technology will be an upcoming trend in the appliance industry. Technological Advancements Frequent product upgrades in terms of technology, functionality, features and design are the main drivers for the increasing demand for product replacements, which provide new growth opportunities in the small household appliance market. For example, in the home environment category, battery and motor development are driving product innovations. With the improvement of battery performance and the decline in costs, the market is seeing a migration toward battery- powered appliances. The improvement in motor power and the reduction in size also improve the ease of mobility and practicality of cordless models. Technological advancement is viewed as a critical driving force behind the robust development of many industries, especially for the technology-driven market like smart home devices market. Underpinned by big data and artificial intelligence technologies like machine learning and natural language process, the smart home devices manufacturers are able to establish platforms, making the devices interoperate and assist with each other in the aspect of functioning and data sharing. It is the future trend that the market players will change their business strategy from device-first to solution-first, which means that, rather than trying to sell a simple smart home product, the market players will engage in more in-depth interactions with consumers, aiming to offer solutions to enhance users’ experience. Consumers, on the other hand, are able to have more interaction with the connected products. For example, through connected mobile apps, consumers are able to receive a work report of their smart home devices. Based on such report, consumers may make better use of the smart home devices, which prompts the market players to provide better solutions to customers. Market players are expected to continuously invest in technological research and to develop high quality and trendy products. Entry Barrier Analysis of Global Small Home Appliance and Smart Home Device Market Sales Channel It is a priority for the retail market players to establish well-organized sales channels, which serve as the foundation to scale up their business operations. Driven by the fact that online retail sales channels have been increasingly critical for the growth and expansion of retailers, close collaboration with e-commerce giants such as Amazon are more likely to assist retailers to achieve synergy horizontally. Brand Awareness
Brand awareness is characterized as the extent to which customers are able to recall or recognize a brand, and seems as a key consideration in consumer behaviors in relation to the purchasing decision-making. Meanwhile, considering the compatibility of smart home devices and the market trends of providing integrated smart home solution, the existing market players have an advantage in brand recognition and image building.
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Technology
As the competition intensifies, the feature-rich and integrated smart home devices with long- term benefits will become the prevalent products in the retail market attribute to its provision of high-quality household experience, which is underpinned by advanced technologies. The existing market participants, especially the internet giants, usually have experienced in-house product R&D departments with strong financial resources. The existing market players could build multi- dimensional customer profiles based on their accumulated use data, which is conducive to the function improvements. Industry Experience
The well-organized smart home companies usually require professional management team to cover multi operation processes, including product R&D, procurement, manufacture, logistics, marketing, retail etc. Besides, professional management and operation teams have advantages in partnership with up-stream suppliers and integrating multi-dimensional resources. Future Trends Analysis of Global Small Home Appliance and Smart Home Device Market Different types of market players will be interdependent and mutually beneficial
At present stage, there are three major types of market participants in smart home device market that offer singular smart products or integrated smart home solutions, such as internet giants like Baidu, Alibaba, Tencent and Jingdong, manufacturers of traditional home appliances such as Haier and Midea, and independent smart home devices brands. Each type of market players has its own competitive strengths as the result of different development strategies, business models and financial conditions. The internet giants and manufacturers of traditional home appliances have accumulated a large user base and user data from their precoding business operations. Meanwhile, the independent smart home devices brands usually focus on certain vertical fields and also have strong execution and innovation capabilities from product design to product retail. In the long term, different types of market players are interdependent and mutually beneficial. The function performance and user experience will be enhanced by advanced technologies
Underpinned by big data and artificial intelligence (AI) technologies like machine learning and natural language process, the smart home device manufacturers are able to establish platforms, making the devices interoperate and assist with each other in the aspect of functioning and data sharing. The service providers alter their business strategy from device-first to solution-first in this market, which means that rather than trying to sell a simple smart home product, these players will start to engage in more in-depth interactions with consumers, aiming to offer solutions to enhance user experience. Integrated smart home products will be provided based on diversified application scenarios
Rapid development of IoT network and the easy access to mobile internet through smartphones or tablets make it possible to provide integrated smart home products based on diversified application scenarios. The mature application of standard and unified wireless communication protocol allows more types of home products to be intelligentized and sold at affordable prices, which tends to form an integrated smart home ecosystem. Compared with singular smart home product, the integrated ones could help to manage lights, thermostat and security in residences upon the requests from users based on diversified scenarios. As the IoT-enabled smart home device market around the world has experienced rapid growth in recent years, especially in the PRC and United States. IoT-enabled smart home device market is constantly evolving, and it is uncertain whether our products and services will achieve and sustain high levels of demand and
– 92 – INDUSTRY OVERVIEW market acceptance. With the rapid increase of mobile internet penetration and development of 5G technology, mobile devices have gradually become the major mean to access the internet in the world. COMPETITIVE LANDSCAPE
The small home appliance market in the USA is relatively fragmented with more than 50 online and offline industry players by the end of 2019. The top five small home appliance market players conducted a online retail sales value of approximately US$1,540.0 million by the end of 2019, accounted for approximately 31.0% of total market share. Market players of small home appliances in the USA mainly compete on (1) product quality with continued research and development to satisfy consumer needs; (2) diversified distribution channels to reach their target customers; and (3) extensive after-sales support to address any concern arises from the users. As the world’s one of the largest e-commerce platforms, Amazon attracts multiple leading smart home appliance retailers to conduct their online sales. In 2019, the top 5 small home appliance retailers generated approximately US$970.0 million through sales on Amazon. We ranked at (i) the third with a retail sales value of approximately US$190.0 million in terms of retail sales value generated through Amazon, (ii) fifth in terms of retail sales value generated through e-commerce platforms, (iii) first in terms of retail sales value of air purifiers through Amazon and (iv) second in terms of retail sales value of air fryers through amazon, all ranked in 2019 in the U.S. The products of the Company cover all four categories in small home appliance industry. The multi-category product portfolio of the Company can enrich its IoT scenario and enable inter-category interactions, which we believe in turn contributed to increased customer loyalty. Levoit, Etekcity and Cosori are three brand belonging to the Company, which are focusing on different products. Levoit, a leading air humidifiers and purifiers manufacturer, focuses on enriching relaxation, health and well-being for its consumers. Etekcity devotes to provide convenient digital and outdoor recreation products, and Cosori focuses on high-end kitchen appliances. Ranking of Leading Small Home Appliance Retailers in terms of Retail Sales Value Generated through Amazon (U.S.) Retail Sales Value Number of Product Categories(1) in Ranking Company for the end of 2019 Small Home Appliance Industry (US$ million)
1 CompanyA ...... ~290.0 2 2 CompanyB ...... ~240.0 3 3 TheCompany...... ~190.0 4 4 CompanyC ...... ~130.0 4 5 CompanyD ...... ~120.0 2
1. In general, small home appliances could be categorized into four segments, namely small cooking appliance, food preparation appliance, small home environment appliance and personal care appliance. Ranking of Leading Small Home Appliance Retailers in terms of Online Retail Sales Value (U.S.) Retail Sales Value Ranking Company for the end of 2019 Market Share (US$ million)
1 CompanyA ...... ~490.0 ~10.0% 2 CompanyB ...... ~450.0 ~9.0% 3 CompanyC ...... ~210.0 ~4.2% 4 CompanyD ...... ~200.0 ~4.0% 5 TheCompany...... ~190.0 ~3.8%
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Ranking of Leading Small Home Appliance Retailers in terms of Retail Sales Value of Air Purifiers(1) Generated Through Amazon (U.S.) Retail Sales Value Ranking Company for the end of 2019 (US$ million)
1 TheCompany...... ~71.0 2 CompanyE ...... ~48.0 3 CompanyF...... ~35.0 4 CompanyA ...... ~34.0 5 CompanyG ...... ~30.0
1. In 2019, our retail sales of air purifiers accounted for approximately 37.4% of our total retail sales.
Ranking of Leading Small Home Appliance Retailers in terms of Retail Sales Value of Air Fryers(1) Generated Through Amazon (U.S.) Retail Sales Value Ranking Company for the end of 2019 (US$ million)
1 CompanyB ...... ~60.0 2 TheCompany...... ~47.0 3 CompanyH ...... ~24.0 4 CompanyI...... ~17.0
1. In 2019, our retail sales of air fryers accounted for approximately 24.7% of our total retail sales.
– 94 – REGULATORY OVERVIEW
This section sets forth a summary of certain laws and regulations that are relevant to our business operations. LAWS AND REGULATIONS RELATED TO OUR BUSINESS IN THE PRC Product Quality and Safety Production Product Quality
Pursuant to the Product Quality Law of the PRC《 ( 中華人民共和國產品質量法》) released by the Standing Committee of the National People’s Congress on February 22, 1993 with effect from September 1, 1993, which was amended and effective on August 27, 2009 and was newly amended on December 29, 2018, the law applies to all the production and sales activities of any product in the PRC. The producer and the seller shall bear the responsibilities for product quality in accordance with the provisions of this law. Victims who suffer personal injury or property losses due to product defects may claim for compensation either from the producer or the seller. Where the responsibility lies with the producer and the compensation is paid by the seller, the seller shall have the right to recover such compensation from the producer. Where the responsibility lies with the seller and the compensation is paid by the producer, the producer shall have the right to recover such compensation from the seller. Safety Production
Pursuant to the Safety Production Law of the PRC《 ( 中華人民共和國安全生產法》) released by the Standing Committee of the National People’s Congress on June 29, 2002 with effect from November 1, 2002, which was newly amended on August 31, 2014 and effective from December 1, 2014, the production and business operation entities shall be equipped with the conditions for safe production as provided in this law and other relevant laws, administrative regulations, national standards and industrial standards. Any entity that is not equipped with the conditions for safe production may not engage in production and business operation activities. The principal supervisor of a production and business entity shall assume the responsibility for the production safety of the entity, including the establishment and perfection of its production safety accountability, and the formulation of rules, regulations and operation procedures on production safety. The production and business entity shall provide funds for labor protection articles and training on production safety. Regulations on Import and Export Goods
Pursuant to the Foreign Trade Law of the PRC《 ( 中華人民共和國對外貿易法》) which was promulgated by the NPC Standing Committee on May 12, 1994 and implemented on July 1, 1994, and subsequently revised on April 6, 2004 and November 7, 2016, and the Measures for the Record and Registration of Foreign Trade Operators《 ( 對外貿易經營者備案登記辦法》) which was promulgated by the MOFCOM on June 25, 2004 and implemented on July 1, 2004, and subsequently revised on August 18, 2016, foreign traders engaging in import and export of goods or technology shall complete the filing and registration with the MOFCOM or its delegated agencies. Where a foreign trade operator fails to complete the filing and registration, the customs will refuse to handle customs declaration and the clearance of goods imported or exported by the operator. Pursuant to the Customs Law of the PRC《 ( 中華人民共和國海關法》) promulgated by the SCNPC on January 22, 1987 and amended on July 8, 2000, June 29, 2013, December 28, 2013, November 7, 2016 and November 4, 2017 and became effective on November 5, 2017, unless otherwise stipulated, the declaration of import and export goods may be made by consignees and consignors themselves, and such formalities may also be completed by their entrusted customs
– 95 – REGULATORY OVERVIEW brokers that have registered with the Customs. The consignees and consignors for import or export of goods and the customs brokers engaged in customs declaration shall register with the Customs in accordance with the laws. Pursuant to the Administrative Provisions of the Customs of the PRC on the Registration of Customs Declaration Entities (2018 Revision)《 ( 中華人民共和國海關報關單位註冊登記管理規 定》(2018修正)) promulgated by the General Administration of Customs on March 13, 2014 and amended on December 20, 2017, May 29, 2018 and became effective on July 1, 2018 the registration of customs declaration entities comprises the registration of the customs declaration enterprise and the registration of the consignor or consignee of imported and exported goods. The consignor or consignee of imported and exported goods shall register with local customs in accordance with the laws. Environmental Protection Environmental Protection Law of the PRC
Environmental protection Law of the PRC《 ( 中華人民共和國環境保護法》) was promulgated by the standing committee of the National People’s Congress on December 26, 1989 and was revised on April 24, 2014. In case of preparing any development and utilization plan and constructing any project with impacts on the environment, the environmental impact assessment must be carried out in accordance with laws and regulations. Any development and utilization plans failing to carry out environmental impact assessment in accordance with laws and regulations must not be implemented; for any construction project failing to carry out environmental impact assessment in accordance with laws and regulations, the construction must not be commenced. Any facility for preventing and control of pollution in a construction project must be designed, constructed and put into operation parallel to the progress of the principal part of the project. The facilities for preventing and control of pollution must comply with requirements of approved environmental impact assessment files and must not be dismantled without permission or left idle. Production, storage, transport, selling, use and disposal of chemicals and articles containing radioactive substances must comply with relevant national regulations and prevent pollution of environment. Environmental Impact Assessment Law of the PRC《 ( 中華人民共和國環境影響評價法》) was promulgated by the Standing Committee of the National People’s Congress on October 28, 2002 and was revised on July 2, 2016 and December 29, 2018. China implements classified management on environmental impact assessment of construction projects in accordance with the impact degree on environment of the construction projects. The construction units must organize the preparation of environmental impact reports and environmental impact statements or fill in the environmental impact registration form (the ‘‘environmental impact assessment files’’) in accordance with the following regulations: (1) where it is possible to cause any major environmental impact, an environmental impact report must be prepared to assess comprehensively the generated environmental impact; (2) where it is possible to cause any minor environmental impact, an environmental impact statement must be prepared to carry out analysis or special assessment on the generated environmental impact; (3) Where the generated environmental impact is slight and environmental impact assessment is not required, the environmental impact registration form must be filled in. According to the Regulation on the Administration of Environmental Protection for Construction Project《 ( 建設項目環境保護管理條例》) promulgated by the State Council of the PRC on November 29, 1998 and effective on November 29, 1998, and latest amended on July 16, 2017 by the State Council and took effect on October 1, 2017, construction units shall, depending
– 96 – REGULATORY OVERVIEW on the level of the environmental impacts, report environmental impact reports and the required environmental impact forms prepared by institutions which possess relevant administration. Environmental protection facilities shall be designed, constructed and put into operation simultaneously with the main construction works. Upon the completion of construction projects, construction units shall file an application with competent department of environmental protection administration for acceptance checks. Pursuant to the classified management catalog for environmental impact assessment of construction projects《 ( 建設項目環境影響評價分類管理目錄》), which was stipulated and released by the environmental protection administration department of the State Council, which was last amended and effective on April 28, 2018, the environmental impact reports and statements of the construction projects shall be submitted by the construction unit to environmental protection departments with approval authority for approval. The Interim Method for Completion Acceptance of Environmental Protection for Construction Projects《 ( 建設項目竣工環境保護驗收暫行辦法》) was promulgated and implemented by the former Ministry of Environmental Protection (current Ministry of Ecology and Environment) on November 20, 2017. This method specifies the procedures and standards for construction units to carry out environmental protection acceptance after the construction of such projects is completed. According to the Measures for the Administration of Pollution Discharge Permits (Trial) (排污許可管理辦法(試行)) which was promulgated by the Ministry of Environmental Protection (‘‘MEP’’) on November 6, 2017 and came into effect on January 10, 2018 and newly amended on August 22, 2019, the MEP shall lawfully formulate and issue the catalog of classified management of pollutant discharge licenses for stationary pollution sources, and define the scope of stationary pollution sources included in pollutant discharge licensing management and the time limit for the application for pollutant discharge licenses. Enterprises, public institutions and other production operators (the ‘‘pollutant discharge entities’’)includedinthecatalogofclassifiedmanagementof pollutant discharge licenses for stationary pollution sources shall apply for and obtain a pollutant discharge license as per the prescribed time limit; and, it is temporarily unnecessary for pollutant discharge entities not included in the catalog of classified management of pollutant discharge licenses for stationary pollution sources to apply for a pollutant discharge license. On December 20, 2019, the Catalogue of Classified Management of Pollutant Discharge Permits for Stationary Pollution Sources (2019 Edition) (固定污染源排污許可分類管理名錄[2019版]) was promulgated by Ministry of Ecological Environment. The Catalogue of Classified Management of Pollutant Discharge Permits for Stationary Pollution Sources (2017 Edition) (固定污染源排污許可分類管理 名錄[2017版]) was repealed simultaneously. Regulations Relating to Foreign-invested Enterprises
Investments in the PRC by foreign investors and foreign-invested enterprises were regulated by the Catalogue of Industries for Guiding Foreign Investment (外商投資產業指導目錄), last repealed by The Special Management Measures (Negative List) for the Access of Foreign Investment (2019)《 ( 外商投資准入特別管理措施(負面清單)(2019年版)》,the‘‘Negative List’’), which was issued by the NDRC and MOFCOM on June 30, 2019 and implemented on July 30, 2019. The Negative List has set out in a unified manner the restrictive measures for the access of foreign investments such as the requirements for equity and senior management, and the industries that are restricted or prohibited for foreign investment. The Negative List covers 13 types of industries, and any industry not falling in the Negative List shall be administered under the principle of equal treatment to domestic and foreign investment.
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Pursuant to the Interim Administrative Measures for the Record-filing of the Establishment and Modifications of Foreign Investment Enterprises (‘‘Interim Administrative Measures’’) 《( 外 商投資企業設立及變更備案管理暫行辦法》) promulgated by Ministry of Commerce on October 8, 2016, amended on July 30, 2017 and June 29, 2018, where the incorporation of foreign invested enterprises do not fall within the Negative List, such enterprises shall go through the record-filing procedures online when applying for establishment or modifications registration with Administration of Industry and Commerce. Within the record-filing scope of the Filings Measures, in the case of a change of basic information of the foreign-invested enterprises or their investors, a change of the basic information about the merger and acquisition transaction of the incorporated foreign-invested enterprise, a change of equity (shares) or cooperation interest of the foreign- invested enterprises, merger, division or dissolution, mortgage or transfer of foreign-invested enterprises’ property or rights and interests to others and other matters, the foreign-invested enterprises shall file the relevant documents online within 30 days upon occurrence of such changes via the comprehensive administrative system. On December 30, 2019, the Ministry of Commerce and the State Administration of Market Regulation issued the Measures for the Reporting of Foreign Investment Information《 ( 外商投資信 息報告辦法》) which came into effect on January 1, 2020 and replaced Interim Administrative Measures. Since January 1, 2020, for foreign investors carrying out investment activities directly or indirectly in China, the foreign investors or foreign-invested enterprises shall submit investment information to the commerce authorities pursuant to these measures. On March 15, 2019, the National People’s Congress approved the Foreign Investment Law of the PRC (‘‘The Foreign Investment Law’’) 《( 中華人民共和國外商投資法》), which came into effect on January 1, 2020. The Foreign Investment Law replaced the Sino-Foreign Equity Joint Venture Enterprise Law《 ( 中華人民共和國中外合資經營企業法》), the Sino-Foreign Cooperative Joint Venture Enterprise Law《 ( 中華人民共和國中外合作經營企業法》) and the Wholly Foreign- Invested Enterprise Law《 ( 中華人民共和國外資企業法》), and became the legal foundation for foreign investment in the PRC. On December 26, 2019, the State Council issued the Regulations on Implementing the Foreign Investment Law of the PRC《 ( 中華人民共和國外商投資法實施條例》), which came into effect on January 1, 2020 and replaced the Regulations on Implementing the Sino-Foreign Equity Joint Venture Enterprise Law of PRC《 ( 中華人民共和國中外合資經營企業法實施條例》), Provisional Regulations on the Duration of Sino-Foreign Equity Joint Venture Enterprise Law,《 ( 中外合資經營 企業合營期限暫行規定》), Implementing Rules of Sino-Foreign Cooperative Joint Ventures Law of PRC《 ( 中華人民共和國中外合作經營企業法實施細則》), Implementing Rules of the Wholly Foreign-Invested Enterprise Law of PRC《 ( 中華人民共和國外商投資企業法實施細則》).
The Foreign Investment Law sets out the basic regulatory framework for foreign investments and proposes to implement a system of pre-entry national treatment with a negative list for foreign investments, pursuant to which (i) foreign natural persons, enterprises or other organizations (collectively the ‘‘foreign investors’’) shall not invest in any sector forbidden by the negative list for access of foreign investment, (ii) for any sector restricted by the negative list, foreign investors shall conform to the investment conditions provided in the negative list, and (iii) sectors not included in the negative list shall be managed under the principle that domestic investment and foreign investment shall be treated equally. The Foreign Investment Law further regulates the organization form, institutional framework and standard of conduct of a foreign-funded enterprise, which shall be subject to the provisions of the Company Law, the Partnership Enterprise Law of the PRC《 ( 中華人民共和國合夥企業法》) and other applicable laws. Foreign-funded enterprises, which were established in accordance with the
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Sino-Foreign Equity Joint Venture Enterprise Law《 ( 中華人民共和國中外合資經營企業法》), the Sino-Foreign Cooperative Joint Venture Enterprise Law《 ( 中華人民共和國中外合作經營企業法》) and the Wholly Foreign-Invested Enterprise Law《 ( 中華人民共和國外資企業法》) before the implementation of the Foreign Investment Law, may retain their original organization forms and other aspects for five years upon the implementation hereof. Specific implementation measures shall be formulated by the State Council. The Foreign Investment Law also sets forth necessary mechanisms to facilitate, protect and manage foreign investments and proposes to establish a foreign investment information report system in which foreign investors or foreign-funded enterprises shall submit the investment information to competent departments of commerce through the enterprise registration system and the enterprise credit information publicity system. Regulations Relating to Foreign Exchange General Administration of Foreign Exchange Pursuant to the Foreign Exchange Administration Regulations of the PRC《 ( 中華人民共和國外匯管理條例》), as amended on August 5, 2008, Renminbi is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless prior approval is obtained from SAFE and prior registration with SAFE is made. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign invested Enterprises 《( 關於改革外商投資企業外匯資本金結匯管理方式的通知》) (‘‘SAFE Circular 19’’). SAFE further promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account《 ( 關於改革 和規範資本專案結匯管理政策的通知》) (‘‘SAFE Circular 16’’), effective on June 9, 2016, which, among other things, amend certain provisions of Circular 19. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of the Renminbi capital converted from foreign currency denominated registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for business beyond its business scope or to provide loans to persons other than affiliates unless otherwise permitted under its business scope. Violations of SAFE Circular 19 or SAFE Circular 16 could result in administrative penalties. From 2012, SAFE has promulgated several circulars to substantially amend and simplify the current foreign exchange procedure. Pursuant to these circulars, the opening of various special purpose foreign exchange accounts, the reinvestment of RMB proceeds by foreign investors in the PRC and remittance of foreign exchange profit and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE. In addition, domestic companies are allowed to provide cross-border loans not only to their offshore subsidiaries, but also to their offshore parents and affiliates. The Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents《 ( 關於印發〈外國投資者境內直接投資外匯管理規定〉及配套文件的通 知》) which was promulgated by SAFE on May 2013, came into effect on the same day and was amended in October 2018, 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 the PRC based on the registration information provided by SAFE and its branches. In February 2015, SAFE promulgated the Notice on Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment《 ( 關於進一步簡化和改進直接投資外匯管理政策的通知》) (‘‘SAFE
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Circular 13’’), which took effect on June 1, 2015. SAFE Circular 13 delegates the power to enforce the foreign exchange registration in connection with inbound and outbound direct investments under relevant SAFE rules from local branches of SAFE to banks, thereby further simplifying the foreign exchange registration procedures for inbound and outbound direct investments. On January 26, 2017, SAFE issued the Notice on Improving the Check of Authenticity and Compliance to Further Promote Foreign Exchange Control《 ( 關於進一步推進外匯管理改革完善真 實合規性審核的通知》) (‘‘SAFE Circular 3’’), which came into effect on the same day, provides that several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profit. Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment. Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Resident’s Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles《 ( 國家外匯管理局關於境內居民通過特殊目的公司境外投融資及返程投資外匯 管理有關問題的通知》) (‘‘SAFE Circular 37’’) on July 4, 2014, which came into effect on the same day, requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. Regulations Related to Tax Enterprise Income Tax
Under the Enterprise Income Tax Law of the PRC《 ( 中華人民共和國企業所得稅法》) (the ‘‘EIT Law’’), which was first promulgated on March 16, 2017 and amended on February 24, 2017 and December 29, 2018, and its implementing rules, enterprises are classified as resident enterprises and non-resident enterprises. PRC resident enterprises typically pay an enterprise income tax at the rate of 25% while non-PRC resident enterprises without any branches in the PRC should pay an enterprise income tax in connection with their income from the PRC at the tax rate of 10%. An enterprise established outside of the PRC with its ‘‘de facto management bodies’’ located within the PRC is considered a ‘‘resident enterprise,’’ meaning that it can be treated in a manner similar to a PRC domestic enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define a de facto management body as a managing body that in practice exercises ‘‘substantial and overall management and control over the production and operations, personnel, accounting, and properties’’ of the enterprise. The EIT Law and the implementation rules provide that an income tax rate of 10% will normally be applicable to dividends payable to investors that are ‘‘non-resident enterprises,’’ and gains derived by such investors, which (a) do not have an establishment or place of business in the
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PRC or (b) have an establishment or place of business in the PRC, but the relevant income is not effectively connected with the establishment or place of business to the extent such dividends and gains are derived from sources within the PRC. Such income tax on the dividends may be reduced pursuant to a tax treaty between China and other jurisdictions. Pursuant to the EIT Law, the expenses of an enterprise for the research and development of new technologies, new products and new process may be additionally calculated and deducted when calculating the taxable amount of incomes. The implementation rules of the EIT Law specifies that, the term ‘‘additional deduction of research and development expenses’’ means that, where the research and development expenses that are actually incurred for the purpose to develop new technologies, new products and new crafts and do not constitute intangible assets are recorded into the current profit or loss, such expenses shall be deducted from the taxable income for the current year at 50% of the actual amount incurred in the current year and on an actual basis as required; if intangible assets are constituted, such expenses shall be amortized at 150% of the costs of the intangible assets before tax. Pursuant to the Notice on Increasing the Ratio of the Additional Deduction of Research and Development Expenses《 ( 關於提高研究開發費用稅前加計扣除比例的通知》), which was promulgated by the Ministry of Finance of the PRC, the SAT and the Ministry of Science and Technology of the PRC on September 20, 2018 and became effective on the same day, with respect to the research and development expenses that are actually incurred in the research and development activities of the enterprise, an extra 75% of the actual amount of expenses is deductible before tax, in addition to other actual deductions, during the period from January 1, 2018 till December 31, 2020, provided that the said expenses are not converted into the intangible asset and balanced into the enterprise’s current gains and losses; however, if the said expenses have been converted into the intangible asset, such expenses may be amortized at a rate of 175% of the intangible asset’s costs before tax during the above-said period. According to the EIT Law, certain high-tech enterprises are entitled to a reduced EIT rate of 15%. The Administrative Measures for Certification of High and New Technology Enterprises (高新 技術企業認定管理辦法) which was promulgated on January 29, 2016 and became effective on January 1, 2016, provides that, an enterprise legally certificated as a High and New Technology Enterprise is entitled to apply for preferential income tax policies according to EIT law and relevant regulations. A qualified enterprise will be issued the High and New Technology Enterprise Certificate (高新技術企業證書) and the qualification of a certificated enterprise shall be valid for a term of three years from the issuance date of the certificate. According to Circular of State Administration of Taxation on Issues Concerning Implementation of Preferential Income Tax Treatment for Hi-Tech Enterprises《 ( 國家稅務總局關於實施高新技術企業所得稅優惠有關問題的 通知》), which was promulgated on April 22, 2009 and came into effective on January 1, 2008, the high-tech enterprises recognized to be qualified may apply for preferential enterprise income tax from the year in which the valid term approved upon recognition begins. Pursuant to the Arrangement Between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income《 ( 內地和香港特別行政區 關於對所得避免雙重徵稅和防止偷漏稅的安排》) (the ‘‘Double Tax Avoidance Arrangement’’) and other applicable PRC laws, if a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise receives from a PRC resident enterprise may be reduced to 5% upon receiving approval from in charge tax authority. However, based on the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties《 ( 關於執行稅收協議股息 條款有關問題的通知》) issued on February 20, 2009 by the SAT, if the relevant PRC tax
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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. On February 3, 2018, the SAT issued the Announcement on Certain Issues Concerning the Beneficial Owners in a Tax Agreement《 ( 關於稅收協定中‘‘受益所有 人’’有關問題的公告》) (‘‘Circular 9’’), effective as of April 1, 2018, which provides guidance for determining whether a resident of a contracting state is the ‘‘beneficial owner of an item of income under China’s treaties and similar arrangements. According to Circular 9, a beneficial owner generally must be engaged in substantive business activities and an agent will not be regarded as a beneficial owner and, therefore, will not qualify for these benefits’’. Transfer Pricing
Pursuant to the EIT Law and its implement rules and the Law of the People’sRepublicof ChinaontheAdministrationofTaxCollection(中華人民共和國稅收徵收管理法), related party transactions should comply with the arm’s length principle. In the event that the related party transactions fail to comply with the arm’s length principle resulting in the reduction of the enterprise’s taxable income, the tax authority has power to make adjustments with reasonable methods within ten years from the tax paying year that the non-compliant related party transaction had occurred. Pursuant to such laws and regulations, any company entering into related party transactions with another company shall submit an annual related party transactions reporting form (年度關聯業務往來報告表) to the tax authority. BasedontheAnnouncement of the State Administration of Taxation on Matters Relating to the Improvement of Affiliated Declaration and Contemporaneous Document Management《 ( 國家稅務總 局關於完善關聯申報和同期資料管理有關事項的公告》) promulgated and became effective on 29 June 2016, enterprises which have related-party transactions shall prepare their contemporaneous documentation of related-party transactions (同期資料) per tax year and submit to the tax authority if required by the same. Contemporaneous documentation includes the master file (主體文檔), local file (本地文檔) and special issue file (特殊事項文檔), each of which is applied to different circumstances in relation to the related-party transactions of the PRC company. According to the Announcement of the State Administration of Taxation on Promulgating the Administrative Measures for Special Tax Investigation Adjustments and Mutual Agreement Procedures《 ( 國家稅務總局關於發佈特別納稅調查調整及相互協商程序管理辦法的公告》) which was which partially repealed the Implementation Regulations for Special Tax Adjustments (Trial) 《( 特別納稅調整實施辦法(試行)), and was issued on 17 March 2017 and became effective on the same day and was amended on 15 June 2018, if an enterprise receives a special tax adjustment risk warning from tax authorities or detects in itself any special tax adjustment risk, the enterprise may carry out voluntary adjustments regarding tax payment matters and the relevant tax authority may still proceed with special tax investigation adjustment procedures according to the relevant provisions. Value-added Tax and Business Tax
Pursuant to the Provisional Regulations on Value-Added Tax of the PRC (2017 Revision) 《( 中華人民共和國增值稅暫行條例》(2017年修訂)) as amended on November 19, 2017 by the State Council, and its implementation regulations, unless stated otherwise, for VAT payers who are selling or importing goods, and providing processing, repairs and replacement services in the PRC, the tax rate is 17%. According to provisions in the Notice on Adjusting the Value added Tax Rates (Caishui [2018] No. 32)《 ( 關於調整增值稅稅率的通知(財稅[2018]32號)》) issued by MOF and the SAT on April 4, 2018, where taxpayers make VAT taxable sales or import goods, the applicable tax
– 102 – REGULATORY OVERVIEW rates shall be adjusted from 17% to 16% and from 11% to 10%, respectively. The Notice takes effect on May 1, 2018, and the adjusted VAT rates take effect at the same time according to the Notice. Pursuant to provisions in the Announcement on Relevant Policies for Deepening Value-Added Tax Reform (Announcement of the Ministry of Finance, the State Taxation Administration and the General Administration of Customs [2019] No. 39)《 ( 關於深化增值稅改革有關政策的公告》)(財政 部、稅務總局、海關總署公告2019年第39號) issued by Ministry of Finance, SAT and General Administration of Customs on March 20, 2019, with respect to VAT taxable sales or imported goods of VAT general taxpayers, the applicable tax rates shall be adjusted from 16% to 13% and from 10% to 9%, respectively. The Announcement took effect on April 1, 2019, and the adjusted VAT rates has come into effect at the same time according to the Announcement. According to The Notice of the Ministry of Finance and the State Administration of Taxation on VAT and Consumption Tax Policies for Exported Goods and Services《 ( 財政部、國家稅務總局 關於出口貨物勞務增值稅和消費稅政策的通知》), which was promulgated on May 25, 2012 by the Ministry of Finance of the PRC and SAT, of which some terms became effective from January 1, 2011, and other terms became effective from July 1, 2012, exported goods and services of export enterprises are eligible for VAT exemption and refund policy. Except for the export VAT refund rate (hereafter referred to as the ‘‘taxrefundrate’’) otherwise provided for by the Ministry of Finance and SAT according to the decision of the State Council, the tax refund rate for exported goods shall be the applicable tax rate. SAT shall promulgate the tax refund rate through the Tax Refund Rate Catalogue of Exported Goods and Services according to the aforesaid provisions for the implementation of the tax authorities and taxpayers. In the event of adjustment to the tax refund rate, the implementing date shall be subject to the export date as indicated in the Customs Declaration of Goods for Export (specifically for export tax refund) (including the goods under process, repair and fitting) except as otherwise provided. Labor, Social Insurance and Housing Accumulation Funds Labor contract
Pursuant to the Labor Contract Law of the PRC《 ( 中華人民共和國勞動合同法》) released by the Standing Committee of the National People’s Congress on June 29, 2007 with effect from January 1, 2008, which was then amended and released on December 28, 2012 and came into force on July 1, 2013, the principle of lawfulness, fairness, equality, free will, negotiation for agreement and good faith shall be observed in the formation of a labor contract. An employer shall establish a sound system of employment rules in accordance with the laws so as to ensure that its employees enjoy the labor rights and perform the employment obligations. Social Insurance and Housing Accumulation Funds
As required under the Regulation of Insurance for Labor Injury《 ( 工傷保險條例》) first implemented on January 1, 2004 and amended in 2010, the Provisional Measures for Maternity Insurance of Employees of Corporations《 ( 企業職工生育保險試行辦法》) came into effect on January 1, 1995, the Decisions on the Establishment of a Unified Programme for Basic Old-Aged Pension Insurance of the State Council《 ( 國務院關於建立統一的企業職工基本養老保險制度的 決定》) issued on July 16, 1997, the Decisions on the Establishment of the Medical Insurance Programme for Urban Workers of the State Council《 ( 國務院關於建立城鎮職工基本醫療保險制度 的決定》) promulgated on December 14, 1998, The Unemployment Insurance Measures《 ( 失業保險
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條例》) promulgated on January 22, 1999, the Interim Regulations Concerning the Collection and Payment of Social Insurance Premiums《 ( 社會保險費徵繳暫行條例》) implemented on January 22, 1999 and the Social Insurance Law of the PRC《 ( 中華人民共和國社會保險法》) which was released by the Standing Committee of the National People’s Congress on October 28, 2010, came into force on July 1, 2011 and was then amended on December 29 2018, enterprises are obliged to provide their employees in the PRC with welfare schemes covering basic pension insurance, unemployment insurance, maternity insurance, work injury insurance and basic medical insurance. These payments are made to local administrative authorities and any employer that fails to contribute may be fined and ordered to make up within a prescribed time limit. Pursuant to the Regulation on the Administration of Housing Accumulation Funds《 ( 住房公積 金管理條例》) released by the State Council on April 3, 1999 and came into force on the same day, which was then amended and came into force on March 24, 2002, an employer shall pay the housing accumulation funds for its employees in accordance with the relevant provisions of the state. On September 18, 2018, the general meeting of State Council announced that the policies for social insurance shall remain unchanged until the reform has been completed for the transfer of the authority for social insurance from the Ministry of Human Resources and Social Security to the SAT on January 1, 2019. On September 21, 2018, the Ministry of Human Resources and Social Security released an Urgent Notice on Notice of Certain Measures on Further Supporting and Serving the Development of Private《 ( 關於貫徹落實國務院常務會議精神切實做好穩定社保費徵收 工作的緊急通知》) and required that the policies for both the rate and basis of social insurance contributions shall remain unchanged until the reform on the transfer of the authority for social insurance has been completed. On November 16, 2018, the SAT released the Notice of Certain Measures on Further Supporting and Serving the Development of Private《 ( 關於實施進一步支援和 服務民營經濟發展若干措施的通知》), which provided that the policy for social insurance shall remain stable and the SAT will pursue to lower the social insurance contribution rates with the relevant authorities, and ensure the overall burden of social insurance contribution on enterprises will be lowered. Intellectual Property
AccordingtotheRegulations for the Protection of Computer Software《 ( 計算機軟件保護 條例》) which was promulgated by the State Council on June 4, 1991 and implemented on October 1, 1991, and subsequently revised on December 20, 2001 and January 30, 2013, and the Measures for Computer Software Copyright Registration《 ( 計算機軟件著作權登記辦法》) which was promulgated and implemented by the Ministry of Machine Building and Electronics Industry (currently known as the Ministry of Industry and Information Technology (the ‘‘MIIT’’)), on April 6, 1992 and subsequently revised by the National Copyright Administration on February 20, 2002, the software copyright holder can register the software copyright registration to the Copyright Protection Center of China, which is the software registration agency identified by the State Copyright Administration. Trademark
Pursuant to the Trademark Law of the PRC《 ( 中華人民共和國商標法》) released by the Standing Committee of the National People’s Congress on August 23, 1982 with effect from March 1, 1983, which was newly amended and implemented on November 1, 2019, and the Implementation Regulations on the Trademark Law of the PRC《 ( 中華人民共和國商標法實施 條例》) which was amended by the State Council on April 29, 2014 and became effective from May
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1, 2014, any enterprise which needs to acquire the right to exclusively use a trademark on the goods or services thereof in the course of its business operation shall apply to the Trademark Office for trademark registration. The period of validity of a registered trademark shall be ten years from the day the registration is approved. Without the authorization of the owner of the registered trademark, using a trademark that is identical with or similar to a registered trademark on the same goods or that is identical with or similar to a registered trademark on the similar goods which could possibly cause confusion, constitutes an infringement of the exclusive right of a registered trademark. The infringer shall, in accordance with the regulations, cease the infringement, take remedial action and pay damages, etc. Patent
Pursuant to the Patent Law of the PRC《 ( 中華人民共和國專利法》) released by the Standing Committee of the National People’s Congress on March 12, 1984 with effect from April 1, 1985, which was newly amended on December 27, 2008 and came into force on October 1, 2009, after granting the patent right for an invention or utility model, except otherwise provided in the Patent Law, no entity or individual may, without the authorization of the patent owner, exploit the patent, that is, make, use, offer to sell, sell or import the patented product, or use the patented process, or use, offer to sell, sell or import any product which is a direct result of the use of the patented process for production or business purposes. And after a patent right is granted for a design, no entity or individual shall, without the permission of the patent owner, exploit the patent, that is, manufacture, offer to sell, sell, or import any product containing the patented design for production or business purposes. Once the infringement of patent is decided, the infringer shall, in accordance with the regulations, cease the infringement, take remedial action, and pay damage, etc. Domain Name
Pursuant to the Administrative Measures of Internet Domain Name《 ( 互聯網域名管理辦法》) released by the Ministry of Industry and Information Technology on August 24, 2017 with effect from November 1, 2017, those who carry out such activities as service provision, operation and maintenance as well as supervision and administration of internet domains within the territory of the PRC shall be subject to the said measures. The registration of a domain name shall follow the principle of ‘‘registration being granted to the first applicant’’, and if it is otherwise provided for in relevant detailed rules for the implementation of domain name registration, such rules shall prevail. LAWS AND REGULATIONS RELATED TO OUR BUSINESS IN THE UNITED STATES
Businesses operating in the United States are subject to a variety of city, state and federal laws and regulations (‘‘U.S. Regulations’’). The U.S. Regulations expected to be material to our operations are those relating to. among others, product safety, product liability, data privacy and customs and imports procedures as described below. Product Safety
The law of product safety is primarily under the jurisdiction of the U.S. Consumer Product Safety Commission (‘‘CPSC’’), an administrative agency of the United States federal government that regulates certain classes of products sold to the public. The CPSC was established pursuant to the 1972 Consumer Product Safety Act (‘‘CPSA’’). The CPSA is the umbrella statute at the federal level with respect to product safety for consumer products. The CPSA was amended by the U.S. Consumer Product Safety Improvement Act of 2008 (‘‘CPSIA’’) in 2008. The implementation of CPSIA was a significant overhaul of consumer product safety laws in the United States and was designed to enhance federal and state efforts to improve
– 105 – REGULATORY OVERVIEW the safety of all products imported into and distributed in the United States. Products imported into the United States which fail to comply with CPSIA’s requirements are subject to confiscation and the importer and/or distributor in the United States is subject to civil penalties and fines, as well as possible criminal prosecution. Under the CPSIA, a ‘‘general conformity certification’’ is required for any consumer product imported into the United States that is subject to a consumer product safety rule, standard, regulation, or ban pursuant to the CPSA or issued by the CPSC. The requirement applies to all subcontractors and importers of goods. Those parties must certify that their products comply with all applicable consumer product safety rules and laws such as the CPSA, Flammable Fabrics Act, Federal Hazardous Substance Act, and Poison Prevention Act. The CPSA specifies that certification must be based on a ‘‘test of each product or a reasonable testing program.’’ The certificate must accompany the product or shipment of products, and a copy must be furnished to each distributor or retailer and U.S. Customs and Border Protection. The CPSC may also request a copy of the certification. The CPSA also contains several reporting requirements for subcontractors and sellers of consumer products sold in the U.S. Section 15 of the CPSA requires a manufacturer or a seller to inform the CPSC immediately in the event it obtains information that any of its products: (1) creates a substantial risk of injury to consumers; (2) creates an unreasonable risk of serious injury or death; or (3) fails to comply with an applicable consumer product safety rule or with any other rule, regulation, standard, or ban under the CPSA or any other statute enforced by the CPSC. The CPSC may require the manufacturer or the seller to cease distribution of the product, and notify each person to whom the manufacturer or the seller knows such product was sold of such non- compliance, defects or risk. In certain circumstances, the CPSC may require the manufacturer or the seller to bring the product into conformity with the applicable product safety rules, repair the defect in the product, replace the product with an equivalent product that complies with the applicable product safety rules, issue a product recall and/or refund the purchase price of the product. Proposition 65
Proposition 65, officially known as the Safe Drinking Water and Toxic Enforcement Act of 1986 (‘‘Prop 65’’), is a California law that requires California consumers receive warnings regarding the presence of more than 800 chemicals known to cause cancer and/or reproductive toxicity. The law is highly technical, constantly evolving, and actively enforced by the government and private enforcers. Under Prop 65, any person in the course of doing business (i.e., any private company subject to jurisdiction in California that employs 10 or more persons) must provide a ‘‘clear and reasonable warning’’ before exposing individuals to listed carcinogens and reproductive toxins in their products. Prop 65 provides detailed requirements for the form, content, and placement of the required warning. The probability that a company will be subject to Prop 65 regulations is high because of how broadly the statute is worded. If a company manufactures, imports, distributes or sells a product that will be sold in California either through brick and mortar or online stores, or if a company has a physical presence of any kind in California (retail, office, warehouse, facility, factory, plant, etc.), then that company must abide by Prop 65 requirements. Recently, the California Office of Environmental Health Hazard Assessment (OEHHA) adopted a significant amendment to the Prop 65 warning requirement allowing companies to provide notice of the potentially toxic product either to the authorized agent for the business to whom they are selling or transferring the product, i.e. the next business in line, or to the authorized agent for the retail seller. Although this amendment appears to minimize the burden on companies, paying careful attention to Prop 65 requirements is
– 106 – REGULATORY OVERVIEW encouraged. Auditing Prop 65 compliance well in advance could mean avoiding costly lawsuits, the loss of valuable business opportunities or relationships, large monetary penalties, serious financial or reputational damage, or even product recalls. Product Liability Law
U.S. state law generally imposes liability on all subcontractors and retailers (and parties in the supply chain) for injuries that result from unsafe, defective and dangerous products sold to consumers. Product liability claims in the United States are typically based on three theories of law: (1) strict liability, (2) negligence and (3) breach of warranty. In addition, as noted above, U.S. laws and regulations can also obligate subcontractors and retailers (and parties in the supply chain) to remedy product defects, which can include safety recall campaigns. Parties involved in manufacturing, distributing or selling a product may be subject to liability for harm caused by a defect in that product. There are three types of product defects, namely, design defects, manufacturing defects and defects in marketing. In a negligence claim, a defendant may be held liable for personal injury or property damage caused by the failure to use due care. Strict liability claims, however, do not depend on the degree of carefulness by the defendant. A defendant is liable when it is shown that an injury (personal or to property) occurred as the result of a product’s defect. Breach of warranty is also a form of strict liability in the sense that a showing of fault is not required. The plaintiff need only establish the warranty was breached, regardless of how that came about. Companies that manufacture, distribute or sell a product in a particular state may be subject to the jurisdiction of such state’s product liability laws, whether the company’s jurisdiction of incorporation or principal place of business is in that state, in another U.S. state or in a non-U.S. jurisdiction. Product liability legal actions and recall campaigns in the United States could involve personal injury and property damage and could involve claims for substantial monetary damages. The results of any future litigation and claims involving product liability in the United States are inherently unpredictable. Based on our past experience, we do not anticipate that, in the aggregate, the outcome of any such litigation and claims involving us will have a material effect on our consolidated financial position or liquidity; however, such outcome could be material to our results of operations in particular period in which costs, if any are recognized by us. Data Privacy
We are subject to a variety of laws and regulations in the United States that involve privacy, data protection and personal information, data security, and data retention and deletion. In particular, we are subject to federal, state, and foreign laws regarding privacy and protection of people’s data. U.S. federal and state laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate, and may be interpreted and applied inconsistently from state to state and country to country and inconsistently with our current policies and practices. Import Tariffs and Customs Regulations
United States customs regulations (‘‘Customs Regulations’’), administered by the U.S. Customs and Border Protection (‘‘CBP’’) apply to any products entering the United States. Those regulations cover, among other areas, valuation of goods, classification, recordkeeping requirements, entry formalities, and laws related to duties and tariffs. The United States imposes tariffs on certain goods imported from various countries. Tariff rates are generally set forth in the
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Harmonized Tariff Schedules of the United States (the ‘‘HTSUS’’). Note that embargoes, anti- dumping duties, countervailing duties, and other specific matters administered by the United States executive branch are not contained in the HTSUS and that various regulations or administrative actions could result in modification of these duties. Section 201 of the Trade Act of 1974, 19 USC.§2101et.seq.(the‘‘Trade Act’’) permits the President of the United States to grant temporary import relief by raising import duties or imposing non-tariff barriers (e.g., quotas) on goods entering the United States that injure or threaten to injure domestic industries producing similar goods. Section 301 of the Trade Act authorizes the President of the United States to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S. commerce. The law does not require that the U.S. government wait until it receives authorization from the World Trade Organization to take such enforcement actions. Currently, U.S. and China trade policy has given rise to the imposition of significant additional tariffs on products imported into the United States from China, and vice versa, under Sections 201 and 301 of the Trade Act. To date, four lists of products imported from China, identified by HTSUS codes, have been issued with various tariff impositions. Most recently, on September 1, 2019, the U.S. government imposed additional tariffs on specific products on List 4 (the ‘‘Product List’’) to be imported from the PRC to the U.S. (the ‘‘Additional Tariffs’’). Certain Additional Tariffs that were intended to go into effect in December 2019 were reduced in half. Depending on the latest development of the trade negotiations between the U.S. and the PRC, the level and number of products subject to additional tariffs may change over time. Corporation Income Tax
A corporation organized under the laws of the U.S. or any state is subject to U.S. corporate tax on its worldwide income and gains. Corporate income tax is imposed at a flat rate of 21% (plus any applicable state or local corporate tax) by the end of 2020. Taxes are based on operating earnings after expenses have been deducted. Transfer Pricing
The U.S. has an extensive system of laws and practices designed to preserve the U.S. tax base by preventing income from being shifted among related parties through the inappropriate pricing of related party transactions. The U.S. transfer pricing regime seeks to ensure that goods and services transferred between related companies are done so at an arm’s length and are priced based on market conditions that permit profit to be reflected in the appropriate tax jurisdiction. Where the results of a transaction do not reflect an arm’s length price, the U.S. tax authority can reallocate the income to reflect the appropriate price and in some cases, impose monetary penalties for substantial or deliberate inaccuracy. The U.S. Congress has enacted legislation and the US Treasury Department has promulgated regulations to control transfer pricing, all of which are administered and enforced by the Internal Revenue Service. On 22 December 2017, the Tax Cuts and Jobs Act (Tax Act) became law. The Tax Act represents a comprehensive reform to the Internal Revenue Code (‘‘IRC’’). Among its many changes, the Tax Act lowered the federal corporate income tax rate to 21% and overhauled the international tax provisions of the IRC, which may cause many multi-national companies to re- evaluate their transfer pricing arrangements. Additionally, the Tax Act amended the IRC’s transfer pricing provisions, which will directly affect transfers of intangible property.
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Federal tax legislation is contained in the IRC. Specifically, section 482 of the IRC governs transfer pricing and applies when two or more organizations, trades, or businesses (regardless of form and place of the organization) are owned or controlled, directly or indirectly, by the same interests. The general rule of section 482 authorizes the Internal Revenue Service (‘‘IRS’’)to reallocate income, deductions, credits or allowances among the members of a controlled group of entities to ensure clear reflection of income or to prevent tax avoidance. Section 482 also provides an additional test for transfers of intangible property (IP). Income withrespecttothetransfer(orlicense)ofIPmustbe‘‘commensurate with the income’’ attributable to the IP. Under the commensurate-with-income standard, actual profit realized from the exploitation of an intangible must be considered in determining an arm’s length price for the transfer of the intangible. The amount of the compensation should therefore reflect changes in the income attributable to that intangible over time. In the U.S., individual states enact their own corporate income tax rules, which include the power and authority to regulate transfer pricing. The state rules focus on the shifting of income and deductions from a high-tax state to lower-tax states. Although the focus of most multinational businesses is on the relationship with the IRS, the state-by-state approach to transfer pricing methodologies must not be ignored. Each state is a sovereign taxing jurisdiction with the authority to disregard the conclusions reached by the IRS with respect to the appropriateness of a particular transfer pricing method. Each of the 50 U.S. states has its own internal statutes, regulations, court cases, and other authority governing transfer pricing issues. FDA Laws and Regulations
The U.S. Food and Drug Administration (‘‘FDA’’) regulates products that meet the definition of ‘‘device’’ under the Federal Food, Drug, and Cosmetic Act (‘‘FDCA’’). FDA’sroleistoensure the safety and effectiveness of medical devices on the U.S. market. ‘‘Devices’’ are defined broadly under the FDCA to include, among other things, products that are intended to diagnose, treat, or prevent a disease or condition, that affect the structure or function of a human body. The FDA’s Center for Devices and Radiological Health (CDRH) is responsible for regulating firms that manufacture, repackage, relabel, and/or import medical devices sold in the United States. Medical devices are classified into Class I, II, and III. Regulatory controls increase from Class I (least risk) to Class III (most risk). FDA regulations determine the class of device types and define the regulatory requirements for each device type. Most Class I devices are exempt from premarket notification under Section 510(k) of the FDCA; most Class II devices require premarket notification 510(k); and most Class III devices require premarket approval. FDA has the authority to conduct inspections of foreign manufacturers whose products are distributed in the U.S. FDA also regulates entities in the U.S. that import, distribute, or sell FDA regulated-products in the U.S. The regulatory requirements depend on the activities conducted by the entity. Requirements include, as applicable, establishment registration; medical device listing; premarket notification 510(k) (unless exempt); Quality System (QS) regulation (including manufacturing, warehousing activities, complaint handling); labeling requirements; and Medical DeviceReporting(MDR),alsoreferredtoasadverse event reports. U.S. entities that distribute FDA regulated products also are expected to cooperate with FDA to conduct voluntary recalls, when necessary.
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While the FDA regulates the labeling of medical devices, the U.S. Federal Trade Commission (FTC) regulates the advertising of medical devices. Labeling and advertising must be truthful and not misleading. In practice, labeling and advertising overlap (e.g., web site, social media) and either agency may issue enforcement for violations of labeling or promotion and advertising rules. LAWS AND REGULATIONS RELATED TO OUR BUSINESS IN HONG KONG Business Registration Ordinance (Chapter 310 of the Laws of Hong Kong)
Every person (a company or individual), carrying on a business in Hong Kong is required by the Business Registration Ordinance to register with the Inland Revenue Department and obtain a business registration certificate within one month of its commencement of the business. Business registration is a process based on application and does not involve government approval. Once the stated criteria are met, a business registration certificate will be granted. Business registration serves to notify the Inland Revenue Department of the establishment of a business in Hong Kong and therefore, designed to facilitate the Inland Revenue Department to collect tax from businesses in Hong Kong. Any person who fails to apply for business registration or display a valid business registration certificate at the place of business shall be guilty of an offense, and shall be liable to a fine of HK$5,000 and to imprisonment for one year. Laws and Regulations Relating to Taxation
The Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) (‘‘IRO’’)isan ordinance for the purposes of imposing taxes on property, earnings and profit in Hong Kong. The IRO provides, among others, that persons, which include corporations, partnerships, trustees and bodies of persons, carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profit (excluding profit arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business. On March 21, 2018, the Legislative Council of Hong Kong (香港立法會)passedTheInland Revenue (Amendment) (No.7) Bill 2017 (the ‘‘IRO Amendment Bill’’), which introduces the two- tiered profit tax rates regime. The IRO Amendment Bill was signed into law on March 28, 2018. Under the two-tiered profit tax rates regime, the first HK$2 million of profit of the qualifying group entity will be taxed at 8.25%, and profit above HK$2 million will be taxed at 16.5%. The profit of group entity not qualifying for the two-tiered profit tax rates regime will continued to be taxed at a flat rate of 16.5%. Accordingly, starting from the year of assessment 2018/19, the Hong Kong profit tax is calculated at 8.25% on the first HK$2 million of the estimated assessable profit and at 16.5% on the estimated assessable profit above HK$2 million for the qualifying group entity. In relation to (i) any tax computation containing incorrect information (the ‘‘Incorrect Information’’); and (ii) the filing of tax return containing the Incorrect Information, a person may be subject to the prosecutions under section 80(2) or 82(1) of the IRO: (a) Any person who without reasonable excuse files an incorrect return commits an offense under section 80(2) of the IRO and is liable on conviction to a fine at level 3 (i.e. HK$10,000) and a further fine of treble the amount of tax which has been undercharged as a result of the incorrect return, statement or information, or would have been so undercharged if the return, statement or information had been accepted as correct.
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(b) Anypersonwhowilfullywithintenttoevade or to assist any other person to evade tax omits from a return any sum which should be included commits an offense under section 82(1) of the IRO is liable:
(i) on summary conviction to a fine at level 3 (i.e. HK$10,000), a further fine of treble the amount of tax which has been undercharged in consequence of the offense or which would have been undercharged if the offense has not been detected and imprisonment for 6 months; and
(ii) on indictment to a fine at level 5 (i.e. HK$50,000), a further fine of treble the amount of tax which has been undercharged in consequence of the offense or which would have been undercharged if the offense has not been detected and imprisonment for 3 years.
Laws and Regulations Relating to Transfer Pricing
The Inland Revenue Department (‘‘IRD’’) may make transfer pricing adjustments by disallowing expenses incurred by Hong Kong residents under sections 16(1), 17(1)(b) and 17(1)(c) of the IRO and challenging the entire arrangement under general anti-avoidance provisions such as sections 61 and 61A of the IRO if the IRD considers that the related party transactions are not conductedonanarm’s length basis. In December 2009, the IRD released Departmental Interpretation and Practice Notes No. 46 (‘‘DIPN 46’’). DIPN 46 provides clarifications and guidance on the IRD’s views on transfer pricing and how it intends to apply the existing provisions of the IRO to establish whether related parties are transacting at arm’s length prices. In general, the practices followed by the IRD are based on the transfer pricing methodologies recommended by the OECD Transfer Pricing Guidelines. In April 2009, the IRD released Departmental Interpretation and Practice Notes No. 45 (‘‘DIPN 45’’). DIPN 45 provides that where double taxation arises as a result of transfer pricing adjustments made by the tax authorities of another country, a Hong Kong taxpayer may potentially claim relief under the treaty between Hong Kong and that country (countries that entered into tax arrangements with Hong Kong includes the PRC). Furthermore, the Hong Kong Government has gazetted the Inland Revenue (Amendment) (No. 6) Ordinance 2018 (the ‘‘Amendment Ordinance’’) on July 13, 2018. The main objectives of the Amendment Ordinance are to codify the transfer pricing principles and implement certain measures under the Base Erosion and Profit Shifting (‘‘BEPS’’) package promulgated by the Organization for Economic Co-operation and Development, such as the transfer pricing documentation requirements. The BEPS package seeks to counter the exploitation of gaps and mismatches in tax rules by multinational enterprises to artificially shift profit to low or no-tax locations where there are little or no economic activity. Section 50AAF of the IRO now codifies the arm’s-length principle and allows for an adjustment of a taxpayer’s profit upwards/losses downwards if the taxpayer has entered into transaction(s) with an associated person, and the pricing of such transaction(s) differs from that between independent persons and has created a Hong Kong tax advantage. Section 82A of the IRO stipulatesthatapersonisliabletobeassessedfor penalties to additional tax of the amount of tax undercharged resulting from transfer pricing adjustments, unless it is proved that reasonable efforts have been made to determine the arm’s length price for the transaction(s).
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LAWS AND REGULATIONS RELATED TO OUR BUSINESS IN GERMANY Product compliance and product liability
As a general rule, according to product-related EU and German law, every product must be designed, manufactured and usable in a way that it does not pose inadequate risks to its user. In addition, electrical and electronic products and equipment must comply with definite technical specifications, specific environmental standards, waste management requirements, eco-design and energy labeling requirements for energy-using products and compatibility requirements in order to avoid inadequate interference with other products (e.g. in terms of electromagnetic compatibility and radio waves). In particular, the following product-related regulations may be relevant to our products: Directive 2014/35/EU (Low Voltage Directive), Directive 2014/30/EU (EMC-Directive), Directive 2014/53/EU (Radio Equipment Directive), Directive 2011/65/EU (RoHS Directive), Directive 2012/19/EU (WEEE-Directive), regulations for batteries and accumulators (e.g. Directive 2006/66/EC), Directive 2009/125/EC (Ecodesign Directive), Regulation (EU) 2017/1369 (Energy Labelling Regulation), Directive 2001/95/EC (General Product Safety Directive), Directive 2009/48/ EC (Toy Safety Directive), each as amended, and their German law equivalents including the German Product Safety Act (Produktsicherheitsgesetz — the ‘‘ProdSG’’), and other national supplementary regulations or legal provisions, in particular those transposing, implementing and shaping the legal requirements of the European Union. In addition, from 2021, Regulation (EU) 2019/1020 (Market Surveillance Regulation) will introduce new provisions that supplement, further develop and strengthen the existing market surveillance concept and the official tasks and competences of market surveillance authorities. Briefly summarized those aforementioned regulations, amongst others, provide for requirements regarding (i) product properties (e.g. restrictions on substances, requirements regarding product construction and design, technical standards, radio or electromagnetic frequencies or other material product qualities), (ii) product labeling (e.g. regarding product and manufacturer/importer identification domiciled in the European Economic Area, applicable markings, e.g. CE-marking and energy efficiency labeling), (iii) registration and notification obligations (e.g. the obligation to register electronic equipment or batteries/accumulators in public registers and participate in a recycling system), (iv) take-back obligations at end of product’slife (e.g. taking back electronic equipment or batteries/accumulators), (v) procedural obligations, such as drawing up specific documentation (e.g. technical obligation comprising testing reports, expert opinions and design drawings, declaration of conformity), and (vi) proper instruction and information to users (e.g. user manual, warnings affixed to the product). Generally, product-related EU and domestic laws are applicable when a product is placed (Inverkehrbringen), made available on (Bereitstellen) or imported to (Einführen) the German or European market. In principle, the acting legal or natural person is considered legally responsible if it acts as manufacturer, importer, distributor or — as expressly provided for in the Market Surveillance Regulation coming into force in 2021 in the future —‘‘fulfillment service provider’’, i.e. any natural or legal person offering, in the course of commercial activity, at least two of the services warehousing, packaging, addressing and dispatching. A product is placed or made available when it is supplied on the German or European market for distribution, consumption or use without the need for a transfer of ownership or possession, as it is sufficient for the product to be made available or offered (including online distribution) in a way that merely requires acceptance by another market participant. Products that do not comply with the aforementioned product compliance requirements cannot be marketed in Germany or in the EU. The competent authorities are entitled and obliged to take appropriate measures when they have reason to suspect that a product does not fulfill these
– 112 – REGULATORY OVERVIEW requirements. Such measures include, but are not limited to: (i) prohibiting the exhibition of such product; (ii) ordering that such products be withdrawn or recalled; and (iii) seizing such products, destroying or having them destroyed or otherwise rendered unusable. Furthermore, non-compliance with product safety regulations is subject to fines (for example, non-compliance with the requirements of the ProdSG may result in a fine of up to EUR 100,000 per violation. Under certain conditions, non-compliance may also constitute a criminal offense and lead to imprisonment for up to one year. Particularly in the case of damage to life and limb, considerably higher penalties may be imposed.). Product liability
In Germany, either the seller or the producer, or both jointly, can be held liable if the product is defective. A distinction is made between product liability, producer liability, and warranty for defects. The rules for liability are to be found in the German civil code (Bürgerliches Gesetzbuch — the ‘‘BGB’’) and in special laws. Pursuant to the BGB, if a product does not fulfill the agreed quality or the quality that is to be expected, the seller in principle would have to either supply the customer with a defect-free product or to repair the defective product. In some circumstances, recourse may be taken against the producer provided recourse from seller to producer is admissible. In the event a product has caused damage to persons or items (other than the defective product), the producer is strictly liable pursuant to the German Product Liability Act (Produkthaftungsgesetz — the ‘‘ProdHaftG’’). Liability under the ProdHaftG can neither be restricted nor excluded in advance. The term ‘‘producer’’ may include distributors and importers of the product. In principle, the individual who suffered damage must prove the fault, the damage, and the causal link between fault and damage. If more than one person is liable for damages caused by a defective product, each person is jointly and severally liable for the damages attributable to any person. The maximum liability for damages relating to a human being as a consequence of one certain defect in a product is EUR 85 million. The ProdHaftG applies if (i) the aggrieved party has its habitual residence in Germany and the defective product was placed on the German market or (ii) if the defective product was bought in Germany and was placed on the German market or (iii) if the harm arose in Germany and the defective product was placed on the German market. It is sufficient that the producer could reasonably foresee that a product might be placed on the German market by another market participant, e.g. one of its customers, to be liable under the ProdHaftG. Thus, it is not necessary that the defective product was imported to Germany by the producer. Comparable regulations also apply in the other Member States of the EU, as the ProdHaftG serves to implement and transpose the requirements of EU law, namely Directive 85/374/EEC (Product Liability Directive). Under some circumstances, producers can also be held liable pursuant to tort law under the BGB if the product is defective due to its producer’s negligence or even intent (producer liability). Any negligent or intentional breach of the producer’s obligations causing damage to property, life, body, health or freedom of a third party or any violation of a protective law causing such damage may result in a liability towards the harmed party. The distributor can only be held liable for negligence in his own range of duties, such as specific dangers related to transportation and storage. The liability under German tort law is in principle unlimited and we would therefore be liable for all damages caused by the defective product. According to case law, the producer is also obliged to observe the market. This constitutes a producer’s duty of investigation and reaction since product safety and compliance first and foremost lies in the producer’s responsibility.
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Intellectual Property
In Germany, various laws and regulations grant protection for different types of intellectual property rights, such as the following: Under the German Patent Act (Patentgesetz) a patent grants the patent owner the right to exclude a third party from making, using, selling, offering for sale, or possessing products or processes using the patented technical invention throughout Germany or importing the invention into Germany. Germany has a ‘‘first to file’’ system which means that the right to a patent for a given technical invention lies with the person who first filed the patent application (regardless of the date the actual invention was made). Another category of intellectual property rights similar to patents are utility models in accordance with the German Utility Model Act (Gebrauchsmustergesetz). The German Trade Mark Act (Markengesetz) and, on an EU level Regulation (EU) 2017/1001 (EU Trademark Regulation), protects trademarks, which may, inter alia, be or consist of words, a logo, sounds, a shape of goods or of their packaging as well as other wrapping, and/or colors and color combinations. The main purpose of a trademark is to identify products and services and to distinguish them from products and services originating from others. The Act on the Legal Protection of Designs (Designgesetz) protects the appearance of a whole or a part of a product resulting from the features of, inter alia, the lines, contours, colors or shape of the product or its ornamentation. Similar protection on an EU level is granted by Regulation (EC) No 6/2002 (Community Designs Regulation). Trademark and design rights grant its holder certain exclusive rights with regard to the use of the trademark or design on the German (for Community designs and EU trademarks on the European) market. If intellectual property rights are infringed by third parties, the owner can claim, in particular, injunctive relief, disclosure and compensation for damages.
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OVERVIEW
In 2011, Ms. Yang, our founder and executive Director, founded Etekcity US and commenced selling our products online through Amazon with a focus on small home appliances. In 2012, in order to increase our product recognition, we launched the ‘‘Etekcity’’ brand for small home appliances.
In 2013, we established Shenzhen Chenbei to strengthen our product design, development and supply chain capability. Relying on the product subcontractors, logistic companies and IoT talents in the PRC, we had stable growth in our supply volume, delivery efficiency and research and development capability.
As demand for small home appliances continued to grow we launched two brands, Levoit’’ and ‘‘Cosori’’, in 2016. ‘‘Levoit’’ brand mainly offers small home appliances for improving home environment, and ‘‘Cosori’’ mainly offers kitchen appliances and dining ware. Our products under ‘‘Levoit’’ and ‘‘Cosori’’ had gained wide recognition in the small appliance market.
To cater customers’ growing demands for smart home solutions, we developed our VeSync app in 2015, offering a more convenient home automation experience to users through centralized control of smart home devices.
KEY BUSINESS MILESTONES
The following table sets forth the key milestones in our Group:
Time Milestone
2011..... — Founded Etekcity US — Commenced online sales of small home appliances on Amazon
2012..... — Launched products under our own ‘‘Etekcity’’ brand
2013..... — Founded Shenzhen Chenbei to strengthen our product design, development and capability. Relied on the abundant resources in the PRC, we had stable improvement in supply volume, delivery efficiency and research and development capability — Expanded into the European market as part of our plan to achieve global presence
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Time Milestone
2014..... — Expanded into the Canadian market to increase our sales volume
2015..... — Developed VeSync app to offer smart home solution
2016..... — Launched products under our own ‘‘Levoit’’ brand for home environment appliances and ‘‘Cosori’’ brand for kitchen appliances and dining ware — Established our VeSync research and development team
2017..... — Commenced sales under Vendor Central program with Amazon — Commenced sales on other retail chains to expand and diversify our sales channel — Launched our first smart small home appliances: smart air purifiers — Expanded into the Japanese market as part of our plan to achieve global presence
2018..... — Launched the first model of our air fryer
2019..... — Launched our second smart small home appliances: smart air fryer — Started to develop smart security solutions
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CORPORATE DEVELOPMENT
(a) Operating entities
1. Shenzhen Chenbei
Shenzhen Chenbei was established in the PRC with limited liability on February 27, 2013 with an initial registered capital of RMB500,000. It is principally engaged in trading and design of small home appliances and smart home devices. Upon its establishment, Shenzhen Chenbei was wholly owned by Ms. Yang. In 2017, due to the business expansion and development, Shenzhen Chenbei obtained a series of capital contributions in the amount of RMB23,000,000 in aggregate, including Mr. Yang Yuzheng (father of Ms. Yang and Mr. Yang Hai) to enhance the working capital of our Group. The following table sets out the changes in registered capital and shareholders of Shenzhen Chenbei since its establishment and immediately prior to the Reorganization:
Registered capital immediately Shareholding percentage immediately Date Change after the change after the change
Upon establishment . — RMB500,000 Ms. Yang
December 15, 2015 . Increase in registered capital by RMB505,050 (i) Ms. Yang (99.0001%); and RMB5,050 (ii) Mr. Yang Hai (0.9999%)
June 23, 2016 . . . . . Increase in registered capital by RMB5,500,000 (i) Ms. Yang (99%); and RMB4,994,950 (ii) Mr. Yang Hai (1%)
January 2, 2017. . . . Increase in registered capital by RMB6,500,000 (i) Ms. Yang (85%); RMB1,000,000 (ii) an ex-employee of Shenzhen Chenbei (13%)(1); (iii) Mr. Yang Hai (1%); and (iv) Ms. Jiang Junxiu (江均秀)(adirectorofYoowoHK) (1%)(2)
May 18, 2017 . . . . . Increase in registered capital by RMB28,500,000 (i) Ms. Yang (46.7684%); RMB22,000,000 (ii) Mr. Yang Yuzheng (36.8421%); (iii) an ex-employee of Shenzhen Chenbei (13.1095%)(1); (iv) an Independent Third Party (1.2632%)(3); (v) Mr. Yang Hai (1.0084%); and (vi) Ms. Jiang Junxiu (1.0084%)(2)
December 27, 2017 . Transfer of 13.1095% equity RMB28,500,000 (i) Ms. Yang (50.7551%); interest by the ex-employee (ii) Mr. Yang Yuzheng (45.9649%); of Shenzhen Chenbei to Ms. (iii) Ms. Jiang Junxiu (1.0084%)(2); Yang and Mr. Yang (iv) Mr. Yang Hai (1.0084%); and Yuzheng, respectively(4) (v) an Independent Third Party (1.2632%)(3)
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Notes:
(1) The ex-employee was the then vice general manager of Shenzhen Chenbei and was principally responsible for overseeing the product development and supply chain of Shenzhen Chenbei. The said ex-employee made capital contributions of RMB845,000 and RMB2,891,200 to Shenzhen Chenbei in January 2017 and May 2017, respectively. Immediately after the aforesaid capital contributions, the said ex-employee held approximately 13.1095% of the enlarged registered capital of Shenzhen Chenbei. The aforesaid capital contributions had been properly and legally settled.
(2) Ms. Jiang Junxiu is a director of Yoowo HK and is principally responsible for overseeing the procurement and administration of our Group. Ms. Jiang Junxiu made capital contributions of RMB65,000 and RMB222,400 to Shenzhen Chenbei in January 2017 and May 2017, respectively. Immediately after the aforesaid capital contributions, Ms. Jiang Junxiu held approximately 1.0084% of the enlarged registered capital of Shenzhen Chenbei. The aforesaid capital contributions had been properly and legally settled.
(3) The Independent Third Party made a capital contribution of RMB360,000 to Shenzhen Chenbei through his nominee (as more particularly described below) in May 2017. Immediately after the aforesaid capital contribution, the said Independent Third Party held approximately 1.2632% of the enlarged registered capital of Shenzhen Chenbei through his nominee. The aforesaid capital contribution had been properly and legally settled. Solely for administrative convenience and cost-saving purposes, the said Independent Third Party, who is a Hong Kong resident, entered into a nominee arrangement with a nominee (the ‘‘Nominee’’)inMay 2017, pursuant to which, the said Nominee held 1.2632% equity interest in Shenzhen Chenbei in the capacity of nominee for the benefit of the said Independent Third Party. The nominee arrangement ended when WFOE acquired Shenzhen Chenbei on June 28, 2019 as part of the Reorganization.
(4) The ex-employee of Shenzhen Chenbei transferred 13.1095% equity interest in Shenzhen Chenbei to Ms. Yang and Mr. Yang Yuzheng, respectively, as he resigned from Shenzhen Chenbei in December 2017. The aforesaid equity transfer had been properly and legally settled.
Pursuant to the equity transfer agreement dated June 28, 2019, as part of the Reorganization, WFOE acquired the entire equity interest in Shenzhen Chenbei from the then registered shareholders of Shenzhen Chenbei. For further details, please refer to the paragraphs headed ‘‘Reorganization—(D) Acquisition of Shenzhen Chenbei by WFOE’’ in this section. Upon completion of the said transfers on August 26, 2019, and up to the Latest Practicable Date, Shenzhen Chenbei was wholly owned by WFOE.
2. Rongyi Shanghai
Rongyi Shanghai was established in the PRC with limited liability on March 17, 2015 with a registered capital of RMB1,000,000. It is principally engaged in export and sales of small home appliances and smart home devices. Upon its establishment, Rongyi Shanghai was owned as to 99% and 1% by Ms. Yang and Mr. Yang Hai, respectively.
Pursuant to the equity transfer agreement dated December 18, 2015, Ms. Yang and Mr. Yang Hai together transferred their entire equity interests in Rongyi Shanghai to Shenzhen Chenbei both at a nominal consideration of RMB1. The aforesaid transfers were properly and legally settled. Upon completion of the said transfers on January 7, 2016, and up to the Latest Practicable Date, Rongyi Shanghai was wholly owned by Shenzhen Chenbei.
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3. Chongqing Xiaodao
ChongqingXiaodaowasestablishedinthePRCwithlimitedliabilityonApril8,2015 with a registered capital of RMB1,000,000. It is principally engaged in research and development of small home appliances and smart home devices. Upon its establishment, Chongqing Xiaodao was owned as to 99% and 1% by Ms. Yang and Mr. Yang Hai, respectively.
Pursuant to two separate equity transfer agreements both dated December 18, 2015, Ms. Yang and Mr. Yang Hai transferred 99% and 1% equity interest in Chongqing Xiaodao to Shenzhen Chenbei both at a nominal consideration of RMB1, respectively. The aforesaid transfers were properly and legally settled. Upon completion of the said transfers on December 29, 2015 and up to the Latest Practicable Date, Chongqing Xiaodao was wholly owned by Shenzhen Chenbei.
4. Dongguan Zhilun
Dongguan Zhilun was established in the PRC with limited liability on February 14, 2017 with a registered capital of RMB5,000,000. It is principally engaged in manufacturing and sales of small home appliances and smart home devices. Upon its establishment and up to the Latest Practicable Date, Dongguan Zhilun was wholly owned by Shenzhen Chenbei.
5. Etekcity US
Etekcity US was incorporated in the United States on December 5, 2011 as a general stock corporation and authorized to issue common stock of 5,000 shares with a par value of US$0.01. It is principally engaged in trading and design of small home appliances and small electronic gadgets. Upon its incorporation, Etekcity US was wholly owned by Ms. Yang.
Pursuant to the share purchase agreement dated December 29, 2015 and its supplemental agreement dated October 12, 2016, Ms. Yang transferred the entire issued share capital of Etekcity US to Chengdu Xiaodu at a consideration of US$1,016,427.44, which was determined based on the net assets value of Etekcity US. Upon completion of the said transfer, Etekcity US was wholly owned by Chengdu Xiaodu.
As part of the Reorganization, the entire share capital of Etekcity US was first transferred from Chengdu Xiaodu to Arcsync BVI on September 29, 2019, and was subsequently transferred from Arcsync BVI to L&H Y US on October 11, 2019. For further details, please refer to the paragraphs headed ‘‘Reorganization—(E) Reorganization of the US subsidiaries’’ in this section. Upon completion of the said transfers, and up to the Latest Practicable Date, Etekcity US was wholly owned by L&H Y US.
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6. Atekcity US
Atekcity US was incorporated in the United States as a general stock corporation on July 3, 2012 and authorized to issue common stock of 1,000 shares with no par values. It is principally engaged in customs clearance and declaration. Upon its incorporation, Atekcity US was wholly owned by Ms. Yang.
Pursuant to the share purchase agreement dated December 29, 2015 and its supplemental agreement dated October 12, 2016, Ms. Yang transferred the entire issued share capital of Atekcity US to Chengdu Xiaodu at a consideration of US$70,415.87, which was determined based on the net assets value of Atekcity US. Upon completion of the said transfer, Atekcity US was wholly owned by Chengdu Xiaodu.
As part of the Reorganization, the entire share capital of Atekcity US was first transferred from Chengdu Xiaodu to Arcsync BVI on September 29, 2019, and was subsequently transferred from Arcsync BVI to L&H Y US on October 11, 2019. For further details, please refer to the paragraphs headed ‘‘Reorganization—(E) Reorganization of the US subsidiaries’’ in this section. Upon completion of the said transfers, and up to the Latest Practicable Date, Atekcity US was wholly owned by L&H Y US.
7. Vesync US
Vesync US was incorporated in the United States as a general stock corporation on April 1, 2015 and authorized to issue common stock of 1,000 shares with no par values for the purpose of holding our trademark of ‘‘Vesync’’ and is intended to be platform for our future business expansion in the US. Upon its incorporation, Vesync US was wholly owned by Etekcity US.
Pursuant to the share transfer agreement dated January 30, 2020, as part of the Reorganization, Etekcity US transferred the entire issued share capital of Vesync US to Arcsync BVI. For further details, please refer to the paragraphs headed ‘‘Reorganization—E. Reorganization of the US subsidiaries’’ in this section. Upon completion of the said transfer and up to the Latest Practicable Date, Vesync US was wholly owned by Arcsync BVI.
8. Cosori US
Cosori US was incorporated in the United States as a general stock corporation on September 8, 2015 and authorized to issue common stock of 1,000 shares with no par values for the purpose of holding our trademark of ‘‘Cosori’’. Upon its incorporation and up to the Latest Practicable Date, Cosori US was wholly owned by Etekcity US.
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9. Arovast US
Arovast US was established in the United States as a general stock corporation on October 20, 2016 and authorized to issue common stock of 1,000 shares with no par values. It is principally engaged in trading of small home appliances and small electronic gadgets. Upon its incorporation and up to the Latest Practicable Date, Arovast US was wholly owned by Etekcity US.
10. Yoowo HK
Yoowo HK was incorporated in Hong Kong with limited liability on September 23, 2015 with a share capital of HK$1,000,000 divided into 1,000,000 shares, which were allotted and issued as fully paid to Shenzhen Chenbei. It is principally engaged in trading of small home appliances and smart home devices. Upon its incorporation and up to the Latest Practicable Date, Yoowo HK was wholly owned by Shenzhen Chenbei.
11. Adiman Netherlands
Adiman Netherlands was incorporated in the Netherlands with limited liability on January 4, 2016 with an issued share capital of EUR1,000 divided into 100 shares. It is principally engaged in trading of small home appliances and smart home devices. Upon its incorporation and up to the Latest Practicable Date, Adiman Netherlands was wholly owned by Yoowo HK.
12. Etekcity Germany
Etekcity Germany was incorporated in Germany with limited liability on November 16, 2017 with a registered capital of EUR150,000. It is principally engaged in customs clearance and declaration and trading of small home appliances and smart home devices. Upon its incorporation and up to the Latest Practicable Date, Etekcity Germany was wholly owned by Yoowo HK.
13. Etekcity Japan
Etekcity Japan was established in Japan as a joint stock company (kabushiki kaisha)on January 28, 2019 with a share capital of JPY2,000,000 divided into 200 shares. It is principally engaged in trading of small home appliances and smart home devices. Upon its incorporation and up to the Latest Practicable Date, Etekcity Japan was a wholly-owned subsidiary of Yoowo HK. For further details, please refer to the paragraphs headed ‘‘Reorganization—A. Incorporation of Offshore Investment Holding Companies, our Company, Offshore Subsidiaries and WFOE’’ in this section.
14. Etekcity Macau
Etekcity Macau was incorporated in Macau as a limited liability company on February 21, 2019 with a share capital of MOP 25,000. It has not commenced business since its incorporation and is intended to be engaged in trading of small home appliances and smart
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home devices. Upon its incorporation, each of Ms. Jiang Junxiu (a director of Yoowo HK) and Mr. Chen Zhaojun (our executive Director) held one share representing the share capital of MOP17,500 and MOP7,500, respectively, under mandate of Ms. Yang, and hence Etekcity Macau was held as to 70% and 30% by Ms. Jiang Junxiu and Mr. Chen Zhaojun, respectively, both as nominee shareholders holding under mandate for Ms. Yang. For further details, please refer to the paragraphs headed ‘‘Reorganization—A. Incorporation of Offshore Investment Holding Companies, our Company, Offshore Subsidiaries and WFOE’’ in this section.
Pursuant to the transfer agreement dated August 3, 2020, as part of the Reorganization, Ms. Jiang Junxiu transferred one share of MOP17,500 in Etekcity Macau, representing 70% of its share capital, to Ecomine HK, and Mr. Chen Zhaojun transferred one share of MOP7,500 in Etekcity Macau representing 30% of its share capital, to Vitasync BVI. For further details, please refer to paragraphs headed ‘‘Reorganization—(F) Acquisition of Etekcity Macau from Ms. Jiang Junxiu and Mr. Chen Zhaojun by Ecomine HK and Vitasync BVI’’ in this section. Upon completion of the said transfers on August 3, 2020 and up to the Latest Practicable Date, Etekcity Macau was owned as to 70% and 30% by Ecomine HK and Vitasync BVI, respectively.
(b) Investment holding entities
1. Our Company
Our Company was incorporated in the Cayman Islands as an exempted company with limited liability on January 9, 2019. As of the Latest Practicable Date, our Company was owned as to 28.9305%, 19.2869%, 43.6667%, 1.2000%, 1.9080%, 0.9580% and 4.0499% by Karis I LLC, Karis II LLC, Caerus BVI, Chen Wangcai BVI, Gongjin BVI, Arceus BVI and BOCT, respectively. For further details, please refer to the paragraphs headed ‘‘Reorganization—A. Incorporation of Offshore Investment Holding Companies, our Company, Offshore Subsidiaries and WFOE’’ in this section.
2. Vitasync BVI
Vitasync BVI was incorporated in the BVI with limited liability on February 27, 2019. As of the Latest Practicable Date, Vitasync BVI was wholly owned by our Company. For further details, please refer to the paragraphs headed ‘‘Reorganization—A. Incorporation of Offshore Investment Holding Companies, our Company, Offshore Subsidiaries and WFOE’’ in this section.
3. Arcsync BVI
Arcsync BVI was incorporated in the BVI with limited liability on February 27, 2019. As of the Latest Practicable Date, Vitasync BVI was wholly owned by our Company. For further details, please refer to the paragraphs headed ‘‘Reorganization—A. Incorporation of Offshore Investment Holding Companies, our Company, Offshore Subsidiaries and WFOE’’ in this section.
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4. L&H Y US
L&H Y US was incorporated in the United States as a general stock corporation on October 3, 2006 and authorized to issue common stock of 5,000 shares with a par value of US$0.01. It was previously engaged in trading of small home appliances and electronic gadgets but had ceased business operations since April 2016. Upon completion of the Reorganization, it will be principally engaged in investment holding for the purpose of holding our US subsidiaries. Upon its incorporation, L&H Y US was wholly owned by Ms. Yang.
Pursuant to the share purchase agreement dated December 29, 2015 and its supplemental agreement dated October 12, 2016, Ms. Yang transferred the entire issued share capital of L&H Y US to Chengdu Xiaodu at a consideration of US$1,111,162.69, which was determined based on the net assets value of L&H Y US. Upon completion of the said transfer, L&H Y US was wholly owned by Chengdu Xiaodu.
Pursuant to the share transfer agreement dated September 29, 2019, as part of the Reorganization, Chengdu Xiaodu transferred the entire issued share capital of L&H Y US to Arcsync BVI. For further details, please refer to the paragraphs headed ‘‘Reorganization—(E) Reorganization of the US subsidiaries’’ in this section. Upon completion of the said transfer and up to the Latest Practicable Date, L&H Y US was wholly owned by Arcsync BVI.
5. Ecomine HK
Ecomine HK was incorporated in Hong Kong with limited liability on March 25, 2019 with a share capital of HK$10,000 divided into 10,000 shares, which was allotted and issued as fully paid to Vitasync BVI. Upon its incorporation and up to the Latest Practicable Date, Ecomine HK was wholly owned by Vitasync BVI. For further details, please refer to the paragraphs headed ‘‘Reorganization—(A) Incorporation of Offshore Investment Holding Companies, our Company, Offshore Subsidiaries and WFOE’’ in this section.
6. WFOE
WFOE was established in the PRC with limited liability with a registered capital of RMB30,000,000 on April 26, 2019. As of the Latest Practicable Date, WFOE was wholly owned by Ecomine HK. For further details, please refer to the paragraphs headed ‘‘Reorganization—(A) Incorporation of Offshore Investment Holding Companies, our Company, Offshore Subsidiaries and WFOE’’ in this section.
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(c) Ceased material subsidiary
Chengdu Xiaodu
Chengdu Xiaodu was established in the PRC with limited liability on October 30, 2015 with a registered capital of RMB2,000,000. Prior to the deregistration, it was wholly owned by Shenzhen Chenbei and was principally engaged in the provision of internet technology services. As part of our internal structure adjustment in 2016, Chengdu Xiaodu acted as an intermediary investment holding company of our Group to hold the shareholdings in certain offshore entities (the ‘‘Investments in Offshore Entities’’), namely Etekcity US, Atekcity US, L&H Y US and HL Y. As part of the Reorganization, Chengdu Xiaodu transferred its entire shareholding interests in the aforesaid offshore entities either to overseas members of our Group or to Mr. Yang Yuzheng, one of our Controlling Shareholders (the ‘‘Relevant Transfers’’) while the application for the overseas direct investment record-filing for the Investments in Offshore Entities was in the process of reviewing. For details of the Relevant Transfers, please refer to the paragraph headed ‘‘Reorganization — (C) Disposal of HL Y and (E) Reorganization of the U.S. subsidiaries’’ in this section. In order to streamline the structure of our Group, pursuant to the written resolutions of its sole shareholder dated November 11, 2019, Chengdu Xiaodu was applying for the deregistration. On July 15, 2020, Chengdu Xiaodu was deregistered.
Prior to its deregistration in July 2020, Chengdu Xiaodu was slightly loss making based on its unaudited management accounts for the six months ended 30 June 2020. The aforesaid net losses were mainly attributable to the general and administrative expenses which mainly included rental expenses arising from the lease of Chengdu Xiaodu’s offices.
Our Directors confirm that Chengdu Xiaodu was solvent, and was not involved in any pending or unresolved arbitration or legal proceedings, or had any material non-compliance immediately prior to its deregistration.
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REORGANIZATION
The following diagram shows the shareholding and corporate structure of our Group immediately before the Reorganization:
Mr. Yang Mr. Yang Ms. Jiang An Independent Ms. Yang Yuzheng Hai Junxiu Third Party(1)
50.7551% 45.9649% 1.0084%1.0084% 1.2632%
Shenzhen Chenbei (PRC)
100% 100% 100% 100% 100% 100%
Shenzhen Rongyi Chengdu Chongqing Dongguan Yoowo HK Zhilun(3) Shanghai Xiaodu(2) Xiaodao Zhilun (Hong Kong) (PRC) (PRC) (PRC) (PRC) (PRC)
60% 40%
100% 100% 100% 100% 100% 100%
Shenzhen Etekcity US Atekcity US L&H Y US Etekcity Adiman HL Y Dedu(3) (the United (the United (the United Germany Netherlands (Hong Kong) (PRC) States) States) States) (Germany) (Netherlands)
100% 100% 100%
Arovast US Cosori US Vesync US (the United (the United (the United States) States) States)
Notes:
(1) The Independent Third Party held the 1.2632% equity interest through his nominee in Shenzhen Chenbei. For details of the nominee arrangement, please refer to the paragraphs headed ‘‘Corporate Development—(a) Operating entities—1. Shenzhen Chenbei’’ in this section.
(2) Chengdu Xiaodu was deregistered on July 15, 2020. For details of its deregistration, please refer to the paragraph headed ‘‘Corporate Development—(c) Ceased material subsidiary’’ in this section.
(3) Shenzhen Dedu and Shenzhen Zhilun were deregistered in May 2019. Prior to their respective deregistration, our Directors confirm that none of the aforesaid subsidiaries had any material business operations or was insolvent, involved in any pending or unresolved arbitration or legal proceedings, or had any material non- compliances with any applicable PRC laws and regulations.
– 125 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
In preparation for the Global Offering, we carried out a series of restructuring steps for the purpose of establishing and streamlining our corporate structure for the Listing and to facilitate our growth and expansion strategy.
(A) Incorporation of Offshore Investment Holding Companies, our Company, Offshore Subsidiaries and WFOE
Offshore Investment Holding Companies
Each of the then individual shareholders of Shenzhen Chenbei (excluding Ms. Yang), namely, Mr. Yang Yuzheng, Mr. Yang Hai, Ms. Jiang Junxiu and an Independent Third Party, incorporated his/her wholly-owned investment holding vehicles in the BVI, namely, Caerus BVI, Arceus BVI, Gongjin BVI and Chen Wangcai BVI, respectively.
North Point Trust Company L.L.C., as the trustee of the Annuity Trusts, incorporated two wholly-owned companies in the United States, namely, Karis I LLC and Karis II LLC, on trust for the benefit of the Annuity Trusts, as of the Latest Practicable Date, and the Family Trusts, being the beneficiaries of the Annuity Trusts, shall receive all of the remaining assets from the Annuity Trusts accordingly upon the expiration of the respective terms of the Annuity Trusts. For details, please refer to paragraphs headed ‘‘Reorganization—(B) Establishment of the Annuity Trusts and the Family Trusts’’ in this section.
Our Company
On January 9, 2019, our Company was incorporated as an exempted company with limited liability in the Cayman Islands with an authorized share capital of HK$380,000 divided into 38,000,000 Shares with par value of HK$0.01 each. Upon its incorporation, one Share was allotted and issued to the initial subscriber,whichwastransferredtoMs.Yangon thesameday.
On March 22, 2019, nine Shares were further allotted and issued, as fully paid, to Ms. Yang at par. The aforesaid allotment had been completed with the register of members of our Company updated on March 22, 2019.
On June 25, 2019, pursuant to the gift deeds both dated June 25, 2019, Ms. Yang transferred six Shares and four Shares to Karis I LLC and Karis II LLC, respectively, by way of gift. The aforesaid transfers had been completed with the register of members of our Company updated on June 25, 2019. Following the aforesaid transfers and allotments, our Company was held as to 60% and 40% by Karis I LLC and Karis II LLC, respectively.
On September 12, 2019, 304,525 Shares, 203,016 Shares, 459,649 Shares, 12,632 Shares, 10,084 Shares and 10,084 Shares were allotted and issued, all as fully paid, to Karis I LLC, Karis II LLC, Caerus BVI, Chen Wangcai BVI, Gongjin BVI and Arceus BVI, at the consideration of Hong Kong dollars equivalent to RMB9,091,089, RMB6,060,726, RMB13,721,813, RMB377,088, RMB301,042 and RMB301,042, respectively. The allotments
– 126 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE had been completed with the register of members of our Company updated on September 12, 2019. Following the aforesaid allotments, our Company was held as to 30.4531%, 20.3020%, 45.9649%, 1.2632%, 1.0084% and 1.0084% by Karis I LLC, Karis II LLC, Caerus BVI, Chen Wangcai BVI, Gongjin BVI and Arceus BVI, respectively.
On June 22, 2020, 52,631 Shares were allotted and issued, as fully paid, to BOCT at par for the purpose of the Pre-IPO Share Award Scheme. The allotments were completed with the register of members of our Company updated. For details, please refer to the paragraphs headed ‘‘Reorganization—(G) Adoption of the Pre-IPO Share Award Scheme and allotment of Shares to BOCT’’ in this section. Following the aforesaid allotments, our Company was held as to 28.9305%, 19.2869%, 43.6667%, 1.2000%, 0.9580%, 0.9580% and 4.9999% by Karis I LLC, Karis II LLC, Caerus BVI, Chen Wangcai BVI, Gongjin BVI, Arceus BVI and BOCT, respectively.
On November 1, 2020, 10,000 Awarded Shares were granted to Ms. Jiang Junxiu under the Pre-IPO Share Award Scheme. In connection with the aforesaid grant, as instructed by our Company, BOCT transferred 10,000 Awarded SharesatpartoGongjinBVI,aninvestment holding vehicle of Ms. Jiang Junxiu, accordingly. For details, please refer to the paragraphs headed ‘‘Reorganization—(G) Adoption of the Pre-IPO Share Award Scheme and allotment of Shares to BOCT’’ in this section. As of the Latest Practicable Date, 1.9080% of our Company was held by Ms. Jiang Junxiu through Gongjin BVI.
Offshore Subsidiaries
On February 27, 2019, Vitasync BVI was incorporated in the BVI with limited liability. Since its incorporation and up to the Latest Practicable Date, Vitasync BVI was wholly owned by our Company.
On February 27, 2019, Arcsync BVI was incorporated in the BVI with limited liability. Since its incorporation and up to the Latest Practicable Date, Arcsync BVI was wholly owned by our Company.
On March 25, 2019, Ecomine HK was incorporated in Hong Kong with limited liability. Since its incorporation and up to the Latest Practicable Date, Ecomine HK was wholly owned by Vitasync BVI.
On January 28, 2019, Etekcity Japan was established in Japan as a joint stock company. Since its incorporation and up to the Latest Practicable Date, Etekcity Japan was wholly owned by Yoowo HK.
On February 21, 2019, Etekcity Macau was incorporated in Macau with limited liability. Upon its incorporation, Etekcity Macau was held as to 70% and 30% by Ms. Jiang Junxiu and Mr. Chen Zhaojun, respectively, both as nominee shareholders holding under mandate for Ms. Yang.
– 127 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
WFOE
On April 26, 2019, WFOE was established in the PRC as a wholly foreign-owned limited liability company. Since its establishment and up to the Latest Practicable Date, WFOE was wholly owned by Ecomine HK.
(B) Establishment of the Annuity Trusts and the Family Trusts
On March 21, 2019, for the purposes of estate planning and family succession, Ms. Yang, as both the settlor, the person settling trust assets on trust, and the trustee, established Family Trust I for the benefit of any children born to or adopted by Ms. Yang and their respective issue, and Family Trust II for the benefit of Mr. Ryan Xu, being Ms. Yang’s child, during his lifetime. In addition, regarding Family Trust II, an independent trustee may be appointed which would have a discretion to distribute any net income of Family Trust II to any charitable organizations from time to time. As of the Latest Practicable Date, Mr. Ryan Xu, who is the only child of Ms. Yang without any issue of his own, is the sole beneficiary of the Family Trusts.
On the same date, Ms. Yang, as the grantor, the person making the transfer of trust assets to the Annuity Trusts, established Annuity Trust I and Annuity Trust II. North Point Trust Company L.L.C. was appointed by Ms. Yang as the trustee of the Annuity Trusts (the ‘‘Annuity Trusts Trustee’’). In June 2019, Ms. Yang transferred 10 Shares in total to Karis I LLC and Karis II LLC, and in September 2019, the Company allotted and issued 507,541 Shares in total to Karis I LLC and Karis II LLC, each of which is wholly owned by the Annuity Trusts Trustee. The aforesaid Shares held by Karis I LLC and Karis II LLC constitute part of the trust properties of the Annuity Trusts. On September 25, 2020, Ms. Yang, as the grantor, established two new annuity trusts, namely Annuity Trust III and Annuity Trust IV. Similar to Annuity Trust I & Annuity Trust II, Annuity Trust III and Annuity Trust IV are structured with Ms. Yang as the grantor and the Annuity Trusts Trustee as the trustee. The beneficiaries of Annuity Trust III and Annuity Trust IV are Family Trust I and Family Trust II, respectively. During the respective terms of the Annuity Trusts, Ms. Yang, as the annuitant, is entitled to receive a fixed annuity and any net income of the Annuity Trusts in excess of the aforesaid annuity annually (the ‘‘Fixed Annuities’’). On September 25, 2020, the Fixed Annuities of US$13,432,621 under Annuity Trust I in the form of 72,849 membership units in Karis I LLC and US$5,498,281 under Annuity Trust II in the form of 29,819 membership units in Karis II LLC were distributed to Ms. Yang, who immediately directed the Annuity Trusts Trustee to transfer the aforesaid Fixed Annuities of US$13,432,621 and US$5,498,281 to Annuity Trust III and Annuity Trust IV, respectively, on the same date. Pursuant to the terms of the Annuity Trusts and the deed of undertaking dated December 1, 2020 executed by Ms. Yang, any Fixed Annuities and/or any Future Fixed Annuities (as defined below) and/or any annuity property vested in Ms. Yang under the Annuity Trusts (the ‘‘Vested Annuity Property’’) in the form of shares, membership units or beneficial interests in Karis I LLC, Karis II LLC and/or
– 128 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE the Company be directed or redirected back to the Family Trusts (the ‘‘Undertaking Objective’’) by taking the following steps and adopting the following additional annuity trusts arrangements:
(a) agreeing to immediately transfer, and directing the Annuity Trusts Trustee to directly transfer on behalf of Ms. Yang, any and all of the Fixed Annuities and the Vested Annuity Property in the form of shares, membership units or beneficial interests in Karis I LLC, Karis II LLC and/or the Company to the trustee of one or more additional annuity trusts (the ‘‘Additional Annuity Trusts’’), which Ms. Yang will establish with substantially the same structure and terms of the Annuity Trusts, being Ms. Yang as the grantor, the Annuity Trusts Trustee (or a similar corporate trustee entity) as the trustee and the Family Trusts as the beneficiaries;
(b) using best endeavors of Ms. Yang to procure that the Annuity Trusts Trustee and the trustees of the Additional Annuity Trusts shall not dispose, sell or transfer any interest in the shares or membership units of Karis I LLC, Karis II LLC and/or the Company to any other party, except for the sole purpose of settling the Fixed Annuities and the Future Fixed Annuities (as defined below) so as to facilitate the termination of the Annuity Trusts and Additional Annuity Trusts in the future, provided always that no disposal or transfer of any interest in the shares or membership units of Karis I LLC, Karis II LLC and/or the Company shall take place before the first (1st) anniversary date of the Listing date; and
(c) continuously applying the above arrangements to the future distribution of the Fixed Annuities under the Annuity Trusts, and any distribution of the future fixed annuities under the Additional Annuity Trusts (the ‘‘Future Fixed Annuities’’), so as to ensure that the Undertaking Objective is met.
– 129 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
Pursuant to the said deed of undertaking, Ms. Yang will also direct all remaining assets of the Annuity Trusts (and any Additional Annuity Trusts) includable in her estate for U.S. estate tax purposes to be distributed to the Family Trusts. Based on the arrangements of the Annuity Trusts, the Family Trusts and the irrevocable undertakings made by Ms. Yang, the Annuity Trusts Trustee and any other subsequent trustees (if any) to be appointed hold the shareholding interests in Karis I LLC and Karis II LLC on trust for the ultimate benefit of the Family Trusts. Ms. Yang, as the powerholder of the Annuity Trusts, has the power to appoint additional trustees and remove and replace the Annuity Trusts Trustee, and as the sole manager of each of Karis I LLC and Karis II LLC, has the authority to make all decisions in relation to them. Set out below is the structures of the Annuity Trusts and the Family Trusts:
Any children born to or adopted (i) Mr. Ryan Xu and by Ms. Yang and their respective issue (ii) any charitable organizations (i.e. Mr. Ryan Xu, the only child of to be subsequently determined Ms. Yang as of the by the independent trustee (if any) at its Latest Practicable Date) discretion upon its appointment
beneficiaries settlor and settlor and beneficiaries trustee trustee
Family Trust I Ms. Yang Family Trust II
grantor, grantor, annuitant and annuitant and beneficiaries powerholder powerholder beneficiaries
Annuity Trust I Annuity Trust II and Annuity North Point Trust Company L.L.C. and Annuity Trust III trustee trustee Trust IV
trust assets trust assets
100% 100%
Karis I LLC Karis II LLC
As of the Latest Practicable Date, Karis I LLC and Karis II LLC, which held in aggregate 507,551 Shares, were wholly owned by the Annuity Trusts Trustee on trust for the benefit of the Annuity Trusts. For details, please refer to the paragraphs headed ‘‘Reorganization—(A) Incorporation of Offshore Investment Holding Companies, our Company, Offshore Subsidiaries and WFOE—Our Company’’ in this section and the section headed ‘‘Relationship with our Controlling Shareholders—Our Controlling Shareholders’’ in this prospectus.
(C) Disposal of HL Y
HL Y was incorporated in Hong Kong with limited liability by Ms. Yang on January 13, 2012 with a share capital of HK$500,000. Prior to cessation of business in March 2016, HL Y had principally engaged in trading of small home appliances and smart home devices.
In December 2015, Ms. Yang transferred the entire issued share capital of HL Y to Chengdu Xiaodu (the ‘‘2015 Acquisition’’) at the consideration of approximately US$1.6 million, which was determined with reference to the net assets value of HL Y as at December 31, 2015, which mainly
– 130 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE comprised trade and other receivables. Chengdu Xiaodu had not settled the aforesaid consideration which was recorded as an amount due to Ms. Yang. After the 2015 Acquisition, HL Y was wholly owned by Chengdu Xiaodu. As part of our internal structure adjustment, our Group established Yoowo HK as its trading arm in Hong Kong in September 2015, and HL Y had subsequently ceased its business operation since March 2016.
As part of the Reorganization, Chengdu Xiaodu ceased to act as an intermediary investment holding company of our Group for holding the shareholdings in certain offshore entities including HL Y. In order to streamline the structure of our Group, pursuant to the written resolutions of its sole shareholder dated November 11, 2019, Chengdu Xiaodu was applying for the deregistration and was deregistered on July 15, 2020. For details of Chengdu Xiaodu, please refer to ‘‘Corporate Development—(c) Ceased Material Subsidiary’’ in this section. For the purpose of its deregistration, Chengdu Xiaodu had to settle all its outstanding liabilities including the aforesaid amount due to Ms. Yang prior to the deregistration. As such, (i) pursuant to a share transfer agreement dated June 3, 2019, Chengdu Xiaodu transferred the entire issued share capital of HL Y to Mr. Yang Yuzheng (the ‘‘2019 Disposal’’) at the same consideration as the 2015 Acquisition; and (ii) pursuant to a debt offset agreement (債權債務抵消協議) dated June 10, 2019 among Ms. Yang, Mr. Yang Yuzheng (father of Ms. Yang) and Chengdu Xiaodu, the consideration for the 2019 Disposal of US$1.6 million receivable from Mr. Yang Yuzheng was offset by the consideration for the 2015 Acquisition of US$1.6 million payable to Ms. Yang. Upon completion of the said transfer, HL Y ceased to be a subsidiary of our Group. A deemed contribution from a controlling shareholder in the amount of approximately US$1,651,000 was recognized as a result of the aforesaid disposal of HL Y. For details, please refer to note 30 in Appendix I to this prospectus.
Prior to its disposal in June 2019, HL Y was slightly loss making based on its unaudited management accounts for the five months ended 30 May 2019. The aforesaid losses were mainly attributable to the general and administrative expenses which mainly included audit fees, filling of profits tax return fees and company secretary service fees.
Our Directors confirm that HL Y was solvent, and was not involved in any pending or unresolved arbitration or legal proceedings, or had any material non-compliances, immediately prior to its disposal.
(D) Acquisition of Shenzhen Chenbei by WFOE
Pursuant to the equity transfer agreement dated June 28, 2019, the then registered shareholders of Shenzhen Chenbei transferred their respective equity interest in Shenzhen Chenbei, representing the entire equity interest in Shenzhen Chenbei to WFOE at the consideration of RMB15,151,815, RMB13,721,813, RMB377,088, RMB301,042 and RMB301,042, respectively, all of which were determined based on the net assets value of Shenzhen Chenbei. Upon completion of the said transfers on August 26, 2019 and up to the Latest Practicable Date, Shenzhen Chenbei was wholly ownedbyWFOE.
– 131 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
(E) Reorganization of the US subsidiaries
L&H Y US
Pursuant to the share purchase agreement dated September 29, 2019, Chengdu Xiaodu transferred the entire issued share capital of L&H Y US to Arcsync BVI at a consideration of US$1,111,162.69, which was determined with reference to the acquisition cost of L&H Y US by Chengdu Xiaodu in December 2015, which in turn was based on the then net assets value of L&H Y US. Upon completion of the said transfer and up to the Latest Practicable Date, L&H Y US was wholly owned by Arcsync BVI.
Etekcity US
Pursuant to two separate share purchase agreements dated September 29, 2019 and October 11, 2019, Chengdu Xiaodu first transferred the entire issued share capital of Etekcity US to Arcsync BVI at a consideration of US$1,016,427.44, and Arcsync BVI subsequently transferred the entire issued share capital of Etekcity US to L&H Y US at the same consideration. The consideration of each of the aforesaid transfers of US$1,016,427.44 was determined with reference to the acquisition cost of Etekcity US by Chengdu Xiaodu in December 2015, which in turn was based on the then net assets value of Etekcity US.
Upon completion of the said transfers and up to the Latest Practicable Date, Etekcity US was wholly owned by L&H Y US.
Atekcity US
Pursuant to two separate share purchase agreements dated September 29, 2019 and October 11, 2019, Chengdu Xiaodu first transferred the entire issued share capital of Atekcity US to Arcsync BVI at a consideration of US$70,415.87, and Arcsync BVI subsequently transferred the entire issued share capital of Atekcity US to L&H Y US at the same consideration. The consideration of each of the aforesaid transfers of US$70,415.87 was determined with reference to the acquisition cost of Atekcity US by Chengdu Xiaodu in December 2015, which in turn was based on the then net assets value of Atekcity US.
Upon completion of the said transfers and up to the Latest Practicable Date, Atekcity US was wholly owned by L&H Y US.
Vesync US
Pursuant to the share purchase agreement dated January 30, 2020, Etekcity US transferred the entire issued share capital of Vesync US to Arcsync BVI at a nominal consideration of US$0.01. Upon completion of the said transfer and up to the Latest Practicable Date, Vesync US was wholly owned by Arcsync BVI.
– 132 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
(F) Acquisition of Etekcity Macau from Ms. Jiang Junxiu and Mr. Chen Zhaojun by Ecomine HK and Vitasync BVI
Pursuant to the transfer agreement dated August 3, 2020, Ms. Jiang Junxiu transferred one share of MOP17,500 in Etekcity Macau, representing 70% of its share capital, to Ecomine HK at a consideration of MOP17,500, and Mr. Chen Zhaojun transferred one share of MOP7,500 in Etekcity Macau, representing 30% of its share capital, to Vitasync BVI at a consideration of MOP7,500. The consideration of each of the aforesaid transfers was determined with reference to the nominal value of the shares in Etekcity Macau. Upon completion of the said transfers on August 3, 2020 and up to the Latest Practicable Date, Etekcity Macau was owned as to 70% and 30% by Ecomine HK and Vitasync BVI, respectively.
(G) Adoption of the Pre-IPO Share Award Scheme and allotment of Shares to BOCT
To recognize and reward the contributions of certain eligible employees of our Group and to incentivize them for their future contribution to the continual operation and development of our Group, our Company adopted the Pre-IPO Share Award Scheme on June 16, 2020. Pursuant to a trust deed dated June 16, 2020, our Company, as the settlor, established the Share Award Trust with BOCT, as the trustee, for holding the awarded shares for the benefit of the selected employees (the ‘‘Selected Employee(s)’’) as determined by our Board under the Pre-IPO Share Award Scheme.
On June 22, 2020, for the purpose of the Pre-IPO Share Award Scheme, a total of 52,631 Shares (the ‘‘Awarded Shares’’) were issued and allotted to BOCT, representing approximately 4.9999% of the total issued share capital of our Company upon the Capitalization Issue but without taking into account the new Shares to be issued pursuant to the Global Offering and approximately 3.7490% of the total issued share capital of our Company immediately upon completion of the Capitalization Issue and the Global Offering (assuming the Over-allotment Option is not exercised and taking into no account of the Shares which may be issued pursuant to the exercise of the options which may be granted under the Share Option Scheme).
Of the 52,631 Awarded Shares, on November 1, 2020, (a) 10,000 Awarded Shares were granted to one Selected Employee, Ms. Jiang Junxiu, a director of Yoowo HK, under the Pre-IPO Share Award Scheme; and (b) in connection with the aforesaid grant, as instructed by our Company, BOCT transferred 10,000 Awarded Shares at par to Gongjin BVI, an investment holding vehicle of Ms. Jiang Junxiu, accordingly. The remaining 42,631 Awarded Shares will be granted to the Selected Employees after the Listing at full discretion of our Board pursuant to the rules of the Pre-IPO Share Award Scheme.
Since no other Awarded Shares have been granted to any employees during the Track Record Period under the Pre-IPO Share Award Scheme save as disclosed above, there is no dilution impact on the financial statements of our Group. Upon the grant of any of the Awarded Shares, the fair value of the Awarded Shares granted to the Selected Employees will be measured at the date of grant and will be recognized as expense in the financial statements of our Group over the vesting period.
– 133 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
Other than pursuant to the Capitalization Issue, and save as disclosed above, no further Shares will be transferred and no new Shares will be issued by our Company for the purpose of the Pre- IPO Share Award Scheme.
For further details of the Pre-IPO Share Award Scheme, please refer to the section headed ‘‘Statutory and General Information—D. Other Information—1. Pre-IPO Share Award Scheme’’ in Appendix IV to this prospectus.
The following diagram shows the shareholding and corporate structure of our Group immediately after completion of the Reorganization but before completion of the Capitalization Issue and the Global Offering:
North Point Trust Mr. Yang(2) Mr. Yang An Independent Ms. Jiang Junxiu Company L.L.C.(1)(2) Yuzheng Hai(2) Third Party
100% 100% 100% 100% 100% 100% Chen Wangcai (2) (2) (2) (2) Gongjin BVI (3) Karis I LLC Karis II LLC Caerus BVI Arceus BVI BVI BOCT 28.9305% 19.2869%43.6667%0.9580% 1.9080% 1.2000% 4.0499%
the Company (Cayman Islands)
100% 100%
Vitasync BVI Arcsync BVI (BVI) (BVI) 100% 100% 100% Ecomine HK L&H Y US Vesync US (Hong Kong) (the United States) (the United States)
70% 100% 100% 100%
Etekcity 30% WFOE Etekcity US Atekcity US Macau (PRC) (the United States) (the United States) (Macau)
100% 100% 100%
Shenzhen Chenbei Arovast US Cosori US (PRC) (the United States) (the United States)
100% 100% 100% 100%
Rongyi Dongguan Chongqing Shanghai Zhilun Xiaodao Yoowo HK (PRC) (PRC) (PRC) (Hong Kong)
100%100% 100%
Etekcity Etekcity Adiman Japan Germany Netherlands (Japan) (Germany) (Netherlands)
– 134 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
Notes:
(1) North Point Trust Company L.L.C., the Annuity Trusts Trustee, established Karis I LLC and Karis II LLC, on trust for the benefit of the Annuity Trusts, which were established by Ms. Yang for the ultimate benefit of the Family Trusts pursuant to certain arrangements, of which Ms. Yang is both the settlor and trustee and Mr. Ryan Xu, being Ms. Yang’s child, is the sole beneficiary as of the Latest Practicable Date. Pursuant to the Annuity Trusts, Ms. Yang, as the powerholder, has the power to appoint additional trustees and remove and replace North Point Trust Company L.L.C., and as the sole manager of Karis I LLC and Karis II LLC, has the authoritytomakealldecisionsinrelationtothem.Ms.YangisdeemedtobeinterestedinbothKarisILLC and Karis II LLC, and hence the Shares held by them.
(2) Ms. Yang, Mr. Yang Yuzheng, Mr. Yang Hai, Karis I LLC, Karis II LLC, Caerus BVI, Arceus BVI and North Point Trust Company L.L.C. are regarded as a group of Controlling Shareholders. For detail of the Controlling Shareholders, please refer to the section headed ‘‘Relationship with our Controlling Shareholders’’ in this prospectus.
(3) BOCT, as the trustee of the Share Award Trust, holds the relevant Shares, being the awarded shares (as defined under the rules of the Pre-IPO Share Award Scheme), on trust for the benefit of the selected employees pursuant to the rules of the Pre-IPO Share Award Scheme and the Trust Deed. For details, please refer to the paragraphs headed ‘‘Reorganization—(G) Adoption of the Pre-IPO Share Award Scheme and allotment of Shares to BOCT’’ in this section and the section headed ‘‘Statutory and General Information—D. Other Information—1. Pre-IPO Share Award Scheme’’ in Appendix IV to this prospectus.
GLOBAL OFFERING AND CAPITALIZATION ISSUE
Conditional upon the creation of our Company’s share premium account as a result of the issue of the Offer Shares pursuant to the Global Offering, our Directors are authorized to capitalize an amount of HK$8,410,521.69 standing to the credit of the share premium account of our Company by applying such sum towards paying up in full at par a total of 841,052,169 Shares for allotment and issue to the then existing Shareholders.
– 135 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
The following diagram shows the shareholding and corporate structure of our Group immediately after completion of the Capitalization Issue and the Global Offering, assuming the Over-allotment Option is not exercised and without taking into account any Shares which may be issued upon exercise of any options which may be granted under the Share Option Scheme:
North Point Trust Mr. Yang Mr. Yang Ms. Jiang Junxiu(4) An Independent Company L.L.C.(1)(2) Yuzheng(2) Hai(2) Third Party(5)
100% 100% 100%100% 100% 100% Chen Wangcai (2) (2) (2) (2) (4) (3) Other public Karis I LLC Karis II LLC Caerus BVI Arceus BVI Gongjin BVI BVI(5) BOCT shareholders 21.6921% 14.4613% 32.7413%0.7183% 1.4306% 0.8998% 3.0366% 25.0199%
the Company (Cayman Islands)
100% 100%
Vitasync BVI Arcsync BVI (BVI) (BVI) 100% 100% 100% Ecomine HK L&H Y US Vesync US (Hong Kong) (the United States) (the United States)
70% 100% 100% 100%
Etekcity Etekcity US Atekcity US 30% Macau WFOE (the United States) (the United States) (Macau) (PRC)
100% 100% 100%
Shenzhen Chenbei Arovast US Cosori US (PRC) (the United States) (the United States)
100% 100% 100% 100%
Rongyi Dongguan Chongqing Shanghai Zhilun Xiaodao Yoowo HK (PRC) (PRC) (PRC) (Hong Kong)
100%100% 100%
Etekcity Etekcity Adiman Japan Germany Netherlands (Japan) (Germany) (Netherlands)
Notes:
(1) North Point Trust Company L.L.C., the Annuity Trusts Trustee, established Karis I LLC and Karis II LLC, on trust for the benefit of the Annuity Trusts, which were established by Ms. Yang for the ultimate benefit of the Family Trusts pursuant to certain arrangements, of which Ms. Yang is both the settlor and trustee and Mr. Ryan Xu, being Ms. Yang’s child, is the sole beneficiary as of the Latest Practicable Date. Pursuant to the Annuity Trusts, Ms. Yang, as the powerholder, has the power to appoint additional trustees and remove and replace North Point Trust Company L.L.C., and as the sole manager of Karis I LLC and Karis II LLC, has the authoritytomakealldecisionsinrelationtothem.Ms.YangisdeemedtobeinterestedinbothKarisILLC and Karis II LLC, and hence the Shares held by them.
– 136 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
(2) Ms. Yang, Mr. Yang Yuzheng, Mr. Yang Hai, Karis I LLC, Karis II LLC, Caerus BVI, Arceus BVI and North Point Trust Company L.L.C. are regarded as a group of Controlling Shareholders. For detail of the Controlling Shareholders, please refer to the section headed ‘‘Relationship with our Controlling Shareholders’’ in this prospectus.
(3) BOCT, as trustee of the Share Award Trust, holds the relevant Shares, being the awarded shares (as defined under the rules of the Pre-IPO Share Award Scheme), on trust for the benefit of the selected employees pursuant to the rules of the Pre-IPO Share Award Scheme and the Trust Deed. For details, please refer to the paragraphs headed ‘‘Reorganization—(G) Adoption of the Pre-IPO Share Award Scheme and allotment of Shares to BOCT’’ in this section and the section headed ‘‘Statutory and General Information—D. Other Information—1. Pre-IPO Share Award Scheme’’ in Appendix IV to this prospectus. The Shares held by BOCT will not be counted towards public float for the purpose of Rules 8.08 of the Listing Rules.
(4) As of the Latest Practicable Date, Ms. Jiang Junxiu is a director of Yoowo HK and hence a Connected Person at subsidiary level of our Company within the meaning of the Listing Rules. The Shares held by Gongjin BVI will therefore not be counted towards public float for the purpose of Rule 8.24 of the Listing Rules.
(5) The Shares held by Chen Wangcai BVI will be counted towards public float after the Listing for the purpose of Rule 8.08 of the Listing Rules.
LEGAL COMPLIANCE
Our PRC Legal Advisers have confirmed that the Reorganization in relation to the equity interest transfers in respect of our PRC subsidiaries as described above had been conducted in compliance with applicable PRC laws and regulations and had been legally completed and duly registered with local registration authorities of the PRC.
After consulting with our legal advisers of the relevant jurisdictions, and taking into account their views, we believe that all share transfers in relation to the Reorganization as mentioned above have been duly authorized, legally and properly completed, and do not contravene the articles of incorporation of the relevant subsidiaries of our Group.
M&A Rules
According to the ‘‘Provisions on the Takeover of Domestic Enterprises by Foreign Investors’’ (關於外國投資者併購境內企業的規定)(the‘‘M&A Rules’’) jointly issued by the Ministry of Commerce of PRC (中華人民共和國商務部)(the‘‘MOFCOM’’), the State-Owned Assets Supervision and Administration Commission of the State Council (國務院國有資產監督管理委員 會), the SAT (國家稅務總局), the China Securities Regulatory Commission (中國證券監督管理委 員會)(the‘‘CSRC’’), State Administration for Industry and Commence (國家工商行政管理總局) and the State Administration of Foreign Exchange (國家外匯管理局)(the‘‘SAFE’’) on August 8, 2006 and effective as of September 8, 2006 and subsequently amended on June 22, 2009, where a domestic natural person intends to take over its/his/her related domestic company in the name of an offshore company which it/he/she lawfully established or controls, the takeover shall be subject to the examination and approval of MOFCOM; and where a domestic natural person holds an equity interest in a domestic company through an offshore special purpose company, any transaction involving the overseas listing of that special purpose company shall be subject to approval by the CSRC.
– 137 – HISTORY, REORGANIZATION AND CORPORATE STRUCTURE
At the time of the acquisition of the equity interest in Shenzhen Chenbei by WFOE, WFOE was indirectly wholly owned by North Point Trust Company L.L.C.. For details of the Annuity Trusts and the Family Trusts, please refer to the paragraphs headed ‘‘Reorganization—(B) Establishment of the Annuity Trusts and the Family Trusts’’ in this section. As of the Latest Practicable Date, the sole beneficiary of the Family Trusts is Mr. Ryan Xu, the son of Ms. Yang. Mr. Ryan Xu is a citizen of the United States and is not a domestic resident as defined under the M&A Rules. Hence, such acquisition was not subject to the approval of the MOFCOM.
On the aforesaid basis, our PRC Legal Advisers advised that, unless new laws and regulations are enacted, or MOFCOM and CSRC have new provisions or interpretations on the M&A Rules in the future, such acquisition and the application by our Company for the issuance and listing of its shares on the Stock Exchange is not subject to the approval from the MOFCOM or the CSRC under the M&A Rules.
SAFE REGISTRATION IN THE PRC
Pursuant to the Circular of the SAFE on Foreign Exchange Administration of Overseas Investment, Financing and Round-trip Investments Conducted by Domestic Residents through Special Purpose Vehicles（關於境內居民通過特殊目的公司境外投融資及返程投資外匯管理有關 問題的通知）(the ‘‘SAFE Circular No. 37’’), promulgated by SAFE and which became effective on July 14, 2014, (a) a PRC resident must register with the local SAFE branch before he or she contributes assets or equity interests in an overseas special purpose vehicle (the ‘‘Overseas SPV’’) that is directly established or indirectly controlled by the PRC resident for the purpose of conducting investment or financing, and (b) following the initial registration, the PRC resident is also required to register with the local SAFE branch for any major change, in respect of the Overseas SPV, including, among other things, a change of Overseas SPV’s PRC resident shareholder(s), the name of the Overseas SPV, terms of operation, or any increase or reduction of the Overseas SPV’s capital, share transfer or swap, and merger or division.
Pursuant to SAFE Circular No. 37, failure to comply with these registration procedures may result in penalties. Pursuant to the Circular of the SAFE on Further Simplification and Improvement in Foreign Exchange Administration on Director Investment（關於進一步簡化和改進直接投資外 匯管理政策的通知）(the ‘‘SAFE Circular No. 13’’), promulgated by SAFE and which became effective on June 1, 2015, the power to accept SAFE registration was delegated from local SAFE to local banks where the assets or interest in the domestic entity was located.
Accordingly, as advised by our PRC Legal Advisers, each of Mr. Yang Yuzheng, Mr. Yang Hai and Ms. Jiang Junxiu has completed the registration under the SAFE Circular No. 13 and the SAFE Circular No. 37.
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OVERVIEW
We are one of the market players in the small home appliance online market in the United States. According to the Frost & Sullivan Report, among small home appliance retailers, we ranked third in terms of retail sales generated through Amazon and fifth through all online channels in 2019 in the United States. Our air purifiers ranked first and our air fryers ranked second in their respective categories, both in terms of retail sales generated through Amazon in 2019 in the United States. Our products are sold to users in a number of countries, including, without limitation, the United States, Canada, the United Kingdom, Germany, France, Spain, Italy and Japan. Our business primarily focuses on the online marketing and sales of self-designed and -developed small home appliances and smart home devices under our increasingly recognized brands. We sell our products primarily through e-commerce marketplaces, mainly Amazon, the largest e-commerce marketplace in the United States. With our mission to ‘‘build a better living,’’ we are dedicated to continuously improving consumers’ daily lives in small but meaningful ways with innovative, user-friendly products.
Innovation is at the heart of our business and we constantly look for new and better ways to meet our customers’ needs. We believe our success is underpinned by our strong design and R&D capabilities. As of October 31, 2020, we had an experienced in-house product design and development team consisting of 223 engineers and designers in the United States and the PRC. We believe every country or region is different, as are the needs and preferences of those who live there. We have leveraged our in-depth understanding of the preferences of users in different places to design and develop a wide range of products, with a focus on small home appliances. Our products are sold under three core brands, namely, , and .
appliances to improve the home environment, such as air purifiers, humidifiers and oil diffusers;
smart home gadgets, health monitoring devices, outdoor recreation products and personal care products, such as smart WiFi light switches, smart WiFi outlets, body weight scales, LED camping lanterns, digital laser thermometers and massagers; and
kitchen appliances and dining ware, such as air fryer, toaster oven, electric kettle, food dehydrator, coffee warmer and personal blender.
We have received a number of awards recognizing our excellence in product innovation, design and development, such as the Red Dot Awards, IHA Global Innovation Awards, iF Product Design Awards and CES Innovation Awards.
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To make our products available as widely as possible, we sell our products to our end consumers mainly via third-party online marketplaces, in particular, Amazon, the largest e- commerce marketplace in the United States. We have maintained a stable business relationship with Amazon for around nine years. Since 2017, we have commenced the sale of our products through its Vendor Central program (a by-invite-only program) in the United States.
Our marketing success requires us to be able to satisfy high-volume demands, and we have built a strong supply chain capability as a result. We maintain strong relationships with well- established and capable subcontractors in China which manufacture a majority of our products. Such subcontractors have provided stable supply of products and are able to deliver in a timely manner. We adopt strict quality control measures on the procurement and production processes of subcontractors to ensure the quality of our products.
Leveraging our R&D capabilities, we develop and sell smart home devices compatible with our VeSync app, which was launched in 2015. Our smart home devices are linked to our VeSync app. Our VeSync app enables users to achieve centralized control of smart home devices for home automation experience. We believe our VeSync app makes our customers’ daily life more convenient, efficient and enjoyable, which in turn enhances the attractiveness of our product offering and helps expand our user base. As of June 30, 2020, there were approximately 1.2 million activated devices on our VeSync app.
OUR STRENGTHS
We believe the following strengths differentiate us from other industry participants and have enabled us to compete effectively in our industry.
Presence in the small home appliance online market in the United States with increasingly recognized self-developed brands
We are one of the market players in the small home appliance online market in the United States. According to the Frost & Sullivan Report, among small home appliance retailers, we ranked third in terms of retail sales generated through Amazon and fifth through all online channels in 2019 in the United States. Our air purifiers ranked first and our air fryers ranked second in their respective categories, both in terms of retail sales generated through Amazon in 2019 in the United States. We principally engage in designing, developing and selling small home appliances and smart home devices. We strategically focus on the U.S. market, the largest small home appliance and smart home device market in the world with a market share of 29.6% in 2019 in terms of shipment of smart devices, according to the Frost & Sullivan Report.
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Our products are widely accepted by the market. We started to operate on Amazon’s Vendor Central program, a by-invite-only program, in 2017, which we believe has significantly uplifted our brand awareness and enhanced customers’ confidence in our products. We can enjoy premium marketing resources exclusive to vendors on the Vendor Central program, and have gained valuable market insight and marketing support through our continuous communications with the representatives from Amazon. As a testament to our brand recognition, certain of our products have been selected to be sold in ‘‘Amazon 4-star Store,’’ where only products rated 4-star or higher by customers on Amazon online marketplace are sold.
Brand image and the consumer trust placed in that brand plays an important role in consumer decisions. We mainly sell our products under three increasingly recognized brands, namely, ‘‘Etekcity,’’ ‘‘Levoit’’ and ‘‘Cosori,’’ which we launched in 2012, 2016 and 2016, respectively. We believe that our diverse product offering, initiatives to create and increase touch points with customers, competitive pricing supported by our economies of scale, and effective supply chain have enabled us to become a trusted supplier for quality and innovative small home appliances and smart home devices.
Comprehensive product portfolio withstrongdesignandR&Dcapabilities
We believe our success is underpinned by our strong design and R&D capabilities. Design and R&D are particularly critical because of our focus on customers’ evolving needs and commitment to improving customers’ daily lives with our products. During the Track Record Period, we launched products under a variety of categories including home environment appliances, kitchen appliances & dining ware, outdoor, sports & health, tools, electrical devices and others. Thanks to our comprehensive product portfolio, we are able to cater to a variety of consumer tastes, needs, and user scenarios. Moreover, by providing a number of products with different features, we are able to better understand our customers’ preferences through their feedback, and continuously iterate our products with new features in relatively short time. Furthermore, our multi-category product portfolio can enrich our smart home scenes and enable inter-category interactions. Customers who buy multiple devices from us can enjoy synergistic operation, which we believe in turn enhances our customer loyalty.
We place great emphasis upon maintaining a dedicated in-house design and development team with strong technology expertise in the small home appliance and smart home device industry.
Our strong product design and development capabilities are in part attributable to the close and active collaboration of our design and development team in the PRC and the United States. We strategically built a ‘‘dual-core’’ team structure, with close collaboration between the team in the PRC and the team in the United States. The team in the United States has the capability to identify trends in the small home appliance and smart home device markets and is therefore well-attuned to consumer needs in product enhancements and development, whereas the team in the PRC has hands-on experience in designing functional small home appliances and smart home devices and the research ability to capitalize on emerging technology. Thanks to the synergies between the two teams, we enjoy greater efficiencies and lower expenses in collecting customer feedback, identifying market trends, and designing new products.
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As a result of our continuous focus on innovation, we have built an extensive intellectual property portfolio. As of the Latest Practicable Date, we had 127 registered patents and 19 software copyrights in the PRC, 29 registered community designs in Europe, 30 registered patents in the United States, two registered patents in Korea and one registered patent in Japan and Brazil, respectively. As of the same date, 53 patent applications were pending approval in the PRC, 45 patent applications were pending approval in the United States and four patent applications were pending under the Patent Cooperation Treaty. Among our registered patents and patent applications pending approval, 142 and 31 were product design related patent registrations and applications respectively, as of the Latest Practicable Date. As of the Latest Practicable Date, our Directors believe that there is no legal impediment for the renewal of the above patents, copyrights, and community designs. We have also received a number of awards in recognition of our product design capability. In 2019, we won the 2019 finalist of the IHA Global Innovation Awards for one of our air purifier products from the International Housewares Association.
We also registered certain domain names including those for our three core brands, namely, Etekcity, Levoit and Cosori. We commend the sale of our ‘‘Etekcity’’ products via ‘‘www.etekcity.com’’ in 2015, ‘‘Levoit’’ products via ‘‘www.levoit.com’’ in 2018 and ‘‘Cosori’’ products via ‘‘www.cosori.com’’ in 2018. Our online shopping websites are being operated in the United States. The Internet server of our online shopping websites is also located outside the PRC. As advised by our PRC Legal Advisers, the operations of our online shopping websites do not involve telecommunications activities in the PRC, and therefore, our online shopping websites are not subject to restriction under the Foreign Investment Catalogue nor the Negative List.
A growing portfolio of smart home devices featuring innovative technologies and automation with the potential to evolve into a home IoT platform
We strive to address a wide variety of our customers’‘‘pain points’’ with innovative technologies and automation features. This has led us to develop a variety of smart home devices, and to seek to connect them to customers, and to each other, through mobile app integration. We have developed a number of smart home devices under our own brands, including (i) smart gadgets such as smart WiFi light switch and smart WiFi outlets; (ii) products for health monitoring such as smart fitness scales and body weight scales; (iii) products to improve the home environment such as smart WiFi air purifiers; and (iv) kitchen appliances and dining ware such as smart air fryers and smart ovens. Apart from smart home devices, we have also developed small home appliances with automation features. For example, we designed a humidifier with an auto mode to automatically diffuse mist to adjust the humidity to a suitable level, air purifier that can automatically indicate the surrounding air quality and suggest fan speed to purify air faster, and our smart air fryer that offers 12 preset modes, provides a book of 100 recipes and supports customized recipes, and allows voice control.
Our VeSync app enables users to remotely control their compatible smart home devices from any place they have an internet connection, create custom on/off schedules and automatic timers, monitor energy usage and protect devices from power spikes, among other things. Our VeSync app is also compatible with Amazon Alexa and Google Assistant. We have also developed intelligent cloud infrastructure as the backbone of our VeSync app. With our cloud-based software system, our endusersareabletostoreandsearchdatainour VeSync app, communicate with other end users and receive push notifications generated based on our data analysis.
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The scene-based control function of our VeSync app leverages this data connectivity to allow users to choose various designated modes of our products, with reference to conditions such as weather, humidity, temperature, air quality, time and/or location, through a simple click. It is designed to enable our consumers to interact with a broad portfolio of smart home products to make their daily life more convenient, efficient and enjoyable, which in turn enhances the attractiveness of our product offerings and we believe helps increase our user base. We continuously strengthen our intelligent cloud infrastructure and our VeSync app to maintain our products’ connection stability and performance.
We believe we have laid a solid foundation for a home IoT platform through the development of our VeSync app, which positions us well to capture future market opportunities.
E-commerce expertise to support our marketing strategies and global penetration
We sell our products to our end consumers mainly via large online marketplaces. We started our online sales on Amazon, the largest e-commerce marketplace in the United States, in 2011. With around nine years’ experience in e-commerce operation on leading e-commerce marketplaces, we have transformed from a humble start-up into a popular brand. We are able to adapt to the fast- changing e-commerce market. Also, we have accumulated valuable know-how in e-commerce store operation (e.g., product listing, pricing and customer service), marketing strategies (e.g., digital marketing, online campaign and search engine optimization), as well as insights into user behaviors and preferences on e-commerce platforms. Our expertise and experience in e-commerce allow us to operate three brands for different categories of products.
We have an experienced in-house digital marketing team, responsible for the implementation of our marketing strategies and global penetration. Our in-house digital marketing team is familiar with the competitive advantages and key selling points of our products, and has accumulated solid know-how on promoting our products. Through their successful promotion of our quality products, we now have several products that are rated four and half or five stars under its five-star rating system by customers, which we believe attracts new customers and sets an entry barrier for new online retailers. We believe that our in-house digital marketing team will be able to replicate the success of earlier digital marketing strategies in our new product launches. Moreover, on e- commerce marketplaces, we can cross sell products in our strong product portfolio more efficiently. We believe the scalability of e-commerce business and successful cross selling have helped us quickly ramp up sales of new products.
Leveraging our e-commerce experience, we continue to enhance our customer service which we believe has helped increase customer loyalty and attract new customers. We have a dedicated customer service team that frequently monitors customers’ reviews and queries, and provides prompt and effective responses to customers. Our customer service team also actively interacts with our product design and development team so that they can address customer feedback when updating and upgrading our products. A large database of customer feedback facilitates our product iterations. We focus on iterating our products by continuously adding new features to our existing products and launching new products to better satisfy our customers’ evolving needs.
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E-commerce marketplaces are highly scalable, and so are the businesses that use them. Compared to offline sales channels, the scalability of e-commerce marketplaces allows us to penetrate into target regions at relatively low entry cost. Leveraging our successful experience on Amazon in the United States, we have entered the Europe, Canada and Japan markets in 2013, 2014 and 2017, respectively. In addition, we believe our e-commerce know-how will help attract the top e-commerce marketplaces in target regions to cooperate with us, which in turn will facilitate our penetration into those regions.
Optimized operation with synergistic global value chain and complementary local knowledge
We have a synergistic global value chain, which enables us to be cost effective and add value to our products by drawing on the latest technologies and local knowledge. Our supply chain is primarily in the PRC. Our product design and development team and sales and marketing team are located in the United States and the PRC.
We are deeply involved in supply chain management in the PRC to reduce cost and improve operational efficiency, and to monitor the quality of our supply chain to ensure that our products can meet the standard of target markets. We primarily outsource the production of our products to suitable subcontractors. Such subcontractors have provided stable supply of products to meet the demand from our customers. We adopt strict quality control measures on the procurement and production processes of subcontractors to ensure the quality of our products.
Utilizing the different resources in our global value chain, we can be well positioned to compete in the market. Our extensive experience in the U.S. market, coupled with our rich experience in managing the PRC supply chain, provide us with a competitive edge to offer appealing products at competitive prices. Our customer service teams assist us in expanding customer base by offering prompt customer services and shaping our marketing strategy.
An experienced and visionary management team and collaborative corporate culture
We believe that our growth and development have been largely attributable to the extensive experience of our executive Directors and senior management team, and our experienced management team has been critical in ensuring the consistent application of our development and operating strategies, and delivery of quality products.
Ms. Yang, our founder, chairperson, chief executive officer and executive Director, has more than 13 years of experience in the small home appliance and smart home device industry and possesses extensive experience in executing business strategies. Mr. Yang Hai, our executive Director and vice president, has around 16 years of experience in the communication technology industry, an essential skill in the development of smart home devices. For details, please see ‘‘Directors and Senior Management—Directors—Executive Directors’’ in this prospectus. Our senior management team possesses complementary skills required for many aspects of our business, including software development, operations, finance as well as sales and marketing. These skills have been enhanced by management training received from leading domestic and foreign
– 144 – BUSINESS institutions and extensive overseas experience in engineering development and management. We believe the leadership, vision, management experience and the proven track record of this management team will continue to be instrumental in driving our future success.
We have nurtured a collaborative corporate culture. In order to keep abreast of the innovation and technology trends, our product design and development team seamlessly work with our sales and marketing team to fine-tune our designs to suit the tastes of end consumers.
OUR STRATEGIES
Further upgrade our product mix and expand our product portfolio
We aim to further enhance our product portfolio, in particular smart home devices, in the consumer space, while leveraging our track record for developing relevant, consumer-friendly products in the business-to-business space.
We plan to introduce innovative new features and upgrade our key products so that they can better meet customers’ needs in main daily scenarios, such as kitchen improvement, home improvement and health monitoring. We plan to incentivize customers to get involved in the design, upgrade and maintenance of our products by providing discounts and gift cards to contributing customers. We believe this will make our products more likely to meet consumer’s needs and receive wide market acceptance.
Leveraging our expertise and experience on smart home devices, we aim to launch smart security solutions for business clients by the end of 2020. Comprising hardware and software, our smart security solutions can help clients monitor the conditions of their properties with smart sensors and safeguard their properties with smart locks, thus reducing their labor and maintenance costs. We plan to cooperate with business clients such as property management companies and real estate developers to market our smart security solutions and services in bulk purchase model. We plan to invest approximately 30% of the net proceeds from our Global Offering in expanding and upgrading our products portfolio and plan to invest approximately 10% of our net proceeds from our Global Offering in developing smart solutions including smart security solutions. For details, see ‘‘Future Plans and Use of Proceeds.’’
Expand geographic coverage and sales channels leveraging our brand recognition
Leveraging our brand recognition and our leading position in the online market of the United States, we plan to enlarge our market presence in our existing major markets including the North America, Europe and Japan. As of the Latest Practicable Date, we had started business relationship with e-commerce operators such as Amazon and other renowned American chain retailers selling smart home devices and small home appliances. We are currently expanding our business in counties such as Japan, Germany, France and Spain, mainly in corporation with Amazon and other e-commerce marketplaces and in cooperation with local retailers. We also plan to enter into new markets by following the development of global e-commerce market places, such as Amazon, to
– 145 – BUSINESS expand our geographic coverage and by enlarging the size of our online operation team, building local sales and marketing teams and establishing local support team as needed in the markets we are expanding to enhance our brand awareness.
We plan to expand our sales channels by increasing sales on our own websites. We started selling products on our own websites under the ‘‘Etekcity’’ brand in 2015, ‘‘Levoit’’ brand in 2018 and ‘‘Cosori’’ brand in 2018, respectively. We are also planning to sell products via our VeSync app. We plan to open experience stores in the United States and Germany, where our customers can try out our products and receive product advice from our sales staff.
In addition, we plan to devote more resources in brand promotion, including expanding our content and creative team, enhancing our advertising efforts and opening offline experience stores.
We plan to invest approximately 25% of the net proceeds from our Global Offering in sales channels and market presence expansion as well as brand promotion. For details, see ‘‘Future Plans and Use of Proceeds.’’
Continue to invest in technologies with an aim to develop our VeSync app into a home IoT platform
We plan to continue to invest significant resources to enhance our technology, software and data insights and to enable increasingly human-like interactions between users and our smart products.
We plan to develop our VeSync app into a home IoT platform which can connect all our smart devices and enables interactions among our users. To achieve this, we plan to create two pilot smart home solutions for health monitoring and home environment improvement by facilitating data exchange on our VeSync app among certain of our smart home devices. Our aim is to integrate lighting, temperature, home security, healthcare, communications and other functions into a unified and personalized home automation solution that improves our consumers’ daily lives. We intend to continue to enhance the efficiency and stability of data transmission among our products, and to build a comprehensive smart home device network which can cover all of our customers’ home living scenes.
We plan to open up the home IoT platform to selected devices developed by third parties to provide a more comprehensive experience to users. We also plan to establish a dedicated business intelligence team to strengthen our cloud database and continuously seek technology upgrades in order to enlarge our customer base.
As our user base continues to grow, we plan to further strengthen our big data capabilities, which we believe will enable us to introduce innovative smart home devices and services that can better address our users’ needs and preferences, and provide solutions for their scenario-driven needs within the home environment. We plan to build a big data analysis center, which can collect data, analyze user behaviors and product conditions, alert problems and generate possible solutions.
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We intend to continue to leverage our business intelligence to provide guidance to the production team, external subcontractors, and even their suppliers with valuable consumer insights. When suitable acquisition opportunities arise, we may consider acquiring technology-focused firms.
We plan to invest approximately 25% of the net proceeds from our Global Offering in VeSync app update. For details, see ‘‘Future Plans and Use of Proceeds.’’
BUSINESS MODEL OF THE GROUP
We are one of the market players in the small home appliance online market in the United States. Our business principally focuses on online marketing and sales of self-designed and -developed products. Our products are sold to users through our accounts in the United States, Canada, the United Kingdom, Germany, France, Spain, Italy and Japan, among others. We primarily design, develop and sell small home appliances under our own core brands ‘‘Levoit’’, ‘‘Etekcity’’ and ‘‘Cosori.’’
PRODUCTS AND BRANDS
We offer a wide range of small home appliances and smart home devices. We sell our products under three main brands, namely, ‘‘Levoit,’’ ‘‘Etekcity’’ and ‘‘Cosori.’’
Set forth below is the revenue breakdown by brand for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 %tototal % to total % to total % to total %tototal US$’000 revenue US$’000 revenue US$’000 revenue US$’000 revenue US$’000 revenue
Levoit...... 14,638 17.2 54,064 37.3 67,410 39.2 26,808 35.6 60,387 46.7 Etekcity...... 66,194 77.7 80,338 55.5 63,444 36.9 31,826 42.3 36,464 28.2 Cosori...... 3,546 4.2 9,581 6.6 40,966 23.8 16,529 22.0 32,348 25.0 Others(1) ...... 832 0.9 775 0.6 99 0.1 87 0.1 55 0.1
Total:...... 85,210 100.0 144,758 100.0 171,919 100.0 75,250 100.0 129,254 100.0
Note:
(1) Others include the Eteki and Zestkit brands that are also owned by us.
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Products under ‘‘Levoit’’
Products under our ‘‘Levoit’’ brand aim to bring comfort, health and well-being in customers’ homes and lives. Levoit products are mainly home environment appliances with automation systems, including air purifiers, air humidifiers, essential oil diffusers and stick vacuum cleaners. The built-in sensor of certain Levoit humidifier is able to monitor the humidity levels of the environment and instantly takes care of humidity adjustment for the users.
The following pictures set forth some of our ‘‘Levoit’’ products.
Air Purifier Humidifier Essential Oil Diffuser Vacuum Cleaner
Products under ‘‘Etekcity’’
We launched ‘‘Etekcity’’ as our first brand for our products. The products sold under our ‘‘Etekcity’’ brand are mainly smart home gadgets, outdoor recreation products, health monitoring devices and personal care products, such as smart fitness scales, smart WiFi outlets, smart LED dimmable light bulbs, digital laser infrared thermometers and smart nutrition scales. In addition, our WiFi smart outlets under ‘‘Etekcity’’ brand are compatible with Amazon Alexa and Google Assistant for voice control.
The following pictures set forth some of our ‘‘Etekcity’’ products.
Body Weight Scale Smart WiFi Outlet Digital Laser Smart Fitness Scale Smart LED Soft Infrared White Dimmable Thermometer Light Bulb
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Products under ‘‘Cosori’’
The products sold under ‘‘Cosori’’ brand are mainly kitchen appliances and dining ware, including air fryer, toaster oven, glass kettle and gooseneck kettle. Our Cosori Premium 5.8-Quart Air Fryer was awarded the Red Dot Award Design Concept by Red Dot Organization in 2019. We also offer a variety of cooking recipes on the website ‘‘www.cosori.com’’ and our VeSync app to enhance users’ experience of our ‘‘Cosori’’ products.
The following pictures set forth some of our ‘‘Cosori’’ products.
Air Fryer Toaster Oven Electric Kettle Food Dehydrator
Our VeSync app enables users to achieve centralized control of smart home devices for home automation experience. For our smart outlets and light bulbs, users can, through our VeSync app remotely, turn on and off, check power usage and adjust color and brightness. For our smart weight scales, users can monitor personal health, such as body mass index, weight, body fat and muscle rate. For our air purifiers, users can monitor real time air quality, and for our kitchen appliances and dining ware, users can check gourmet recipes, from our VeSync app. Our VeSync app can connect all our smart appliances under our various brands, and provide scene-based control function.
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Our key products
The table below sets forth some of our key products as of the Latest Practicable Date:
Product series Brand Category Product description Representative picture
Air Purifier Levoit Home Function: filter dust, pollen, pet environment dander, smoke and bacteria to appliances efficiently purify indoor air
Approximate retail price range: US$59.99 to US$384.99
Humidifier Levoit Home Function: keep surrounding environment hydrated in dry weather with appliances mist
Approximate retail price range: US$39.99 to US$89.99
Air Fryer Cosori Kitchen Function: fry, bake, grill, and appliances and roast with little to no oil. The dining ware air fryer can cook crispy fried chicken, steak, french fries, pizzaandmoreinone countertop appliance
Approximate retail price range: US$89.99 to US$129.99
Kettle Cosori Kitchen Function: boil water with appliances and different temperature setting dining ware Approximately retail price range: US$29.99 to US$69.99
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Product series Brand Category Product description Representative picture
Toaster Oven Cosori Kitchen Function: preset food cooking appliances and programs and informative dining ware recipes included; coupled with convenient knob control, high- definition display screen, convenient cabinet lighting and a variety of accessories, which enable you to achieve an efficient and convenient gourmet cooking experience
Approximate retail price range: US$169.99 to US$199.99
Body Weight Etekcity Health Function: body weight Scale monitoring measurements devices
Approximate retail price range: US$19.99 to US$57.99
Infrared Etekcity Tools Function: temperature check with Thermometers its built-in laser
Approximate retail price range: US$21.98 to US$27.99
The product life cycles for our key products are typically above two years. Small home appliances experience frequent upgrades in technology, functionality, features and design and we constantly introduce new products and iterate existing products to follow the upgrade with an aim to improve consumers’ daily lives. We actively monitor competing product development in the market and upgrade our own promptly to remain competitive. As such, our product life cycle varies depending on market evolvement.
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SALES AND DISTRIBUTION
We sell products globally, and the United States is our largest market. Our revenue derived from the sale of products generated from the United States account accounted for approximately 84.0%, 79.6%, 79.1%, 78.8% and 76.6%, respectively, of our total revenue in 2017, 2018, 2019 and six months ended June 30, 2019 and 2020. We also sell products in other countries, including, without limitation, Canada, the United Kingdom, Germany, France, Spain, Italy and Japan. We have entered the Europe, Canada and Japan markets through our expanded cooperation with Amazon by following its geographic coverage expansion. We have also expanded to Vietnam, France and Germany through sales channels other than Amazon. The table below sets out a breakdown of our revenue by geographic location for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 %to %to %to %to %to Total Total Total Total Total Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue US$’000 US$’000 US$’000 US$’000 US$’000
North America(1) United States ...... 71,582 84.0 115,246 79.6 136,045 79.1 59,309 78.8 99,028 76.6 Canada and others ...... 1,761 2.1 5,740 4.0 12,589 7.3 4,670 6.2 10,633 8.2 Europe(1)(2) ...... 11,733 13.8 22,391 15.5 21,976 12.8 10,607 14.1 17,125 13.3 Asia(1)(3) ...... 134 0.1 1,381 0.9 1,309 0.8 664 0.9 2,468 1.9
Total ...... 85,210 100.0 144,758 100.0 171,919 100.0 75,250 100.0 129,254 100.0
Notes:
(1) For the purpose of this table, geographic locations refer to a combination of the locations of our accounts with the sales channels and the locations of customers.
(2) Includes the United Kingdom, Germany, Spain, France and Italy.
(3) Includes Japan and Vietnam.
We sell products in the United States primarily through Amazon’s Seller Central and Vendor Central programs, and in other countries primarily through Amazon’s Seller Central program. Apart from Amazon, we sell a small portion of our products through other channels, including chain retailers, other e-commerce marketplaces and our online shopping websites.
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The following table sets out the breakdown of our revenue by sales channels for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 %to %to %to %to %to Total Total Total Total Total Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue US$’000 US$’000 US$’000 US$’000 US$’000
Amazon Seller Central ...... 77,509 91.0 102,362 70.7 83,201 48.4 43,733 58.1 45,600 35.3 Vendor Central ...... 7,173 8.4 41,400 28.6 87,284 50.8 30,870 41.0 79,125 61.2 Others(1) ...... 528 0.6 996 0.7 1,434 0.8 647 0.9 4,529 3.5
Total:...... 85,210 100.0 144,758 100.0 171,919 100.0 75,250 100.0 129,254 100.0
Note:
(1) Others include chain retailers, other e-commerce marketplaces and our online shopping websites.
Sales Through Amazon
We sell our products through Amazon’s two programs, namely, Seller Central and Vendor Central programs. Seller Central program is one of Amazon’s retail seller programs. We commenced our sales through Amazon’s Seller Central program in 2011. We usually use Amazon’s ‘‘Fulfillment By Amazon’’ service where we will ship inventories to Amazon’s warehouses and Amazon fulfills the order to our customers on our behalf. We recognize revenue from retail sales when control of the products are transferred to our customers. Our revenue generated from Amazon’s Seller Central program amounted to approximately US$77.5 million, US$102.4 million, US$83.2 million, US$43.7 million and US$45.6 million, respectively, representing approximately 91.0%, 70.7%, 48.4%, 58.1% and 35.3%, respectively, of our total revenue in 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020.
We commenced our sales through Amazon’s Vendor Central program in the United States in 2017. Under the Vendor Central program, Amazon makes bulk purchase orders from us and directly fulfills the order to its customers. Our revenue generated from Vendor Central program amounted to approximately US$7.2 million, US$41.4 million, US$87.3 million, US$30.9 million and US$79.1 million, respectively, representing approximately 8.4%, 28.6%, 50.8%, 41.0% and 61.2%, respectively, of our total revenue in 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020. Generally, we will not place a product for sale through both the Seller Central program and the Vendor Central program in the United States to avoid unnecessary competition between the two in the United States. In 2017, 2018 and 2019 and for the six months ended June 30, 2020, we had 33, 57, 144 and 154 products selected by Amazon sold through Vendor Central program, respectively.
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We have entered into framework agreements with Amazon for the Seller Central and Vendor Central programs, the salient terms of which are set out as follows:
Seller Central Vendor Central
Term and termination The term of Amazon’s service starts on The term starts when we register or use when we register or when we first use Amazon’s website for bulk sales, Amazon’s Seller Central services, whichever occurs first. Either party may whichever occurs first. Amazon may terminate the agreement with 60 days’ prior terminate upon prior notice or we may written notice.* terminate with proper cause as specified under the framework agreement.*
International logistic We mainly engage third-party carriers to We typically arrange shipment from our arrangements ship products from us or our suppliers to suppliers to our warehouses in the United Amazon (either directly to Amazon’s States. warehouse, or first to our warehouse then to Amazon’s warehouses) and bear When Amazon pays for transportation, we shipping expenses, customs duties, taxes, deliver the products to the Amazon- and other charges. designated carrier in the United States. Ownership and risk of damage or loss for We retain ownership of the products and the products shall pass to Amazon when generally bear the risk of damage or loss we deliver the products to such carrier. until the products are sold and delivered to When we pay for transportation, title and the customers. risk of damage or loss for the products shall pass to Amazon when Amazon accepts the products.
Fulfillment and We usually use the ‘‘Fulfilment By Amazon shall ship units to their customers. warehouse services Amazon’’ service, where Amazon will ship units from their warehouses to our customers on our behalf.
Product return Our customers can generally return the Amazon may return or dispose of at our purchased products within 30 days of expense, and we shall accept and reimburse receipt from Amazon. Amazon for any product that (a) is damaged or defective, (b) does not conform to agreed specifications or to samples, (c) is subject to recall, (d) was not ordered in the applicable purchase, or (e) does not comply with the framework agreement.
Platform Service fee We shall pay Amazon the applicable fees None. described in the applicable Seller Central service fee schedule.
Credit control Amazon generally will remit to us our We generally offer a credit period of 30–60 available balance every 14 days, or in some days to Amazon. cases, more frequent than 14 days
Customs duty We shall bear the customs duties imposed We shall bear the customs duties imposed on our products on our products
* This is the standard term offered to all sellers or vendors under respective program as advised by Frost & Sullivan.
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For the details on the transaction amount to Amazon, please refer to ‘‘— Our Relationship with Amazon’’ below.
Other Sales
We commenced sales on our own websites our ‘‘Etekcity’’ products in 2015, ‘‘Levoit’’ products in 2018 and ‘‘Cosori’’ products in 2018. We intend to improve the functionality of our online shopping websites on an ongoing basis to enhance customer loyalty to our brands. In the meantime, we also sell our products on other e-commerce marketplaces (such as eBay, Cdiscount, Rakuten, Newegg and Adorama), and other customers including well-established bulk purchase customers (such as Best Buy, Bed Bath & Beyond, Walmart, Target, The Home Depot, Staples and QVC) and individual consumers who contact us directly. Our revenue generated from sales to these customers amounted to approximately US$0.5 million, US$1.0 million, US$1.4 million, US$0.6 million and US$4.5 million, respectively, representing approximately 0.6%, 0.7%, 0.8%, 0.9% and 3.5%, respectively, of our total revenue in 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020.
Pricing
We typically set the selling prices of our products based on factors including, among others, product positioning, selling prices of comparable products, our cost structure, customer reviews, purchase volume, bargaining power of customers and sales channel. See also ‘‘—Our Relationship with Amazon’’ below for pricing arrangement with Amazon.
Products Return Policy
In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, the total sales of products returned to us amounted to US$2.3 million, US$4.0 million, US$3.6 million, US$1.8 million and US$3.4 million, respectively, representing 2.7%, 2.8%, 2.1%, 2.3% and 2.6%, respectively, of our total revenue. In addition, we separately agreed to provide an allowance for damaged or defective products to Amazon under the Vendor Central program at a stipulated rate, which was deducted directly from our revenue during the Track Record Period. During the Track Record Period and up to the Latest Practicable Date, there were no product recalls, product returns, product liability claims, or customer complaints that materially and adversely affected our business. See ‘‘—Sales and Distribution—Sales through Amazon’’ for customer service and product return policy applicable to Amazon’s Seller Central and Vendor Central programs.
Warranties and After-sale Services
The default warranty period for our products is typically one year from the date of purchase by the end consumers, and the end consumers can obtain an additional year of warranty by optional registration for certain types of our products. Under our warranty, we usually repair, replace, or refund any parts found to be defective due to manufacturer flaws. Our warranty is non-transferrable and usually does not apply to product damages due to abuse, accident, alteration, misuse, tampering or vandalism. As of December 31, 2017, 2018 and 2019 and June 30, 2020, we made provisions for warranties in the amount of approximately US$63,000, US$0.2 million, US$0.3 million and US$0.4 million, respectively.
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Our sales and marketing team offers customer support to our online retail customers and collects their feedback on quality, preferences, improvements and market demands of our products. Our sales and marketing team will share this information collected with our product design and development team in order to improve our existing products and develop new products.
Seasonality
Our operations and sales fluctuate due to various factors. In particular, we often experience a peak level of sales in the second half of a year due to (i) the biggest promotion event of Amazon, the Prime Day, held in the second half of each year and (ii) increased sales of small home appliances around Thanksgiving and Christmas time.
OUR RELATIONSHIP WITH AMAZON
We have cultivated our relationship with Amazon since our inception in 2011. We sell our products primarily through Amazon’s Seller Central and Vendor Central programs. In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, revenue generated from sales through Amazon’s Seller Central program amounted to approximately US$77.5 million, US$102.4 million, US$83.2 million, US$43.7 million and US$45.6 million, respectively, representing approximately 91.0%, 70.7%, 48.4%, 58.1% and 35.3%, respectively, of our total revenue. As a result of the increasing market acceptance of our products, in 2017, we were invited by Amazon to be an ‘‘Amazon Vendor’’ and sell selected products to Amazon through its Vendor Central program in the United States, and Amazon in turn sells our products to its end consumers. In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, revenue generated through Amazon’s Vendor Central program amounted to approximately US$7.2 million, US$41.4 million, US$87.3 million, US$30.9 million and US$79.1 million, respectively, representing approximately 8.4%, 28.6%, 50.8%, 41.0% and 61.2%, respectively, of our total revenue. The increases were mainly due to (i) increases in sales volume of products and (ii) increases in number of products sold to Amazon through the Vendor Central program. We have strategically increased our sales to Amazon under the Vendor Central program in the United States since we were included as an ‘‘Amazon Vendor’’ in 2017, principally for three reasons: (i) We believe the program has significantly uplifted our brand awareness as the products under such program are marked as ‘‘sold by Amazon,’’ enhancing customers’ confidence in our products, which in turn has boosted the sales volume of our products under such program. (ii) Although we utilize Amazon’s advertising services to facilitate our sales through both the Seller Central and Vendor Central programs, we can enjoy premium marketing resources exclusive to Amazon Vendors under the Vendor Central program, among other benefits, and have gained valuable market insight and marketing support through our continuous communication with the representatives from Amazon. We also participate in marketing campaigns only available under the Vendor Central program such as ‘‘Home Gift Guide’’ to move up the exposure of our products; (iii) Unlike the Seller Central program where the risks of damages or loss for the products are borne by us until the products are sold and delivered to the customers, the relevant risks under the Vendor Central program pass to Amazon once we deliver the products to the Amazon-designated carriers to Amazon. The products sold under the Vendor Central program are by-invite only by Amazon for which we would have conducted thorough assessments before we have made a decision to accept such invitation to ensure anticipated profitability can be achieved. If we continue to strategically increase the sales of our products to the Vendor Central program, we expect our revenue contribution from Amazon, as our largest customer, under the Vendor Central program in the United States to further increase.
– 156 – The table below sets forth revenue and sales volume generated from Amazon under the two programs by product category for the periods indicated. (1) (1) Seller Central Vendor Central
Year ended Year ended December 31, Six months ended June 30, December 31, Six months ended June 30, Product Category 2017 2018 2019 2019 2020 2017 2018 2019 2019 2020 Sales Sales Sales Sales Sales Sales Sales Sales Sales Sales Revenue volume Revenue volume Revenue volume Revenue volume Revenue volume Revenue volume Revenue volume Revenue volume Revenue volume Revenue volume US$’000 unit US$’000 unit US$’000 unit US$’000 unit US$’000 unit US$’000 unit US$’000 unit US$’000 unit US$’000 unit US$’000 unit
Home environment appliances ...... 7,457 114,540 19,998 361,771 22,785 425,779 11,753 225,818 15,710 241,289 2,872 51,012 27,913 412,174 41,066 788,719 13,158 210,715 41,093 831,997 Kitchen appliances & dining ware ...... 9,074 516,108 8,314 321,957 11,101 379,836 5,719 188,924 9,009 227,043 2,781 197,920 10,016 749,360 36,597 1,050,447 13,431 339,763 28,810 932,149 Health monitoring devices 17,676 897,897 24,765 1,225,058 21,426 1,122,558 12,668 636,683 13,582 629,745 ————3,744 310,596 1,415 110,966 5,508 392,510 Home improvement devices ...... 17,112 666,924 19,516 769,057 7,746 355,328 3,451 151,430 1,631 75,060 675 28,138 263 25,727 1,405 135,796 584 53,805 414 36,102 Outdoor recreation products ...... 14,451 764,413 19,309 768,357 12,419 615,114 6,157 292,665 3,187 176,436 ——10 130 331 12,007 71 1,869 404 27,141 Tools ...... 6,872 383,657 5,391 304,163 4,171 234,401 2,196 120,654 1,547 71,832 845 86,911 3,012 289,850 4,014 390,616 2,196 180,499 2,372 187,681 Others ...... 4,867 216,492 5,069 197,053 3,553 136,890 1,789 68,223 934 33,964 ——186 18,346 128 9,611 15 1,433 524 16,337
Total ...... 77,5093,560,031 102,362 3,947,416 83,201 3,269,906 43,733 1,684,397 45,600 1,455,369 7,173 363,981 41,400 1,495,587 87,284 2,697,792 30,870 899,050 79,125 2,423,917 BUSINESS – 157 –
Note:
(1) We generally sold our products under the Seller Central program for markets outside the United States, such as Europe and Asia, during the Track Record Period. Generally, we do not place a product for sale through both the Seller Central program and the Vendor Central program in the United States to avoid unnecessary competition. However, as a general principle of pricing, we use the estimated profitability in Seller Central program as a benchmark when negotiating terms with Amazon for the Vendor Central program. Our Directors confirm that our profitability for sales of comparable products under the two programs of Amazon would not be of material difference. BUSINESS
We also procure services from Amazon. For instance, we work with Amazon Web Services as our cloud computing service provider. We also utilize Amazon’s advertising services to facilitate our sales through Amazon’s Vendor Central and Seller Central programs. In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, we paid marketing and advertising fees to Amazon of US$5.5 million, US$10.2 million, US$13.8 million, US$4.9 million and US$4.7 million, respectively.
We target the same end users, i.e., Amazon’s online purchasers and shoppers, under the Seller Central program and the Vendor Central program of Amazon for our products. Under the Seller Central program, we sell products at retail price to shoppers on Amazon marketplace directly while we use certain services offered by Amazon, such as platform services, fulfilment and warehouse services, marketing and advertising services and other miscellaneous services, and pay various service fees to Amazon separately. The table below sets forth the major service fees we paid to Amazon under the Seller Central program during the Track Record Period.
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000
Commission fee for platform services . . . . . 11,565 15,516 12,779 6,706 7,129 Fulfillment fee and warehouse services . . . 18,122 24,603 21,395 11,238 9,282 Borrowings from Amazon(1) ...... 571 ————
Note:
(1) Amazon provides ‘‘Amazon Lending’’ services to qualified sellers for working capital purpose. We obtained Amazon loans which were secured by all inventories, accounts, equipment, goods and other tangible property Etekcity US owned. We fully repaid the Amazon loans in October 2018 and did not obtain new Amazon loans since then.
Under the Vendor Central program, we sell products at bulk purchase price to Amazon. Amazon then sells our products on the marketplace to online shoppers under its own accounts. The bulk purchase price we offer to Amazon is based on our negotiations with Amazon, and has taken into account and deducted discounts and rebates, including (i) a general discount based on manufacturer suggested retail prices we provided to Amazon, which generally ranged from 10% to 15% during the Track Record Period, and (ii) further discounts and rebates, in total ranged from 20% to 35% during the Track Record Period, based on negotiations with Amazon, which generally take into account factors such as marketing development fund, freight allowance, damage allowance, quick pay fee, promotional events and purchase volume. The overall average discounts and rebates offered to Amazon under the Vendor Central program, based on manufacturer suggested retail prices, were approximately 34.2%, 35.5%, 41.4% and 32.8% for 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively.
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Amazon offers standardized arrangements for all vendors, which are set out on Amazon’s website. According to the Frost & Sullivan Report, the above arrangements and terms under Seller Central program and Vendor Central program are in line with industry norms.
Reasons for Cooperation with Amazon
According to the Frost & Sullivan Report, the favorable nature of internet, particularly the potential unlimited geographic coverage, promptness and inclusivity, allows it to be an increasingly important sales channel in the smart home device market. We started selling our products through online channels in 2011, and have been focusing on online sales channels ever since then. According to the Frost & Sullivan Report, the U.S. e-commerce market is dominated by the top three companies, which in aggregate had approximately 68.0% of market share in 2019, and the largest player, Amazon, had approximately 58.0% of market share in 2019. eBay and Walmart, the second and the third largest players in the U.S. e-commerce market, respectively, each had less than 10.0% of market share in 2019. According to the Frost & Sullivan Report, this dynamic has persisted for some time and is unlikely to change significantly in the near future.
Vendors of small home appliances and smart home devices mainly sell products through Amazon in the United States. According to the Frost & Sullivan Report, more than 60% of online sales from the top five small home appliances brands were generated from Amazon in 2019. In addition, according to the Frost & Sullivan Report, approximately 53.8% of smart home devices were sold through online channels globally in 2019, and Amazon is the largest e-commerce marketplace in the United States. In addition, other e-commerce marketplaces have different positioning and digital strategy that may not be suitable for vendors of small home appliances and smart home devices. For example, Walmart is better known for items such as grocery and daily essentials and eBay is best known for its auction feature and consumer to consumer sales. Both platforms are not typical sales channels of small home appliances and smart home devices. As such, Amazon is the most critical e-commerce marketplace for vendors of small home appliances and smart home devices to conduct online retail business in the United States. The top five small home appliance brand owners conduct a combined online retail sale of US$1,540.0 million in 2019, accounting for a market share of 31% of the total online retail sales of small home appliances.
Amazon’s large customer base enables business vendors to achieve more market exposure from those who regularly shop online. According to the Frost & Sullivan Report, for market players who focus on online sales in the United States, Amazon, in most cases, is their only major online retail channel. Therefore, it is an industry norm for market players like us to have Amazon as the primary online retail channel. In addition, according to the Frost & Sullivan Report, Amazon’swell- developed review system and user-friendly website interface help Amazon continuously expand its customer base. We can enjoy premium marketing resources exclusive to Amazon Vendors, and have gained valuable market insight and marketing support through our continuous communications with the representatives from Amazon. As such, we believe we are able to reach more customers and enhance our brand recognition on Amazon than through other channels. To use our limited human and financial resources in a more cost effective way, we have in the past focused on establishing and strengthening our presence and brand recognition on Amazon, a major player in the
– 159 – BUSINESS e-commerce marketplace before expanding to other sales channels. As our business continues to grow rapidly, we are gradually diversifying our sales channels to include other e-commerce marketplaces such as eBay, Cdiscount, Rakuten, Newegg and Adorama, and chain retailers such as Best Buy, Bed Bath & Beyond, Walmart, Target, The Home Depot, Staples and QVC to expand our customer base.
Well-established and Mutually Beneficial Relationship with Amazon
We have maintained a stable business relationship with Amazon for around nine years, having commenced selling our products to retail customers through Amazon’s Seller Central program in 2011.
Our Directors consider that the interests of our Group and Amazon align.
. To us: We are able to increase our sales by leveraging the high user traffic on Amazon. When we list our products on Amazon, we have access to a large pool of customers, which increases our products’ exposures to consumers. Besides, Amazon offers us convenient back-end supports and save our costs and time in logistics, inventory management and customer services. Thus, we are able to devote more time and resources in brand building and product development. Moreover, since Amazon is one of the biggest and most trusted global e-commerce websites and it operates its online marketplaces worldwide, collaboration with Amazon helps us expand our customer reach in different countries.
. To Amazon: Amazon provides an open e-commerce marketplace for third-party vendors/ sellers and offers consumers a broad selection of products. We believe our high quality products, as well as our extensive experience on selling products on Amazon are valuable to Amazon. We have been a well-performing vendor/seller on Amazon.
We believe our relationship with Amazon will not materially and adversely change or terminate. We have maintained stable relationship with Amazon since 2011. Our revenue generated from Amazon has been increasing steadily since our establishment. During our cooperation with Amazon, we have complied with Amazon’s terms and conditions in general or have timely remedied violations. We endeavor to ensure compliance with Amazon’s terms and conditions in the future. As such, we do not foresee any material adverse change in our relationship with Amazon. We have transparent and smooth communication channels with Amazon mainly through designated vendor managers and account managers. We believe such communications with Amazon have addressed issues that arose from our cooperation with Amazon efficiently and enhanced mutual understanding between Amazon and us, and we were included as an ‘‘Amazon Vendor’’ in 2017. Our products have a proven track record of sales on Amazon e-commerce marketplace as evidenced by the robust growth of our sales volume on Amazon during the Track Record Period. We believe we can maintain steady growth in terms of sales revenue from Amazon, and on the other hand, Amazon can generate increasing commission and service fees from us. Therefore, we believe our business relationship with Amazon will remain stable.
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Having considered the factors mentioned above, our Directors are of the view, and the Joint Sponsors concur, that the likelihood that our relationship with Amazon will materially adversely change or terminate is remote.
Our Directors are of the view, and the Joint Sponsors concur, that in the unlikely event that our relationship with Amazon materially adversely changes or terminates, we would be able to cooperate with other e-commerce marketplaces readily at similar terms, having considered that:
(i) we have established business relationship with a total of 13 other e-commerce marketplaces and chain retailers during the Track Record Period in addition to Amazon. Revenue generated from channels other than Amazon increased to US$4.5 million for the six months ended June 30, 2020 from US$0.6 million in the corresponding period in 2019, representing an increase of over seven times. In the first half of 2020, gross profit margin recorded as 52.9% which was similar to that of Vendor Central program;
(ii) we have an independent research team focusing on researching and understanding the operation of non-Amazon channels, such as eBay and Cdiscount, and our own website. Third party seller programs between Amazon and other e-commerce marketplaces are quite similar on terms of fees and entry conditions. The cost of selling on some other e- commerce marketplaces, such as eBay, is lower, especially for sellers with large amount of sales. We discussed with them about expanding our product portfolio on their platforms and have received positive responses from them;
(iii) we have a retail sales and marketing team focusing on expanding our cooperation with chain retailers, such as Best Buy, Bed Bath & Beyond, Walmart, Target, The Home Depot, Staples and QVC. According to the Frost & Sullivan Report, besides Amazon, online stores of traditional retailers, such as Walmart and Target, are critical online distribution channels for small home appliance brand owners. Since traditional retailers are continuously developing their online sales channels, they actively collaborate with small home appliance brand owners, so that they can enrich their online product portfolio. Some of our competitors in the industry generate more than 20% of their online sale through the online stores of traditional retailers. Therefore, Frost & Sullivan is of the view that we will be able to extend our collaboration with traditional retailers through their online stores;
(iv) we gained valuable experience through cooperating with e-commerce giant, Amazon, which we believe can help us start another successful business relationship with other e- commerce marketplaces; and
(v) our strong design and R&D capability enables us to constantly launch innovative products to meet the evolving needs of our customers.
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Amazon does not restrict us from selling products on other e-commerce marketplaces in large volume. Leveraging our online operating experience with Amazon and our increased recognition in the small home appliances market, we believe that we will be able to cooperate with other e- commerce marketplaces on similar terms.
For a discussion of risks related to our relationship with Amazon, see ‘‘Risk Factors—Risks Relating to Our Business and Industry—Disruption of our relationship and unfavorable changes in terms of our arrangement with Amazon could have a material adverse effect on our business and results of operations.’’
Ability to Reduce Reliance on Amazon and Sustainability of Our Business
Our business grew rapidly during the Track Record Period. According to the Frost & Sullivan Report, among small home appliance retailers, we ranked third in terms of retail sales generated through Amazon and fifth through all online channels in 2019 in the United States. With an aim to sustain our growth, we have taken initiatives to diversify our sales channels and reduce our reliance on Amazon.
We continuously make efforts to enhance customer loyalty and enlarge our customer base. Through the years, we believe we have gained credibility and trust from consumers and wide market recognition. We believe the popularity and recognition of our products are due to high quality, our innovative and aesthetic product design, and our product development capabilities. Our products generally have positive customer reviews. We believe customers who are satisfied with our products are likely to make repeat purchases from us and recommend our products to other users through word of mouth. We believe our brands are receiving increasing recognition in small home appliance market. To further improve user experience and bring potential business opportunities, we launched our VeSync app in 2015 and as of June 30, 2020, we had approximately 1.2 million activated devices on our VeSync app. We believe our VeSync app makes our customers’ daily life more convenient, efficient and enjoyable, whichinturnhelpsenhancethe attractiveness of our product offering and expand our user base. We plan to develop our VeSync app into a home IoT platform which can connect all our smart devices and enables interactions among our users. We also attend international trade fairs and participating renowned international products design competitions to exhibit our work, collect potential customers’ feedback on our ideas, and enhance our brand awareness to attract potential customers.
Additionally, although Amazon was our largest sales channel during the Track Record Period, we are not bound to sell our products exclusively through Amazon. We maintain flexibility in selecting our sales partners and are expanding our sales channels. Starting from 2018, we developed bulk purchase relationship with renowned small home appliance chain retailers and other e- commerce marketplaces. Leveraging our successful e-commerce operation experiences, accumulated logistic service resources and increased human and financial resources, we are determined to further diversify our sales channels, in particular through channels other than Amazon. We are also expanding our sales channels by increasing sales on our own websites and launching offline experience stores. We started selling products on our own websites under the ‘‘Etekcity’’ brand in 2015, ‘‘Levoit’’ brandin2018and‘‘Cosori’’ brand in 2018, respectively. We are also planning to
– 162 – BUSINESS leverage the increase in registered users to sell products via our VeSync app. To increase our sales via the VeSync app, we launched advertisements and offered promotions of our products to registered users on the VeSync app. We also plan to increase our advertisement spending in online marketing of our VeSync app to promote our brand awareness. We believe well-known brands generally have greater independence from sales channels. We have continuously improved our product design by incorporating customers’ feedback to improve customer satisfaction and to improve our brand recognition. Although our revenue generated from channels other than Amazon contributed to a small percentage of our total revenue during the Track Record Period, it has experienced steady growth. For the six months ended June 30, 2020, we recorded revenue from channels other than Amazon of US$4.5 million, representing an increase of 650.0%, or US$3.9 million, from US$0.6 million during the same period in 2019. We expect our revenue from channels other than Amazon continue to grow in 2020, as compared to 2019, primarily reflecting our continuous efforts to expand our sales on the channels other than Amazon.
If there should be any unforeseen circumstances, under which we are unable to sell products through Amazon, including suspension of our accounts or withholding our sales proceeds, we will initiate communication with Amazon through account manager or vendor manager in a timely manner. At the same time, we will form a working group comprising our Amazon product manager, legal and compliance officer, chief financial officer and executive Directors to start internal review on the situation. We will consult with professional consultant if necessary. A report on clarification or rectification will be submitted to Amazon to resume trading of our accounts or release of our sales proceeds. If the situation persists and the problem cannot be solved in a reasonable period of time, we will retrieve our products from Amazon’s warehouse and re-sell the products on non- Amazon channels. Should Amazon withholds our sales proceeds and such withholding results in working capital difficulties, we will seek alternative funding sources, such as banking facilities, to replenish our working capital. We will also allocate additional manpower and resources to conduct sales on non-Amazon channels. Leveraging our successful e-commerce operation experiences, accumulated logistic service resources and increased human and financial resources, we believe that we are capable to sell products on non-Amazon channels.
According to the Frost & Sullivan Report, the outlook for the smart home device market of the United States remains positive, with total sales forecasted to reach approximately US$156.9 billion by 2024, representing a CAGR of 15.2% between 2020 and 2024, primarily attributable to the sustainable growth in demand for high-quality home automation experience, the continuous technology advance achieved in the IoT networks and the more mature application of related technologies that enhance the performance of smart home devices. Our Directors believe that we will be able to leverage our competitive strengths to capitalize on the increasing market demand for smart home devices. In addition, we are developing smart security solutions targeting corporate customers, which we believe can bring us a new income stream in the future. Despite our current reliance on Amazon’s marketplace, in light of (i) our well-established and mutually beneficial business relationship with Amazon and our proven track record of well-performing and compliant operations on Amazon; (ii) Amazon’s inclusiveness as an open e-commerce marketplace; (iii) our flexibility and efforts in expanding our sales channels; (iv) our growing customer base and our
– 163 – BUSINESS continuous effort to attract potential customers; and (v) our capability to maintain our business in light of the positive outlook for the market, our Directors consider that our business is, and will remain, sustainable.
Competition with AmazonBasics
Amazon sells products under its own brand, AmazonBasics, which offers 11 product categories, including bedding, kitchen, household, home improvement, pets, hobbies, office, travel, batteries, cables and electronics. According to the Frost & Sullivan Report, only a small number of AmazonBasics products fall under small home appliances. AmazonBasics’ product targets at price sensitive customers while we target high-end customers by offering premium products. Considering price range and ranking of sales volume on Amazon, we believe that our products do not directly compete with AmazonBasics. For example, our Cosori air fryers have a price range between approximately US$89.99 per unit and US$129.99 per unit, while AmazonBasics’ air fryers have a price range between approximately US$65.25 per unit and US$66.49 per unit.
SINO-U.S. TRADE WAR
Background of Sino-U.S. Trade War
In 2018 and 2019, the U.S. government under the administration of President Donald J. Trump, imposed several rounds of tariffs on cumulatively US$550 billion worth of Chinese products. In retaliation, the PRC government responded with tariffs on cumulatively US$185 billion worth of U.S. products. In 2019, the U.S. government restricted certain Chinese technology firms from exporting certain sensitive U.S. goods. The PRC government lodged a complaint in the World Trade Organization against the U.S. over the import tariffs in the same year. The trade war created substantial uncertainties and volatilities to global markets. On January 15, 2020, the United States and PRC governments signed the U.S.-China Economic and Trade Agreement (the ‘‘Phase I Agreement’’). Under the Phase I Agreement, the United States agreed to cancel a portion of tariffs imposed on Chinese products, China promised additional purchases of U.S. goods and services, and both parties expressed a commitment to further improving various trade issues. Subsequent to the entering of Phase I Agreement, the PRC government and the U.S. government adopted specific measures to exclude imports from the other country from additional tariffs.
Effect of Sino-U.S. Trade War
We are one of the market players in the small home appliance online market in the United States. During the Track Record Period, we primarily sold products in the United States. Our revenue derived from the sale of products through our Amazon’s account in the United States accounted for approximately 84.0%, 79.6%, 79.1%, 78.8% and 76.6%, respectively, of our total revenue in 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020.
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As a result of the Sino-U.S. trade war, a number of our products are subject to additional tariffs. For example, when we export air purifiers, WiFi outlets and multi-meters from the PRC to the United States, we are subject to additional tariff of up to 25%. In September 2018, the United States Trade Representative initiated an exclusion process, under which companies may submit request for tariff exclusion of certain products. The product exclusion, once obtained, would apply from the original date of the additional duties and expire one year from the publication of the notice of product exclusion. Among our products subject to additional tariffs, some are included in the product exclusion list and enjoy exemptions from additional tariffs, such as thermometers, multi-meters and air purifiers, the exemptions enjoyed by which expired or will expire on July 31, 2020, October 1, 2020 and December 31, 2020, respectively. During the Track Record Period, our customs duties incurred amounted to US$1.2 million, US$4.9 million, US$5.5 million, and US$2.2 million, representing 1.5%, 4.2%, 3.8% and 4.0% of our total cost of sales, respectively. In addition, we recorded tax reimbursement in the amount of US$2.3 million and US$0.1 million in 2019 and six months ended June 30, 2020, respectively. See ‘‘Financial Information—Principal Components of Consolidated Statements of Profit or Loss—Cost of Sales’’ for impact on our financial performance.
– 165 – The table below sets forth the rate and effective periods of additional tariffs imposed on our top selling products by revenue contribution, as well as their respective revenue, revenue contribution and customs duties incurred by types of products for the periods indicates below:
Exclusion from Effective Period of Additional EffectiveDateof Additional Exclusion from Year ended December 31, Six months ended June 30, Product Tariff Rate Additional Tariff Tariff Additional Tariff 2017 2018 2019 2020 Revenue Customs Revenue Customs Revenue Customs Revenue Customs Contribution Duties Contribution Duties Contribution Duties Contribution Duties Revenue (%) Incurred Revenue (%) Incurred Revenue (%) Incurred Revenue (%) Incurred US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Airpurifier...... 25% July6,2018 Y May14,2019to 7,427 8.7 34 36,752 25.4 2,443 43,172 25.1 1,136 42,268 32.7 114 December 31, 2020 Airfryer...... ———449 0.3 20 27,694 16.1 593 22,703 17.6 413 Bodyweightscale...... 17,032 20.0 41 23,287 16.1 62 20,734 12.0 61 14,339 11.1 52
Humidifier...... 2,211 2.6 59 7,365 5.1 185 13,723 8.0 376 9,106 7.0 166 Airpurifierfilter...... 25% July6,2018 N 432 0.5 3 3,908 2.7 283 6,819 4.0 422 7,212 5.6 692 Kitchenscale...... 7,517 8.8 16 8,209 5.7 27 6,699 3.9 19 6,502 5.0 30 Smartfitnessscale...... 536 0.6 3 1,545 1.1 15 4,408 2.6 34 4,731 3.7 28
Digital laser infrared 25% August 23, 2018 Y July 31, 2019 to thermometer...... July 30, 2020
5,840 6.9 38 5,933 4.1 240 6,377 3.7 482 3,152BUSINESS 2.4 2 (2)
Air Fryer Toaster oven.– . . . . 10% September 24, 2018 Y April 22, 2020 to — ——— ——1,465 0.9 410 2,687 2.1 51 25% May 10, 2019 December 31, 2020 Fooddehydrator...... 166 —————1 1,694 1.0 34 2,311 1.8 41 Saltlamp...... 10% September 24, 2018 N 4,299 5.0 262 4,966 3.4 100 2,346 1.4 191 478 0.4 90 25% May 10, 2019
Smartwifioutlet...... – 10% September 24, 2018 N 4,702 5.5 140 8,348 5.8 340 2,451 1.4 454 373 0.3 59 25% May 10, 2019 Campinglantern...... 7,770 9.1 195 5,023 3.5 48 2,586 1.5 41 814 0.6 24 Others
(1) ...... 27,443 32.2 438 38,974 26.8 1,106 31,751 18.4 1,224 12,578 9.7 460
Total ...... 85,210 100.0 1,229 144,758 100.0 4,870 171,919 100.0 5,477 129,254 100.0 2,222
Notes:
(1) Among our products, other than the top selling products listed, we also have other products that are subject to additional tariff, such as multi-meter power cable, reflector, speaker, sealer, and water filter pitcher. These products are subject to additional tariff at rates ranging between 7.5% and 25%. The effective dates of additional tariff are July 6, 2018, August 23, 2018, September 24, 2018, May 10, 2019, September 1, 2019 and February 14, 2020, as the case may be. Some of these products were within the additional tariff exclusion list. Certain exclusions ended on September 17, 2020.
(2) Digital laser infrared thermometer is subject to additional tariff of 25% after the expiry of exclusion period. BUSINESS
Among our top selling products above, six of them were subject to additional tariff in the range of 10% to 25% in 2018 and 2019. We also have other products that are subject to additional tariff. In 2018, 2019 and for the six months ended June 30, 2020, we incurred customs duties amounted to US$3.3 million, US$3.3 million and US$0.9 million, respectively, as a result of the additional tariff imposed on our products. Despite the generally increasing revenue proportion of these products, the proportion of customs duties of our total customs duties on these six products decreased since 2019 because three of the products were included in the product exclusion list and enjoyed exemptions from additional tariffs, including air purifiers, digital laser infrared thermometer and air fryer toaster oven. Particularly, for air purifiers, our top selling product during most of our Track Record Period, recorded significant decrease in customs duties incurred from US$2.4 million in 2018 to US1.1 million in 2019 as result of tariff exemption taking effect in May 2019. The imposition of additional tariff in the U.S. had a negative impact on our profitability.
For illustrative purpose only, had the additional US customs duties of 25% been imposed since January 1, 2018, assuming the product exclusion list was not published and other variables held constant, our customs duties expenses would have increased by approximately US$4.2 million, US$4.2 million and US$2.0 million in 2018, 2019 and the first half of 2020, respectively for products which were subject to additional tariff, including but not limited to air purifiers and filters, thermometers, outlets and salt lamps.
Please also refer to ‘‘Financial Information—Significant Factors Affecting Our Financial Condition and Results of Operations—Trade restrictions under Sino-U.S. trade war could materially and adversely affect our business, financial condition and results of operations’’ sensitivity analysis illustrating the financial impact of additional tariffs of 10%, 15% and 25%.
Our Response towards the Sino-U.S. Trade War
In response to the Sino-U.S. trade war, we have adopted various measures aiming to minimize financial impact on us, including:
(i) optimizing our product mix. We enhanced our product development and marketing efforts on products with a higher profit margin. We focused on launching new models and upgrades of these higher-margin products such as air purifiers and air fryers, which are our top selling products. We also devoted more marketing resources for these higher- margin products to optimize their detailed product pages on e-commerce platforms and enhance marketing content about these products on social media such as Youtube. We also actively participated in tradeshows to increase the exposure of these products. Thanks in part to these efforts, the percentage of our revenue generated from air purifier increased from 8.7% of our total revenue in 2017 to 25.1% in 2019 and further to 32.7% for the six months ended June 30, 2020. The percentage of our revenue generated from air fryer increased from nil in 2017 to 16.1% of our total revenue in 2019 and further to 17.6% for the six months ended June 30, 2020.
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(ii) increasing the selling prices of some of our products. Our air purifiers have been subject to an additional 25% tariff since July 8, 2018. To mitigate the financial impact of such additional tariff on us, we increased the U.S. selling prices of certain of our top selling air purifiers primarily under the Vendor Central program in August 2018. Taking air purifiers as an example, the average selling price of air purifiers under the Vendor Central program increased from US$70.1 per unit in 2018 to US$72.8 per unit in 2019.
(iii) improving our operating efficiency. We enhance our efforts on increasing the effectiveness of our online sales and marketing activities, thereby reducing our average marketing and advertising expenses. We took a more systemic approach in using online sales and marketing tools by further analyzing the features of the sales and marketing tools (including those provided by Amazon) and provided more training to our staff on how to utilize them more effectively and efficiently. Thanks in part to these efforts, our marketing and advertising expense as a percentage of revenue decreased from 8.5% in 2019 to 4.2% for the six months ended June 30, 2020.
(iv) expanding into markets outside the United States. We have been actively exploring markets outside the United States. Amazon offers global selling channels, based on which we have opened accounts in Canada, the United Kingdom, Germany and Japan. We plan to further strengthen or expand our market share in countries other than the United States. We believe our diversification efforts will help mitigate the impact of the Sino-U.S. Trade War on us.
Our Directors believe that the foregoing measures we adopted are effective. We managed to grow our business continuously during the Track Record Period. Our profit for the year increased by 45.5% from US$4.4 million in 2018 to US$6.4 million in 2019 and our profit for the period increased significantly from US$2.0 million for the six months ended June 30, 2019 to US$22.5 million for the same period ended June 30, 2020. In addition, our net profit margin was approximately 2.2%, 3.0%, 3.7%, 2.6% and 17.4%, respectively, in 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020.
In addition, we have been actively exploring alternative suppliers outside China, in case the foregoing measures could not adequately mitigate the negative impact from Sino-U.S. trade war. We plan to seek suppliers that offer comparable price and quality as our existing suppliers in China to reduce tariff expenses. We believe that we have higher flexibility than those competitors who have their own factories in China.
The increase in tariff as a result of the Sino-U.S. Trade War had a negative impact to our financial statements during the Track Record Period. We have been actively monitoring and will continue to monitor the ongoing trade negotiation between China and the United States. If the Sino- U.S. trade war continues to intensifies, our business, results of operations and financial position may be materially and adversely affected. See ‘‘Risk Factors—Risks Relating to Our Business and Industry—The Sino-U.S. trade war and other trade or import protection policies may materially and adversely affect our business.’’
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EFFECTS OF THE COVID-19 OUTBREAK
Effects of the COVID-19 Outbreak on Our Business Operations
Towards the end of 2019, a respiratory illness caused by a highly infectious novel coronavirus was detected. The WHO later named the novel coronavirus as COVID-19. In March 2020, the WHO characterized the outbreak of COVID-19 a pandemic. As of the Latest Practicable Date, the COVID-19 pandemic has spread to more than 200 countries and regions globally. To contain the COVID-19 outbreak, the PRC government imposed certain measures across the country including travel restrictions and 14-day quarantine for travelers or returnees from affected regions, whether infected or not, and an extended shutdown of business operations. In addition, the United States has imposed stay home orders and other lock down measures since late March 2020. Several countries in Europe also imposed lockdown measures to contain the spread of COVID-19.
As a result of the timely and effective implementation of these measures, on March 17, 2020, China reported no local infections for the first time since the outbreak of the COVID-19 pandemic. The PRC government across the country has subsequently lowered emergency response levels to the COVID-19 pandemic since late March 2020, allowing businesses and factories to gradually reopen. In addition, China ended the lockdown of Wuhan, the most seriously affected city in China, on April 8, 2020. In June and July 2020, China reported few new local infections in Beijing, Dalian and Urumqi. The PRC government then raised emergency response levels in certain areas in Beijing, Dalian and Urumqi. As of the Latest Practicable Date, the aforementioned local infections had been effectively controlled. On the other hand, confirmed cases in the United States continue to rise.
According to the Frost & Sullivan Report, the outbreak has resulted in a high number of fatalities and caused an adverse impact on the livelihood of the people and the economy worldwide. Governments across the world have taken various measures to manage cases, reduce potential spread and impact of infection. In addition, governmental authorities have adopted various incentive policies to boost the economy, such as cutting taxes, increasing government investment and cutting interest rates. The combination of fiscal and monetary incentives would help reduce the negative impacts of the epidemic.
Our Directors are of the view that the recent outbreak of COVID-19 worldwide has had the following effect on our business, results of operations and financial condition:
. Product sales. As of the date of this prospectus, we did not experience any material cancellation of orders, with respect to all of our products, either from our customers or our suppliers. Sales of our outdoor recreation products, such as air mattress and camping lanterns, decreased to US$3.6 million for the six months ended June 30, 2020 from US$6.2 million in the corresponding period due to reduced outdoor and travel activity. However, sales of outdoor recreation products only accounted for a small portion of our total revenue, and sales of the rest of our products all recorded strong growth in the first half of 2020 as a result of increased consumer demand for home products. The COVID- 19 outbreak did not have material adverse impact on the selling price of our other products.
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. Supply chain. Governments across the world have taken various measures to manage cases and reduce potential spread and impact of infection. Due to the strengthened travel restriction and quarantine measures adopted in the beginning of 2020 in the PRC, the operations of our suppliers in the PRC were suspended in February 2020, as their employees were not able to return to work due to the strict travel restriction and mandatory quarantine measures. From February 2020 to March 2020, our top five suppliers experienced suspension of operation from seven to 35 days based on information provided to us. As a result, we experienced corresponding delays in product delivery by these suppliers. Most of our top five suppliers resumed operation in late February 2020.
. Production. We manufactured a small portion of our products at our Dongguan Production Base during the Track Record Period. Due to the COVID-19 outbreak, our employees in the PRC were not able to return to work as expected and thus our production capacity was affected for 10 days in February 2020. Our revenue contributable to products produced at our Dongguan Production Base decreased to approximately US$2.3 million in the first half of 2020 from approximately US$3.2 million in the first half of 2019. As the quarantine measures in China were lifted, substantially all of our employees in China have returned to work, and our production has resumed normal operation.
. Logistics and fulfillment. For our Amazon orders, because Amazon prioritized shipments of medical supplies, household staples and other high-demand products, inboundshipmentcreationtoAmazonwastemporarily disabled for approximately three weeks between mid-March and early April 2020. As a result, our shipment value based on contract price (without deducting further discounts and rebates) to Amazon under the Vendor Central program decreased by approximately 57.4% and 10.1%, respectively, in March 2020 and April 2020 as compared to that in February 2020. Since then, Amazon has endeavored to restore its fulfillment capacity by increasing labor workforce. After the inbound shipment to Amazon resumed in mid-April 2020, our shipment value based on contract price (without deducting further discounts and rebates) to Amazon under the Vendor Central program increased by approximately 46.9% and 52.1%, respectively, in May2020andJune2020ascomparedtothatinFebruary2020.Oursales(calculated based on orders received from our customers) in the United States under the Seller Centralprogramdidnotgetmateriallyandadverselyimpactedbythetemporary suspension of inbound shipment to Amazon, as we maintained inventories in Amazon’s warehouses that were sufficient for orders placed by our customers during the temporary suspension period. As a result, sales orders in the United States under the Seller Central program remained relatively stable in March 2020 as compared to those in February 2020. In the six months ended June 30, 2020, our average inventory turnover days remained relatively stable as compared to our average inventory turnover days in 2017, 2018 and 2019. As of the date of this prospectus, Amazon’s fulfillment services had generally resumed normal operation.
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. Expansion plan. The COVID-19 outbreak may have negative impact to our expansion plan. We canceled or suspended business trips to visit potential new markets as a result of the mandatory quarantine measures and reduction of international flights. In addition, due to the strengthened travel restrictions, traveling overseas may incur additional costs and take a longer time. As such, our geographic expansion is slightly affected.
According to the Frost & Sullivan Report, due to the COVID-19 pandemic, consumer behavior was significantly influenced as demonstrated by the higher ratio of online retail sales to total retail sales. Since the COVID-19 pandemic, offline retail sales of small home appliance has been significantly affected, but online retail sales have accelerated. In the second quarter of 2020, Amazon recorded net sales of US$89.9 billion, representing a 40% increase from the same period in 2019 according to the Frost & Sullivan Report, our revenue and gross profit, which was largely generated from online sales, increased from approximately US$75.3 million and US$29.2 million for the six months ended June 30, 2019, respectively, to approximately US$129.3 million and US$61.8 million for the six months ended June 30, 2020, respectively. Based on our unaudited management accounts for the nine months ended September 30, 2020, we experienced a significant increase in revenue, gross profit and net profit as compared to the same period in 2019, mainly because customers spent more time shopping online and their demand for home products increased. However, the impact of COVID-19 pandemic on customers shopping preference is one-off in nature and may not sustain when the COVID-19 pandemic becomes under control. The gross profit margin for the nine months ended September 30, 2020 also increased as compared to that in the same period in 2019, primarily driven by the increased sales of our key products, which are generally more profitable.
In the worst case scenario where we are forced to reduce or suspend a substantial part of its business operations, due to the COVID-19 pandemic, we estimate that our existing financial resources (including cash and bank balances) as of June 30, 2020 could satisfy our necessary expenses for at least 20 months from June 30, 2020 based on certain assumptions. Key assumptions for the estimates include: (i) we will not generate any revenue due to overall suspension of business; (ii) we will incur expenses to maintain our operations at a minimum level, primarily our estimated monthly fixed costs (including staff costs based on the minimum wage level required by local laws and regulations and rental costs); (iii) the settlement of account receivables and payables will follow historical settlement patterns; (iv) we will use the immediate cash and deposits as of June 30, 2020; (v) we will repay the short-term bank loans as of June 30, 2020 and no further bank facilities available; (vi) the expansion plan will be suspended; (vii) the 10% of the proceeds from the Global Offering is allocated for general business operations and working capital; (viii) no further dividend will be declared and paid; and (ix) there will be no material changes in the near future that would significantly affect the aforementioned key assumptions. Such extreme situation may or may not occur. The abovementioned analysis is for illustrative purpose only and our Directors currently assess that the likelihood of such situation is remote.
Based on the discussion above, our Directors are of the view that the COVID-19 outbreak had not had any material adverse impact on our business operation and financial position as of the date of this prospectus. Nevertheless, in the event that the COVID-19 outbreak cannot be successfully
– 171 – BUSINESS contained globally in a timely manner, we estimate that our product supply and international logistics will continue to be affected. If our supply chain becomes disrupted again and if our inventories in United States and Europe run out, we may not be able to refill the inventories in a timely manner, which will negatively affect our online sales fulfillment. See ‘‘Risk Factors—Risks Relating to Our Business and Industry—Our business operations may be affected by the outbreak of COVID-19.’’
Our Contingency Plan and Response towards the COVID-19 Outbreak
In response to the COVID-19 outbreak, we have implemented a contingency plan and have adopted enhanced hygiene and precautionary measures at our offices. For example, we purchased masks, ethanol hand sanitizer and infrared thermometers enhancing protection measures of our employees. In addition, we are in contact with multiple logistic companies for product deliveries to ensure delivery on time. We had also established additional sales and marketing team to support and increase our sales on other e-commerce marketplaces to diversify our sales channels in case Amazon’s operations are interrupted by the COVID-19 outbreak. We estimate that the additional costs for implementing these enhanced measures, after taking into account the medical and cleaning supplies distributed by local governments, to be approximately US$80,000 for the year ending December 31, 2020, which we believe will not have a significant impact on our financial position in 2020. We also make use of the remote working facilities to ensure proper function of our business operation. Moreover, we pay attention to the collection of receivables and payment of payables, and actively explore external financing opportunities to manage our liquidity position.
OUR CUSTOMERS
Our customers primarily consist of (i) Amazon; (ii) retail customers who purchase products through Amazon’s Seller Central program; and (iii) other customers including chain retailers, retail customers who purchase products through other e-commerce marketplaces or our online shopping websites and other individual or enterprise customers who order products from us directly. The chain retailers mainly include Best Buy, Bed Bath & Beyond, Walmart, Target, The Home Depot, Staples and QVC, and other e-commerce marketplaces mainly include eBay, Cdiscount, Rakuten, Newegg and Adorama.
Five Largest Customers
Amazon was our largest customer in 2017, 2018, 2019 and the six months ended June 30, 2020. Our other major customers include chain retailers of small home appliances and other bulk purchase customers. For the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, our aggregate sales to our five largest customers amounted to approximately US$7.4 million, US$41.7 million, US$87.9 million and US$81.3 million, respectively, representing approximately 8.6%, 28.8%, 51.1% and 62.9%, respectively, of our total revenue; and sales to our largest customer (without considering retail customers from Amazon’s Seller Central program or other sales channels) amounted to approximately US$7.2 million, US$41.5 million, US$87.3
– 172 – BUSINESS million and US$79.1 million, respectively, representing approximately 8.4%, 28.6%, 50.8% and 61.2%, respectively, of our total revenue. We generally receive payment from our major customers via telegraphic transfer.
During the Track Record Period, apart from Amazon, our five largest customers for each year/ period included: (i) a chain retailer selling home merchandise; (ii) a distributor of consumer electronics; (iii) e-commerce retailers; (iv) a retailer selling kitchen products; (v) chain retailers selling consumer electronics and household appliances; (vi) companies selling technology products and (vii) a school district purchasing consumer electronics.
As of the Latest Practicable Date, the length of our business relationship with our five largest customers ranged from approximately one to three years. Our Directors believe such relationships stem from our customers’ recognition of our product quality, product innovation, aesthetic design and user experience. Our Directors believe that such relationships help preserve the loyalty of our customers and reinforce commitment from our customers to place further orders with us.
During the Track Record Period, we also used the advertising tools available on Amazon for marketing purpose. As such, Amazon, our largest customer, was also one of our service providers. We incurred marketing and advertising expenses amounting to US$6.0 million, US$11.1 million, US$14.6 million, US$5.4 million and US$5.5 million for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2019 and 2020, respectively, most of which were advertising fees paid to Amazon. In addition, sales commission fees and fulfillment fees paid to Amazon related to sales through the Seller Central program amounted to approximately US$28.3 million, US$37.6 million, US$31.5 million, US$16.7 million and US$15.5 million for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2019 and 2020, respectively.
Our Directors believe that the risk of channel stuffing with respect of our products sold to Amazon under Vendor Central program is very remote, considering (i) Amazon is one of the largest public companies globally in terms of market capitalization listed on the NASDAQ Global Market with solid corporate governance, which is also an Independent Third Party of our Group; (ii) we do not impose any minimum sales targets or requirements on Amazon; (iii) we generally allow our retail customers to return products within 30 days after receipt, and Amazon is also entitled to return damaged or defective products we sold to them through the Vendor Central program; (iv) notwithstanding that Amazon sells our products to its customers directly under the Vendor Central program, we are involved in Amazon’s marketing campaigns and hence are able to formulate the selling strategies together with Amazon to promote the products; and (v) we have full access to Amazon’s sales data through Amazon’s Vendor Central portal and we regularly monitor its sales and inventory level.
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Our Directors confirm that all of our five largest customers during the Track Record Period were Independent Third Parties. None of our Directors or their respective close associates or any Shareholders, which to the best knowledge of our Directors, own more than 5% of the issued share capital of our Company, had any interest in our five largest customers for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020.
PRODUCT DESIGN AND DEVELOPMENT
Product design and development is essential to our business. Our brands’ core values of innovation, aesthetic design and distinguished product quality have to be consistently reflected in our products, and we devote significant resources to new product design and development. We incurred research and development costs of approximately US$1.8 million, US$4.0 million, US$8.2 million, US$3.8 million and US$4.6 million for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2019 and 2020, respectively. In 2017, 2018 and 2019 and for the six months ended June 30, 2020, we launched 18, 25, 41 and 25 new models of existing products and new products, respectively. We intend to continue to invest substantial resources in research and development activities in connection with the development of new products. Smart technologies in cooking and home environment appliances are becoming popular with consumers and are expected to be an upcoming trend in the appliance industry. To capture the market opportunity, we started to develop smart security solutions since January 2019. As of the Latest Practicable Date, our smart security solutions had gone through several rounds of tests and were substantially ready for commercialization, and we had been in contact with prospective business clients who signed master service agreements with us or expressed interests in our smart security solutions. Our smart security solutions comprise hardware such as smart lock, motion detector and smoke detector, with home security management portal. We have a R&D team with an average of four years of industry experience for smart security solutions. Leveraging our R&D capabilities, we plan to launch our smart security solutions by the end of 2020.
We have continuously developed new products by improving existing designs to incorporate new technologies. Our products are the fruit of our constant search for home automation technology that will enhance the user experience and make the most of our products’ innovative functions. In October 2018, we launched our smart nutrition scale which allows users to connect smart nutrition scale with our VeSync app to set nutrition goals, keep a nutrition diary and manage unit conversions. In addition, users can get instant access to nutrition data for food items with our VeSync app. In February 2019, we launched our Smart True HEPA Air Purifier, which is equipped with built-in smart algorithm allowing customers to monitor real filter life based on air condition and other factors. In addition, customers may also control Smart True HEPA Air Purifier remotely and through Amazon Alexa and Google Assistant via voice command. In August 2019, we launched Cosori Smart WiFi Air Fryer, which can be remotely controlled through the VeSync app or through voice commands with Amazon Alexa. We launched smart LED light bulb in late 2019. We plan to launch new purifier, smart nutrition scale and sphygmomanometer by the end of 2020. We have a pipeline of future products on our design and development list and we continue to closely monitor user preferences and make corresponding adjustment and updates to our product plans.
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Our Product Design and Development team
As of October 31, 2020, our product design and development team had approximately 223 employees, of whom 190 had bachelor’s degrees. Our product design and development team comprises industrial design engineers, electric engineers, mechanical engineers, software engineers, cloud Platform engineers and mobile app developers. The members of product design and development team have on average more than eight years of relevant experience in design and development of small home appliances. Among them, Mr. Wen Yong, our head of product design and development department, has approximately eight years’ experience in software engineering and more than six years’ experience in developing internet of things and cloud storage. Our product design and development team is located in the PRC and the United States, respectively, specialized in different design and development functions. Our PRC design and development team places more focus on mechanical, software and hardware design, and our U.S. design and development team is more involved in aesthetic, innovative and industrial design based on user experience, user preference, market insights and customers’ feedback. The PRC and the U.S. product design and development teams collaborate closely and actively throughout the whole design process. Our U.S. product design and development team formulates design concepts and ideas which capture the market trend based on market research provided by our sales and marketing team, and then discusses such design concepts and ideas with our PRC product design and development team for further development. The PRC product design and development team then takes into account the technology trend and functional feasibility aspect of the products to further modify the design. During the whole design process, the U.S. and PRC product design and development teams collaborate and communicate frequently to polish and modify aesthetic and functional aspects of the products to cater for end consumers’ taste and preference. Occasionally, our PRC product design and development team collaborates with our subcontractors to create design concepts and then modify the design based on the suggestions of our U.S. product design and development team.
Our Innovative Technologies
We have innovative technologies and endeavor to embed these technologies into our products. For example, some of our Levoit humidifiers are equipped with water level sensors and patented silencer. When water level is low, the sensor will trigger the humidifier to stop misting. With our patented silencer, some of our humidifiers can operate at less than 30dB. Moreover, our Levoit air purifiers are equipped with built-in smart algorithm. With the real time air quality, operation time and fan speed, the air purifiers can calculate the real filter life. We have also implemented other technologies in our products, such as security encryption algorithm for mobile devices and home equipment, blue tooth based connection system and dynamic key management algorithms.
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In 2019, we started the research and development of our smart security solutions. Our smart security solution, an all-in-one property management system, integrates hardware, such as smart hub, smart lock, motion sensor and smoke detector, with home security management portal. We plan to launch our smart security solutions by the end of 2020. The smart security solution allows our customers to monitor the conditions of their properties with smart sensors and safeguard their properties with smart locks, thus reducing the labor and maintenance costs.
We also work with third party developers to develop new products. Under such cooperation, we primarily focus on the smart features, product appearance, user interface and software development. The third parties primarily focus on product manufacturing, to achieve our ideas.
OurVeSyncApp
In 2015, we developed and launched our own VeSync app, available for iOS and Android devices. Our VeSync app is designed to provide users with an user friendly and customized experience to control smart home devices remotely wherever they have an internet connection.
As of June 30, 2020, there were approximately 1.2 million activated devices on our VeSync app. The table below sets forth the total number of registered users, average monthly active users and number of smart home devices linked to, the VeSync app for the periods or as of the dates indicated.
Six months ended/ Year ended/As of December 31, As of June 30, 2017 2018 2019 2019 2020
Number of registered users..... N/A(1) N/A(1) 763,417 550,923 1,120,985 Average monthly active users(2).. N/A(1) N/A(1) 389,214 280,352 433,362 Number of smart home devices linked to the VeSync app..... N/A(1) N/A(1)1,030,761 806,543 1,237,648
Notes:
(1) Data is not available due to VeSync’s system upgrade in 2019.
(2) Monthly active users are referred to registered users who accessed the VeSync Cloud service via the VeSync app or other third party services at least once during the relevant month. Average monthly active users is calculated by dividing the sum of monthly active users for each month during the periods by the number of months involved in the relevant period.
Our VeSync app enables users to achieve centralized control of smart home devices for home automation experience. Through VeSync’s connection with our different smart home devices, users can monitor energy consumption of our products, track their body mass index, monitor real time air quality and check gourmet recipes. As of June 30, 2020, all of our smart devices were compatible with VeSync.
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The VeSync app is built on smart cloud infrastructure incorporating advanced database technologies and data analysis technologies, allowing us to process massive multi-source data and instructions generated by the registered devices on our VeSync app in a highly stable, efficient and secure way. Through a single registered VeSync account, users can check the status of multiple devices and control them remotely. In addition, VeSync users can store and search data, communicate with other end users and receive push notifications generated based on our data analysis. For information about data privacy protection and related risks, please refer to the section headed ‘‘— Data privacy and protection’’ and ‘‘Risk Factors—Risks Relating to our Business and Industry—We collect, store, process and use personal information and other customer data, which subjects us to governmental regulations and other legal obligations related to privacy, information security, and data protection, and any security breaches or any actual or perceived failure to comply with such legal obligations could harm our reputation and business.’’ in this prospectus.
The VeSync app is also compatible with Amazon Alexa or Google Assistant. Most of our products have obtained Works With Alexa certification. After connecting with Amazon Alexa or Google Assistant, users can control compatible smart home devices hands free by using voice commands to control those smart home devices activated on the VeSync app.
Users of the VeSync app can communicate with our customer services staff directly through the VeSync app or send email inquiries to us regarding our products. Our product teams in the relevant market monitor these messages and provide assistance with questions or problems.
Our VeSync app is being operated by Vesync US in the United States. The Internet server of the Vesync app is also located outside the PRC. As advised by our PRC Legal Advisers, the operations of the Vesync app do not involve telecommunications activities in the PRC, and therefore, the VeSync app is not subject to restrictions under the Foreign Investment Catalogue nor the Negative List.
OUTSOURCING AND PRODUCTION
During the Track Record Period, we manufactured in-house a small portion of our products at our Dongguan Production Base. We outsource the production of a majority of our products to sub- contractors to provide flexibility in resource allocation and to allow us to devote more efforts and resources to product design and development. For the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2019 and 2020, we incurred subcontracting cost in the amount of US$25.6 million, US$49.4 million, US$70.9 million, US$28.0 million and US$49.4 million, respectively, representing approximately 50.7%, 55.6%, 67.7%, 60.9% and 73.2%, respectively, of our total cost of sales during the corresponding periods.
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The table below sets forth the respective revenue attributable to products that were self- manufactured in our Dongguan Production Base and outsourced to sub-contractors for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 US$’000 % US$’000 % US$’000 % US$’000 % US$’000 %
Products outsourced to subcontractors . 68,951 80.9 125,472 86.7 161,144 93.7 72,085 95.8 126,978 98.2 Self-manufactured products...... 16,259 19.1 19,286 13.3 10,775 6.3 3,165 4.2 2,276 1.8
Total ...... 85,210 100.0 144,758 100.0 171,919 100.0 75,250 100.0 129,254 100.0
Outsourcing to Subcontractors
Our subcontractors are companies principally engaging in manufacturing and selling electronic appliances, electronic components, small home appliances and household accessories. We generally provide the subcontractors with our product design and specifications or our modification specifications and instructions on product design, and the subcontractors will then develop and make prototypes or sample products for our inspection before mass production. Occasionally, we may also collaborate with the subcontractors to co-develop new products.
We employ various evaluation and assessment criteria in selecting our subcontractors, including industry experience and track record, expertise, product quality and quality control effectiveness, price, financial condition, production capacity and ability to meet our delivery timeline. In addition, all of our subcontractors are subject to an annual evaluation, which includes an assessment on their product quality, production costs and product delivery time.
We have established stringent quality control measures and standards for our subcontractors. We conduct on-site inspection prior to engagement if necessary. We usually enter into a quality control agreement which sets out the quality control standard, the product warranty period and the product inspection criteria and other relevant terms. We also cooperate with our subcontractors to monitor the key raw materials or components they used for production. For details of quality control and assurance, please refer to the paragraph headed ‘‘— Quality Control and Assurance’’ below. For any outsourced products that are defective, the subcontractors are required to provide solutions within the prescribed timeframe, and are required to destroy the defective products if necessary.
For the year ended December 31, 2017, 2018 and 2019 and the 10 months ended October 31, 2020, we placed orders with 72, 65, 81 and 68 subcontractors, respectively. We have maintained stable business relationships with our subcontractors. For each category of our key products, we have at least two to three subcontractors on our list of approved suppliers to provide subcontracting services to us. In addition, there are also numerous factories engaging in the production of small
– 178 – BUSINESS home appliances and smart home devices in the PRC. Thus, our Directors are of the view that we will not encounter any major difficulty in engaging a substitute sub-contractor on similar terms when needed.
Our subcontractors are generally responsible for delivering our products to the warehouses or destinations as designated in the purchase orders. We generally settle our bills with subcontractors through bank transfer with credit period of not more than 90 days.
During the Track Record Period, we generally entered into a legally binding cooperation framework agreement and a quality assurance agreement with our subcontractors, and set out the specified product terms including product type, delivery timeline, and product price in the purchase orders with our subcontractors. The salient terms of a typical cooperation framework with our subcontractors are set out as follows:
Term and termination: mostly two to three years, and shall be automatically extended if after the expiration of this agreement, the parties continue to perform their obligations under the agreement and shall be terminated until the date of a new agreement.
Payment: 30% deposit, payment after product inspection but before delivery
Shipping: the subcontractor shall ship and pack the products in accordance with the supplier logistics practices guide provided by our Group
Inspection: the subcontractor shall provide our Group with inspection reports of the products, and our quality control staff shall attend the production facilities to conduct sample check, and shall refuse to accept the products if the products fail thesamplecheck.
Qualification of subcontractor: Subcontractor shall obtain all the licenses required by the PRC laws and regulations, and industry standards including but not limited to business license, product certification, product inspection accreditation
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Production
During the Track Record Period, we manufactured a small portion of products in our Dongguan Production Base. The entire production process of our products generally takes approximately one month. The following chart illustrates the typical production process:
Procurement Warehouse of raw Assembling Testing Packaging and delivery materials
We procure semi-finished goods and raw materials for assembly from third party suppliers. With the raw materials and semi-finished goods, we conduct PCB assembly, the process of assembling, populating and soldering of electronic components onto a PCB to form and produce a functional PCBA. After assembling, we then test the finished products to check the products’ functionality and conformity to the design. Once the finished products pass internal testing, such products are packed and sealed in boxes labeled with our brand names.
Production Facility
As of the Latest Practicable Date, we had one production facility, the Dongguan Production Base, located in Dongguan, Guangdong Province in the PRC with a total gross floor area of approximately 11,000 sq.m. We leased the land and properties for our production facility from an Independent Third Party. Please refer to the section headed ‘‘— Our Dongguan Production Base’’ below for details.
Our Dongguan Production Base manufactures products with less complex production process, such as remote control outlets, WiFi outlets, salt lamps, and camping lanterns. The manufacture of these products requires substantive manual works with the assistance of less complicated machinery and tools.
Raw Materials and Procurement
As of October 31, 2020, our procurement department consisted of 49 employees. The semi- finished goods we procure mainly include WiFi-PCBA, and semi-finished LED camping lanterns. The raw materials we procure mainly include electronic components and ancillary materials, packaging materials, lampshade and other consumables. Most of our raw materials and semi- finished goods are sourced from PRC suppliers. For the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2019 and 2020, our costs for raw materials were approximately US$3.6 million, US$7.0 million, US$4.3 million, US$2.0 million and US$1.6 million, respectively, representing approximately 7.1%, 7.8%, 4.1%, 4.3% and 2.4%, respectively, of our total costs of sales. Our procurement department procures raw materials by placing purchase orders with our raw material suppliers with reference to our production plans, production orders on hand, and inventory level. We usually obtain price quotations from two to three qualified suppliers of comparable major raw materials before placing an order, and select the most suitable supplier to
– 180 – BUSINESS provide the raw materials we need. We have strict quality control standards for the raw materials we purchase. For production outsourced to subcontractors, our subcontractors are responsible for purchasing raw materials and we control the quality of those raw materials by random inspection.
We settle our bills issued by our suppliers mainly through bank transfer or different credit arrangements. During the Track Record Period, trade payables were normally settled on terms of 30 to 90 days. Our Directors confirmed that during the Track Record Period and up to the Latest Practicable Date, we did not experience any material shortage or delay in the supply of raw materials. Our Directors do not anticipate any material difficulties in the procurement of the raw materials in the foreseeable future.
OUR SUPPLIERS
During the Track Record Period, our suppliers primarily included subcontractors and raw material suppliers. As of June 30, 2020, the length of our business relationship with our five largest suppliers ranged from approximately two to seven years.
For the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, purchase value from our five largest suppliers amounted to approximately US$18.1 million, US$32.7 million, US$43.3 million and US$32.2 million, respectively, representing approximately 42.1%, 54.4%, 51.0% and 55.3% of total purchase value, respectively; and purchase value from our largest supplier amounted to approximately US$4.5 million, US$10.2 million, US$19.7 million and US$11.4 million, respectively, representing approximately 10.5%, 17.0%, 23.3% and 19.5% of our total purchase value, respectively.
The following tables set out the details of our five largest suppliers for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020.
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Five Largest Suppliers
For the six months ended June 30, 2020
Purchase Years of Major products/ recognized %toour relationship raw material for the Credit term and total (up to June 30, Rank Supplier Business nature supplied period payment method purchase 2020) US$’000
1 Supplier A . . . principally engaged in manufacturing Air fryer 11,359 30–60 days after 19.5 two kitchen appliances delivery; bank transfer
2 Supplier K . . . principally engaged in R&D and sales of Air purifier and air 8,148 45 days after delivery; 14.0 one and half medical equipment, healthcare humidifier bank transfer equipment, physiotherapy equipment, fitness equipment, beauty appliances, household products, among others.
3 Supplier F . . . principally engaged in manufacturing Body weight scale, 4,308 90 days after delivery; 7.4 six plastic toys, gifts, leisure furniture smart fitness bank transfer and other plastic products and scale electronic and electrical accessories
4 Supplier C . . . principally engaged in manufacturing air Air purifier and air 4,298 payment before delivery; 7.4 three humidifier, air freshener, electric humidifier bank transfer kettle, food processor, air dehumidifier, vacuum cleaner, microwave oven and electrical appliances, among others
5 Supplier L . . . principally engaged in manufacturing Air purifier 4,064 40 days after delivery; 7.0 one and half household air conditioners, other bank transfer technology promotion and application services; energy-saving technology promotion services; professional design services; other mechanical equipment and electronic product wholesale; communications and radio and television equipment wholesale, among others
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For the year ended December 31, 2019
Years of Major products/ Purchase %toour relationship raw material recognized Credit term and total (up to June 30, Rank Supplier Business nature supplied for the year payment method purchase 2020) US$’000
1 Supplier A . . . principally engaged in manufacturing Air fryer 19,743 payment before delivery; 23.3 two kitchen appliances bank transfer
2 Supplier B . . . principally engaged in manufacturing Air purifier 6,945 payment before delivery; 8.2 three household air conditioners, special bank transfer accessories for household electrical appliances, non-electric household appliances and household sanitary electrical appliances, among others
3 Supplier C . . . principally engaged in manufacturing Air purifier and air 5,898 payment before delivery; 6.9 three air humidifier, air freshener, electric humidifier bank transfer kettle, food processor, air dehumidifier, vacuum cleaner, microwave oven and electrical appliances, among others
4 Supplier D . . . principally engaged in manufacturing Body weight scale, 5,779 payment before delivery; 6.8 six weighing products and their smart fitness bank transfer accessories, measuring equipment, scale electronic and electrical products, plastic products, hardware products and sensors, among others
5 Supplier E . . . principally engaged in manufacturing Body weight scale, 4,944 60 days after delivery; 5.8 four measuring tools; research, develop smart fitness bank transfer and sell intelligent weighing system scale products and intelligent measurement products, among others
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For the year ended December 31, 2018
Years of Major products/ Purchase %toour relationship raw material recognized Credit term and total (up to June 30, Rank Supplier Business nature supplied for the year payment method purchase 2020) US$’000
1 Supplier B . . . principally engaged in manufacturing Air purifier 10,224 payment before delivery; 17.0 three household air conditioners, special bank transfer accessories for household electrical appliances, non-electric household appliances and household sanitary electrical appliances, among others
2 Supplier C . . . principally engaged in manufacturing Air purifier and air 8,580 payment before delivery; 14.3 three air humidifier, air freshener, electric humidifier bank transfer kettle, food processor, air dehumidifier, vacuum cleaner, microwave oven and electrical appliances, among others
3 Supplier D . . . principally engaged in manufacturing Body weight scale, 6,096 payment before delivery; 10.1 six weighing products and their smart fitness bank transfer accessories, measuring equipment, scale electronic and electrical products, plastic products, hardware products and sensors, among others
4 Supplier E . . . principally engaged in manufacturing Body weight scale, 4,048 60 days after delivery; 6.7 four measuring tools; research, develop smart fitness bank transfer and sell intelligent weighing system scale products and intelligent measurement products, among others
5 Supplier F . . . principally engaged in manufacturing Air mattress 3,765 payment before delivery; 6.3 three plastic toys, gifts, leisure furniture bank transfer and other plastic products and electronic and electrical accessories
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For the year ended December 31, 2017
Years of Major products/ Purchase %toour relationship raw material recognized Credit term and total (up to June 30, Rank Supplier Business nature supplied for the year payment method purchase 2020) US$’000
1 Supplier B . . . principally engaged in manufacturing Air purifier and air 4,518 payment before delivery; 10.5 three household air conditioners, special humidifier bank transfer accessories for household electrical appliances, non-electric household appliances and household sanitary electrical appliances, among others
2 Supplier D . . . principally engaged in manufacturing Weight scales 3,954 payment before delivery; 9.2 six weighing products and their bank transfer accessories, measuring equipment, electronic and electrical products, plastic products, hardware products and sensors, among others
3 Supplier G . . . principally engaged in manufacturing Remote outlet 3,528 payment after delivery; 8.2 four household appliances and their bank transfer accessories, electrical switches, sockets, security monitoring and alarm equipment, computer network equipment, solar water heaters, plastic products and hardware accessories
4 Supplier H . . . principally engaged in manufacturing Pressure cooker 3,362 payment after delivery; 7.8 three and selling household appliances bank transfer and their accessories
5 Supplier E . . . principally engaged in manufacturing Kitchen scale 2,735 30 days after delivery; 6.4 four measuring tools; research, develop bank transfer and sell intelligent weighing system products and intelligent measurement products, among others
Our Directors confirm that during the Track Record Period, all of our top five suppliers are Independent Third Parties, and none of our Directors or their respective close associates or any Shareholders, which to the best knowledge of our Directors, own more than 5% of the issued share capital of our Company, had any interest in our five largest suppliers.
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INVENTORY
Our inventory comprises mainly finished products, semi-finished goods and raw materials. We closely monitor our inventory level to meet our production requirements, minimize any waste on inventory and avoid obsolete inventory. We have adopted a comprehensive inventory process to ensure appropriate levels of inventory, shown as follows:
. sales and marketing department to monitor and predict sales activities;
. procurement departments submit orders for approval;
. upon approval, procurement departments send the orders to suppliers; and
. suppliers provide products according to the orders.
We continuously monitor our inventory level by conducting regular checks on quality and quantity, and formulate our procurement plan every month with reference to our production plans, production orders on hand, and inventory level. For the retail sales through Amazon’s Seller Central program, our staff also from time to time check our inventory status in Amazon’s warehouses through Amazon’s online system to ensure we have sufficient inventory to fulfill the purchase needs of retail customers.
As we carefully monitor our inventory, we usually do not maintain a high level of inventory for finished goods and raw materials. As of December 31, 2017, 2018 and 2019 and June 30, 2020, the finished goods inventories amounted to approximately US$20.4 million, US$24.8 million, US$33.5 million and US$39.3 million, respectively. In 2017, 2018, 2019 and the six months ended June 30, 2020, our average inventory turnover days was 101, 97, 102 and 96, respectively.
MARKETING AND PROMOTION
We promote our brands and products mainly through Amazon’s advertising features and to a lesser extent, our brands’ websites, social media and participation in exhibitions and awards. Our sales and marketing team work closely with Amazon and other service providers to carry out our marketing and advertising activities. We had a sales and marketing team comprising of 172 team members as of October 31, 2020. In 2017, 2018, 2019 and the six months ended June 30, 2019 and 2020, we incurred US$6.0 million, US$11.1 million, US$14.6 million, US$5.4 million and US$5.5 million, respectively, for our marketing and advertising expenses, out of which approximately 93.0%, 92.3%, 94.8%, 90.6% and 86.2%, respectively, was for promotion on Amazon under Seller Central program and Vendor Central program, with the remaining portion incurred in connection with other sales channels.
Amazon
We make use of certain advertising features offered by Amazon to promote our brands such as EBC (Enhanced Brand Content), SEO (Search Engine Optimization) and ‘‘Deals’’. Amazon’sEBC allows sellers to add enhanced images and text placements that convey a brand story. Amazon’s SEO (Search Engine Optimization) help users to achieve better rankings on key-word searches and thus increase product visibility. ‘‘Deals’’ allows sellers to participate in product promotions organized by Amazon. We consider these Amazon advertising features effective tools to help us enhance brand recognition, gain more visibility and promote product sales.
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Our Brands’ Websites
Our brands’ websites are our own marketing platform for users to have a better understanding of our brands and products. Each of our brands has its own website where customers can get access to the motto and history of the brand, and can view pictures and descriptions of products sold under the brand. We sometimes post our activities or promotions on our brands’ websites to gain us additional exposure and strengthen our brand recognition. For example, we share cooking recipes on the website of our ‘‘Cosori’’ brand to attract user traffic for the website, and show users how to have a convenient cooking experience with our kitchen appliances. Handling customer feedback is also a core part of our brands, and we use our websites to receive feedback and reply with answers and solutions to their problems.
Social Media
We maintain social media accounts on Youtube, Facebook, Twitter to actively promote our products, and engage with the users by addressing their questions and concerns.
Exhibition and Award Participation
In order to keep abreast of and capture the latest market trends, as well as to attract potential customers, our Directors and sales and marketing team regularly attend international trade fairs and exhibitions such as Consumer Electronics Show, which is the world’s gathering place for the business of consumer technologies. We also participate in renowned international product design competitions and awards to exhibit our work, earn critical feedback on our ideas, and increase our brand awareness. We mainly participated in the iF product design award, Red Dot Design Award, IHA Global Innovation Award, and CES Innovation Awards Program during the Track Record Period.
TRANSFER PRICING ARRANGEMENTS
Commercial Rationale
As a global business, we established subsidiaries in different jurisdictions to perform different functions including but not limited to strategy development and management, R&D, manufacturing, procurement, sales and marketing, distribution, and custom clearance.
Our Group’s major intra-group transactions were the tangible goods buy-sell as well as certain back-end and operational support service transactions. During the Track Record Period, we conducted our operations primarily through our subsidiaries in the PRC, Hong Kong, United States, Germany and the Netherlands. We primarily conducted our sales activities through our subsidiaries in the United States and Europe. During the Track Record Period, in most of the cases, our indirect wholly owned subsidiary, Yoowo HK, purchased products from Independent Third Party suppliers or Shenzhen Chenbei, who purchased finished products from Dongguan Zhilun or Independent Third Party subcontractors. Yoowo HK then sold the finished products to Etekcity Germany and Atekcity US, who help on custom clearance of the products and then send to our overseas sales companies in the United States, Germany and the Netherlands, who would sell products to overseas customers. During the Track Record Period, to a much lesser extent, our PRC subsidiaries also provide research & development services, logistics services, procurement support services and other
– 187 – BUSINESS back-end and operational support services to other subsidiaries in our Group. The above transactions between the subsidiaries of our Group were regarded as our Group’s intra-group transactions (the ‘‘Covered Transactions’’).
The following diagram sets forth our Group’s typical transaction flow in respect of our major transfer pricing arrangement:
Function
Manufacturing Dongguan Zhilun Independent Third Party Suppliers
Procurement Shenzhen Chenbei
PRC
Hong Kong and International trade center overseas (business strategy Yoowo HK development & management)
Custom clearance Atekcity US Etekcity Germany
Sales and distribution
Adiman B.V Etekcity US Arovast US
Among these Group’s entities, Yoowo HK acts as the international trade center which (i) makes major business decisions for the Group’s other subsidiaries to execute; (ii) manages the cash flow of the supply chain; and (iii) centralizes the Group’s procurement, warehousing and logistics management. Taking into account (i) the economic policy of free trade; (ii) the rule of law; (iii) a sophisticated commercial infrastructure; and (iv) a variety of financial alternatives available, our Directors decided to set our international trade center in Hong Kong to support our distribution in overseas markets.
Given (i) the low production costs in the PRC; and (ii) a wide variety of networked suppliers and component manufacturers in the PRC, our Directors consider such manufacturing and procurement arrangement in the PRC would enhance both cost effectiveness and operating efficiencies of our business.
Transfer Pricing Assessment
The Organisation for Economic Co-operation and Development (the ‘‘OECD’’), an international organization of international cooperation, promulgated the transfer pricing guidelines for multinational enterprises and tax administrations (the ‘‘OECD Transfer Pricing Guidelines’’), which is generally followed by all tax jurisdictions involved in our Covered Transaction including
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China, the United States, Germany and the Netherlands. According to the OECD Transfer Pricing Guidelines, our Covered Transactions should be at arm’s length basis to avoid distorted taxable income in different jurisdictions.
In order to ensure compliance with the relevant transfer pricing regulations, we have engaged an independent transfer pricing consultant, Ernst & Young (China) Advisory Limited, (the ‘‘Transfer Pricing Consultant’’), an international professional accounting firm in the PRC, to conduct benchmarking studies on the Covered Transactions during the Track Record Period in accordance with the OECD Transfer Pricing Guideline, which primarily identified the arm’slength pricing and/or profit range for the Covered Transactions.
Transfer Pricing Consultant first selected the most appropriate transfer pricing analysis methodology in its benchmarking studies based on the nature and characteristics of the intra-group transactions. For the provision of procurement support services, the Transfer Pricing Consultant selected comparable uncontrolled price method (‘‘CUP’’), which compares the arrangement for the services in the intra-group transactions to the arrangement of transactions between independent parties under similar and comparable circumstances. For all of our intra-group transactions except for the provision of procurement support services from Shenzhen Chenbei to Yoowo HK, the transactional net margin method (‘‘TNMM’’) was selected, which compares the profit margin of a taxpayer arising from intra-group transactions with the profit margin realized by independent parties engaging in similar comparable transactions. The main difference between CUP and TNMM was that the later focuses on the margins rather than the prices earned on a particular transaction.
For the benchmarking study using CUP method, commission arrangement is usually applied to the procurement support services between independent parties. Accordingly, a range of commission rate was determined by reference to the comparable commission agreements between independent parties. The commission rate range determined through the benchmarking study followed the OECD Transfer Pricing Guidelines and can be regarded as an arm’s length commission range.
For the benchmarking study using TNMM method, a range of reasonable profit level was determined by reference to the range of reasonable profit level derived by comparable companies (the ‘‘Comparable Profit Level Range’’). The Comparable Profit Level Range determined through the benchmarking study followed the OECD Transfer Pricing Guidelines and can be regarded as an arm’s length profit level range.
Pursuant to the OECD Transfer Pricing Guidelines, if the profit levels are not on arm’slength basis, it is necessary to consider whether any allocations in the profit levels shall be made between the subsidiaries in the accounts to achieve comparability with the arm’s length profit level. Therefore, based on the benchmarking studies prepared by our Transfer Pricing Consultant, we compared the profit level of our operating subsidiaries of the Covered Transactions against the Comparable Profit Level Range for the Track Record Period. When the original profit level of our operating subsidiaries fell outside of the Comparable Profit Level Range, we re-allocated the profits among our subsidiaries such that the final profit level was within the Comparable Profit Level Range (the ‘‘Re-allocation’’). Any residual profits/losses after the Re-allocation were assumed by Yoowo HK, being our international trade center and our major decision-making entity. Below we
– 189 – BUSINESS set forth the Comparable Profit Level Range, the original profit level of our major operating subsidiaries before Re-allocation and the final profit level of our major operating subsidiaries after Re-allocation during the Track Record Period:
Comparable Original profit level of our subsidiaries Final profit level of our subsidiaries Profit Level Range before the Re-allocation after the Re-allocation Lower- Upper- Tested party quartile Median quartile 2017 2018 2019 2020.1–6 2017 2018 2019 2020.1–6
Manufacturing entity — Dongguan Zhilun in the PRC 3.77% 4.91% 9.18% 7.42% N/A(1) N/A(1) N/A(1) 4.76% 4.76% 4.76% 4.72% Distributing entities — Adiman B.V in Netherlands 1.13% 2.86% 4.47% N/A(1) 18.81% 2.54% 18.03% 1.72% 1.97% 1.97% 1.98% — Etekcity US and Arovast US in 1.13% 2.86% 4.47% N/A(1) N/A(1) 5.21% 22.15% 2.17% 1.87% 2.00% 1.99% the US — Shenzhen Chenbei in the PRC 1.80% 3.27% 7.31% 12.6% N/A(1) N/A(1) N/A(1) 6.98% 6.99% 6.99% 6.99% Custom clearance entities — Atekcity US 1.05 1.13 1.17 0.00 0.00 0.00 N/A(1) 1.12 1.12 1.12 1.12 — Etekcity Germany 1.05 1.13 1.17 N/A(2) 0.87 0.21 0.88 N/A(2) 1.12 1.12 1.12
Notes:
1. The entities recorded loss in the relevant period.
2. There was no intra-group transaction in the relevant period.
Our Transfer Pricing Consultant has performed a review of the Covered Transactions in accordance with the OECD Transfer Pricing Guidelines and is of the opinion that the final profit level of our major operating subsidiaries after the Re-allocation are within the Comparable Profit Level Range, which represented the arm’s length profit range for the Covered Transactions. As our Group’s major operating subsidiaries had achieved profits within the arm’s length profit range determined in accordance with the OECD Transfer Pricing Guidelines and have therefore complied with the arm’s length principle. Although benchmarking studies conducted in accordance with OECD Transfer Pricing guidelines would generally be followed by all tax jurisdictions involved in the Covered Transactions, it does not have binding effect on any local taxation authorities in the event of transfer pricing controversy. For details, please refer to ‘‘Risk Factors—Taxation authorities could challenge our allocation of taxable income which could increase our consolidated tax liability’’.
Tax Implications and Compliance
After considering the Re-allocation together with other tax adjustments, we have made voluntary adjustments with tax authorities in various jurisdictions.
In the PRC, as the original profit level during most of the Track Record Period of both Dongguan Zhilun and Shenzhen Chenbei were lower than the Comparable Profit Level Range, more profits were re-allocated to these entities in the PRC for tax purposes. As a result, we have made voluntary adjustments with tax authorities in the PRC to pay an additional net tax payment of RMB0.9 million and RMB0.4 million for the years ended December 31, 2017 and 2018,
– 190 – BUSINESS respectively. For the year ended December 31, 2019 and the six months ended June 30, 2020, the Group filed and will file tax declaration based on the final profit level after the Re-allocation in the PRC.
In the United States, as the original profit level of Etekcity US and Arovast US were lower than the Comparable Profit Level Range during the years ended December 31, 2017 and 2018 and was significantly higher than the Comparable Profit Level Range for the year ended December 31, 2019 and the six months ended June 30, 2020, their profits were therefore reduced. On the other hand, the original profit level of Atekcity US was slightly lower than the Comparable Profit Level Range, more profits were then re-allocated to Atekcity US during the Track Record Period. As a result, we have made voluntary adjustments with tax authorities with no additional income tax exposure on a combined declaration basis during the Track Record Period, and only recorded a tax recoverable of approximately US$0.6 million as of December 31, 2019, which was subsequently utilized during the first half of 2020 as a result of our business growth and thus increasing our income tax payable in the United States.
In the Netherlands, the original profit level of Adiman B.V. exceeded the Comparable Profit Level Range for the year ended December 31, 2018 and the six months ended June 30, 2020, its profits were therefore reduced after the Re-allocation. We had not, however, voluntarily applied for tax refunds with tax authorities for the Track Record Period due to the insignificant amount.
In Germany, the original profit level of Etekcity Germany were slightly lower than the Comparable Profit Level Range, slightly more profits were then re-allocated to Etekcity Germany after the Re-allocation. Due to the insignificant amount, we had not made voluntary adjustments with the tax authorities for the Track Record Period.
In Hong Kong, upon the Re-allocation, Yoowo HK would assume the residual profit. We have made annual tax declaration for the fiscal year ended March 31, 2019 and March 31, 2020 after the Re-allocation with no additional income tax exposure during the Track Record Period, and only recorded a tax recoverable of approximately US$1.3 million as of December 31, 2019, which was also utilized during the first half of 2020 due to our significant business growth and thus increasing our income tax payable in Hong Kong. Yoowo HK received a letter from the Hong Kong Inland Revenue Department (the ‘‘IRD’’) dated June 15, 2020 requesting Yoowo HK to provide certain informationinrelationtoYoowoHK’s profit tax assessment for the year of assessment 2018–19. Such information requested by the IRD primarily includes relationship and details of service arrangements between Yoowo HK and Shenzhen Chenbei; basis of service fee computation; date, manner and invoice of the service payment; justification for the service fee; and detailed information of employees who received salaries and allowances from Yoowo HK. Yoowo HK engaged Hong Kong tax adviser and submitted the relevant information requested by the IRD in September 2020. The Directors, after consulting its Hong Kong tax adviser, believe that the information request is part of the IRD’s common practice and that we have valid arguments to support our tax position.
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Our Directors confirmed that our transfer pricing arrangements during the Track Record Period did not involve tax evasion. Our Controlling Shareholders will provide indemnity to cover the tax liability incurred in relation to the transfer pricing arrangements on or before the Listing Date.
Except as disclosed in the above and the enquiry on value-added tax disclosed in the section headed ‘‘Risk Factors,’’ our Directors confirm that during the Track Record Period and up to the Latest Practicable Date, we were not aware of any inquiry, audit or investigation by any tax authority in the PRC, Hong Kong, the United States or Europe that had material impact on our business operations. Karis I LLC, Karis II LLC, Caerus BVI, Arceus BVI, Ms. Yang, Mr. Yang Yuzhong and Mr. Yang Hai entered into the Deed of Indemnity to indemnify us for any tax liabilities we incurred on or before the Listing Date. For details, please refer to the section headed ‘‘Appendix IV—Statutory and General Information—D. Other Information—3. Estate Duty, Tax and Other Indemnity’’.
With a view to ensure ongoing compliance of the applicable transfer pricing regulations, we will (i) continue to monitor our transfer pricing arrangements to ensure compliance with the arm’s length principle, by designating our finance manager to review the reasonableness of the pricing policy of our key intra-group transactions on a monthly basis; (ii) assign our chief financial officer, currently Mr. Chen Zhaojun, who has over 16 years of experience in the accounting and business management industries and in multi-national businesses, to monitor the amount of intra-group transactions to determine whether transfer pricing documentation reports are required to be prepared for the relevant tax authorities and our chief financial officer will report to our audit committee on an annual basis. For the details on the background and experience of our chief financial officer, see ‘‘Directors and Senior Management—Directors—Executive Directors’’; and (iii) engage an independent transfer pricing consultant on a regular basis to review the Interquartile Range of our intra-group transactions and provide any updates on relevant transfer pricing laws and regulations. Having considered the above, our Directors are of the view that the above measures are sufficient and effective. In addition, after discussing with our internal control consultant and reviewing the internal control procedures of our Group, nothing has come to the attention of the Joint Sponsors that the above measures are not adequate and sufficient.
QUALITY CONTROL AND ASSURANCE
Our Directors believe that the quality of our products has not only been a key to our success, but is also crucial to our continued growth. Delivering quality products to customers is our corporate goal and one of the major factors for us to maintain long-term relationships with our customers. We have stringent quality requirements in our production process, and we select new suppliers based on several factors and only those who meet our quality control requirements are qualified to be approved suppliers. We follow recognized standards such as Radio Equipment Directive 2014/53/EU (RED), the Federal Communication Commission Certification in the United States and Electromagnetic Compatibility 2014/30/EU and RoHS 2 Directive 2011/65/EU Annex II (EU) 2015/863 as last amended by Directive (EU) 2017/2102.
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The quality control of our production facility and suppliers was carried out by our quality control and assurance team comprising 70 staff members as of October 31, 2020. For production at our production base, our quality control and assurance team routinely inspects the sample raw materials and finished products, and checks whether production procedures have been properly carried out. In addition, we have entered quality assurance agreements with our sub-contractors to set out the quality requirements. For products required to be in compliance with international recognized standards, we engaged independent third party laboratories to inspect such products to ensure compliance with these standards before we start selling these products to the market.
During the Track Record Period and up to the Latest Practicable Date, we did not experience any significant quality defects or product claims, refunds or returns from our customers or other remedies in respect of our products which materially and adversely affected our financial condition. Our Directors confirm that we have complied with the product safety standards of the jurisdictions in which we operate in all material respects. Our Directors believe that our commitment to high quality helps strengthen the recognition and trust from our customers.
MARKET AND COMPETITION
We face competition from a number of enterprises that provide products similar to ours. According to the Frost & Sullivan Report, the competition in the global small home appliance and smart home device industry has gradually intensified in recent years. At present, some major market players have accumulated high levels of financial, technological and marketing resources and may be able to devote greater resources to the development, promotion, sales and support of their platforms in offering products and services. We mainly compete with other sellers of small home appliances and smart home devices in market where we operate on product price, quality, industry experience, technology, sales channel and brand awareness.
The key entry barriers to enter into small home appliance and smart home device market include, among others, the following:
. Brand awareness: brand awareness is a key consideration in markets of the small home appliances and smart home devices. We have a strong user base that can be quickly monetized, as users may replace the old products with the advanced new ones. The commercial monetization of smart home devices is accelerating globally, so the capability to attract and maintain users is one of core competencies to maintain our market share.
. Technology barrier: innovative technology is the essential element for the prevalence of smart home devices, and for the new entrants, technology usually requires time and efforts to develop and maintain. We have design and development capabilities that allow us to design innovative products and build in new automation features.
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. Experience barrier: experienced management capability is also one of the key edges for small home appliance and smart home device providers. Without qualified and experienced management, a company seeking to enter could easily fall victim to this highly competitive market. Our management team has an average of over 15 years experiences, so we believe that we can maintain our competitiveness in the small home appliance and smart home device market.
. Sales channel: the need to establish a reliable sales channel for small home appliances and smart home devices could pose an entry barrier for the new entrants. Without a well- established sales channel for small home appliances and smart home devices, new entrants will not be able to get their products in front of potential customers. We have a well-established relationship with Amazon as well as other e-commerce marketplaces. We are also exploring offline sales to complement our online sales volume.
We believe our competitive edge is attributable to factors, including (i) strong brand recognition and a high sales rank on Amazon, (ii) design and development capabilities that allow us to design innovative products and build in new automation features, (iii) a well-established and stable relationship with Amazon, and (iv) an experienced and dedicated management team. Our Directors foresee our competitive strengths will solidify and further enhance our business with the implementation to our strategies. Please refer to the paragraphs headed ‘‘Our Strengths’’ and ‘‘Our Strategies’’ above in this section for further information. Coupling with our competitiveness and the potential increase in demand of small home appliances and smart home devices in the United States and European market, our Directors believe we will be able to maintain our position notwithstanding the increasing competition we face in the small home appliance and smart home device industry.
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AWARDS AND CERTIFICATIONS
In recognition of our innovation and aesthetic design, we have been granted a number of awards and certifications.
The following table sets forth the major awards received by us:
Year of grant Award Issuing authority/institution
2020..... iFProductDesignAwardforLevoitCore300 iF Organization True HEPA Air Purifier
2019..... ContemporaryGoodDesignAwardforLevoit Red Dot Organization and Core 300 True HEPA Air Purifier Xiamen Wenguang Media Group
2019..... RedDotDesignAwardforCOSORIAirFryer RedDotOrganization
2019..... IHAGlobalInnovation Awards for Levoit International Housewares Willow True HEPA Air Purifier Association
2018..... iFProductDesignAwardforAURA-smart iF Organization essential oil diffuser
2018..... iFProductDesignAwardforEmoryhandle iF Organization steamer
2018..... iFProductDesignAwardforPinnaclesmart iF Organization nutrition scale
2017..... CESInnovationAwardsforLevoithalosmart Consumer Technology diffuser Association
2017..... HonorableMentionofRedDotAwardDesign Red Dot Organization Concept for AURA-smart essential oil diffuser
INTELLECTUAL PROPERTY
As of the Latest Practicable Date, we had 127 registered patents and 19 software copyrights in the PRC, 29 registered community designs in Europe, 30 registered patents in the United States, two registered patents in Korea and one registered patent in Japan and Brazil, respectively. We had made application for registration of 53 patents in the PRC, 45 patents in the United States and four patent applications pending under the Patent Cooperation Treaty. Among our registered patents and patent applications pending approval, 142 and 31 were product design related patent registrations and applications, respectively, as of the Latest Practicable Date. In addition, as of the Latest Practicable Date, we were the registered owner of 152 trademarks and 28 domain names. We had
– 195 – BUSINESS also made an application for the registration of 74 trademarks. As of the Latest Practicable Date, our Directors believe that there is no legal impediment for the renewal of the above patents, copyrights, community designs, trademarks and domain names. For details, please refer to the paragraph headed ‘‘Appendix IV—Statutory and general information—B. Further Information About Our Business—2. Intellectual property of our Group’’ in this prospectus.
We recognize the importance of protecting and enforcing our intellectual property rights. We have entered into framework cooperation agreements with our suppliers imposing confidentiality obligations so as to protect our intellectual property rights during the production.
We have adopted the following internal control measures to protect our intellectual property, including product design, from unauthorized use by third parties:
. we have established an intellectual property department under our legal department, being responsible for overseeing and handling intellectual property infringement disputes or claims;
. we have entered into agreements with our suppliers prohibiting them from unauthorized use or misappropriation of our intellectual property. Our designated personnel will regularly monitor the use of our intellectual property by the suppliers to ensure its proper use;
. if our employees noticed any unauthorized use or other infringement of our intellectual property, our employees shall notify legal department immediately. Our legal and intellectual property department will prepare cease and desist letters, collect infringement evidence and prepare for legal actions when necessary.
To the best of our knowledge, information and belief, during the Track Record Period and up to the Latest Practicable Date, we did not experience any material infringement of our intellectual property rights nor had we been subject to any material intellectual property rights claims by third parties.
PROPERTY INTERESTS
As of the Latest Practicable Date, we did not own any properties and we leased all of the properties from Independent Third Parties. As of the Latest Practicable Date, we leased 23 premises in the PRC, United States, Germany, Macau and Japan, with a total GFA of approximately 50,000 sq.m. As of the Latest Practicable Date, one of these leases had expired and is being renewed and eight of these leases will expire within one year. Our Directors believe that there is no legal impediment for such renewals. We primarily use the properties for office premises, warehouses and the Dongguan Production Base.
As of the Latest Practicable Date, we failed to register certain lease agreements as the tenant, including the leases in connection with our office premises and production base in the PRC. See ‘‘Risk Factors—RisksRelatingtothePRC—We may be subject to fines due to the lack of registration of our leases.’’
As of the Latest Practicable Date, we did not own any properties, nor did we have any single property with a carrying amount of 15% or more of our total assets. Therefore, according to section 6(2) of the Companies (exemption of Companies and Prospectuses from Compliance with Provisions) Notice, this prospectus is exempted from compliance with the requirements of section
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342(1)(b) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance in relation to paragraph 34(2) of the Third Schedule to the Companies (Winding Up and Miscellaneous Provisions) Ordinance which requires a valuation report with respect to all our interests in land or buildings.
OUR DONGGUAN PRODUCTION BASE
We leased our Dongguan Production Base (the ‘‘Leased Property’’) from an Independent Third Party (the ‘‘Lessor’’). Our Dongguan Production Base is located on collectively-owned land (集體建設用地) in Qinghu Village, Qishi Town, Dongguan City, the PRC (the ‘‘Dongguan Land’’). According to a collectively-owned land ownership certificate (集體土地所有證) dated June 4, 2013 and a construction land use permit (建設用地規劃許可證) dated September 30, 2014, the Dongguan Land is held by the Joint Stock Economic Association of Qinghu Village of Qishi Town, Dongguan City (東莞市企石鎮清湖股份經濟聯合社農民集體)(the‘‘Villagers’ Association’’) and the permitted usage is industrial. As advised by our PRC Legal Advisers, the assignment of the land use right of the Dongguan Land to the Lessor has not complied with the applicable requirements for transfer of collectively-owned land and the Lessor has not obtained the building ownership certificate for the Leased Property. As advised by our PRC Legal Advisers, there is a potential risk that we may be forced to vacate our Dongguan Production Base from the Dongguan Land.
Based on the confirmation letter provided by Villagers’ Committee of Qinghu Village, Qishi Town, Dongguan City (‘‘Villagers’ Committee’’), the assignment of the land use right of the Dongguan Land to the Lessor and the construction of the buildings thereon, as well as the lease of the Leased Property to our Group, were recognized by the Villagers’ Committee. In addition, based on the interview with the Planning Unit of Qishi Town (東莞市企石鎮規劃所)(the‘‘Planning Unit’’), conducted by our PRC Legal Advisers on April 16, 2019 and March 12, 2020, the Planning Unit confirmed that failure in obtaining building ownership certificates is not uncommon in Dongguan City and the Leased Property is in compliance with the urban planning. According to relevant PRC laws and regulations, the Lessor may be subject to administrative penalties imposed by relevant authorities. However, as our subsidiary, Dongguan Zhilun, is the lessee of Leased Property and did not participate in any construction of Leased Property, based on Law of the People’s Republic of China on Urban and Rural Planning, Law of the People’s Republic of China on Construction and the Regulation on the Quality Management of Construction Projects and as advised by our PRC Legal Advisers, Dongguan Zhilun will not be penalized by relevant authorities for entering into the lease agreement for the Leased Property.
In the unlikely event that we are forced to vacate our Dongguan Production Base from the Dongguan Land by the relevant PRC authority, we believe that it would not be difficult to find a suitable site for relocation or to transport and reinstall our machinery and equipment. We estimate the costs of the relocation would be approximately RMB50,000, including the logistics expenses and capital expenditure for the backup site, which are expected to be funded by our internal resources. We estimate such relocation, if occurs, would take approximately two weeks to complete. We believe that such relocation, if occurs, would not have a material adverse effect on our business, financial condition and results of operations.
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EMPLOYEES
The following table sets out the geographic presence of our employees as of October 31, 2020:
Number of Percentage of Location employees total employees
ThePRC...... 583 84.1 UnitedStates...... 105 15.2 Others...... 5 0.7
Total...... 693 100.0
The following table sets out the functional distribution of our employees as of October 31, 2020:
Number of Percentage of Department employees total employees
Directors (excluding the independent non-executive 30.4 Directorsandnon-executiveDirector)...... Productdesignanddevelopment...... 223 32.2 Salesandmarketing...... 172 24.8 Production...... 38 5.5 Administrationandfinance...... 128 18.5 Qualitycontrolandassurance...... 70 10.1 Procurement...... 49 7.1 Warehouse ...... 10 1.4
Total...... 693 100.0
We believe that our ability to recruit and retain experienced and skilled labor is crucial to our growth and development. We provide training to our new employees to familiarize them with our working environment and work culture. We also provide on-the-job training to our employees, which aims at developing their skills so as to meet our strategic goals and customer requirements. In addition to providing our staff with the opportunities to receive on-the-job trainings, we strive to create a harmonious and warm working and living environment for our staff.
We consider that we have maintained a positive relationship with our employees during the Track Record Period and up to the Latest Practicable Date. We had not experienced any strike, labor dispute or other labor disturbances which had materially and adverselyinterferedwithour operations during the Track Record Period and up to the Latest Practicable Date.
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Recruitment and Remuneration
We generally recruit our employees by placing advertisements in the open market, or through personal referrals and recruitment agencies, selecting candidates reference to their experience, qualifications and expertise required for our business operations. We enter into employment agreements with each of our employees in accordance with the applicable laws and regulations. The remuneration packages of our employees generally include basic salaries, bonuses and employee benefits such as medical insurance packages. We conduct annual review on employee salary and promotion based on their respective performances, and we conduct annual review to identify employees with extraordinary performance and offer them promotions and salary raises.
During the Track Record Period, we maintained social insurance for our employees pursuant to the applicable PRC laws and regulations by making contributions to the mandatory social insurance and housing provident funds which provide basic retirement, work-related injury, maternity benefits.
We have adopted a training policy, pursuant to which trainings on management skills, technology and other relevant topics are regularly provided to our employees by internal speakers and third-party consultants.
Share Option Scheme and Share Award Scheme
We have adopted the Pre-IPO Share Award Scheme and conditionally adopted the Share Option Scheme. The principal terms of Pre-IPO Share Award Scheme and the Share Option Scheme are summarized in the section headed ‘‘Statutory and General Information—D. Other Information— 1. Pre-IPO Share Award Scheme’’,and‘‘—2. Share Option Scheme’’ in Appendix IV to this prospectus, respectively.
INSURANCE
We maintain various insurance policies including property insurance covering risks of physical loss or damage to the inventory of our products and fixed assets, general liability insurance (including product liability), worker compensation insurance, employer liability insurance and transportation and logistics insurance covering the products delivered by third party logistic companies. For details, please refer to the section headed ‘‘Risk factors—RisksRelatingtoour Business and Industry—Our insurance coverage may not be sufficient to cover significant losses resulting from the operation of our business’’ in this prospectus.
During the years ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, the premiums which we paid for our insurances were approximately US$0.3 million, US$0.3 million, US$0.4 million and US$0.3 million, respectively. We believe that our insurance coverage in line with industry practice. During the Track Record Period and up to the Latest Practicable Date, we had not made or been the subject of any material insurance claims.
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WORK HEALTH AND SAFETY
To prevent work injuries and to promote a safe working environment, we have established safety rules and measures to govern workplace safety. We conduct regular maintenance to keep our production machinery and equipment in good condition for their intended use. We also provide staff training to ensure our employees are properly trained and are under adequate supervision. During the Track Record Period, there was no material incident or accident, nor any penalty or fine in relation to any non-compliance of applicable laws, rules and regulations relatedtoworksafety and occupational health.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (‘‘ESG’’)
We are committed to environmental protection and promoting corporate social responsibility. We have established ESG policies, which set forth our environmental protection measures, social responsibility principals and internal governance. Under our ESG policies for environmental protection, we aim to promote usage of renewable resources and reduce production of hazardous electronic product. Our ESG policies for social responsibility and internal governance aim to ensure that our business meets applicable laws and regulations, contribute to social responsibility causes and promote employees’ work safety. We also established ESG policies for corporate governance, which aim to manage risks in operation and enhance our operating efficiency.
The following are some of our important ESG policies:
. We continue to reduce the amount of packaging to save unnecessary plastic and paper waste. We also promote the use of recyclable packaging materials to promote environmental protection.
. We take energy saving into consideration when designing our product. We seek to enhance product performance, improve the useful life of products and reduce energy consumption. Some of our products are ‘‘Energy Star’’ certified products, as they meet strict energy-efficiency guidelines set by U.S. Environmental Protection Agency.
. We promote energy saving in workforce. For example, we require double-side printing of documents, install energy saving office appliances and ask employees to turn off light and other electronic devices when leaving office.
. We purchased commercial insurance for our employees and promote work-life balance.
In addition to the above policies, we have been actively engaging in activities demonstrating our corporate social responsibility. We are in cooperation with non-profit environmental agencies to reduce carbon emissions by planting trees in Africa and promoting energy saving activities on our VeSync app. During the COVID-19 outbreak, we also donated Etekcity products to social administration in Shenzhen as part of our social responsibility initiatives.
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Our Board is responsible for establishing, adopting and reviewing our ESG policies to evaluate, determine and address our ESG-related risks once a year. Our Board may assess or engage independent third party(ies) to evaluate the ESG risks and review our existing strategy, target and internal controls. Necessary improvement will then be implemented to mitigate the risks.
LICENSES AND PERMITS
According to our PRC Legal Advisers, we have obtained all licenses, permits, approvals and certificates that are material for our business operations in the PRC and such licenses, permits, approvals and certificates are valid and subsisting.
We have obtained all licenses, permits, approvals and certificates that are material for our business operations in the United States, Germany, Japan, Netherlands and Hong Kong and such licenses, permits, approvals and certificates are valid and subsisting.
DATA PRIVACY AND PROTECTION
We are committed to protecting our consumers’ personal information and privacy. We believe it is crucial that our consumers understand how we handle their information so that they can make informed choices in deciding how such information is used and shared. We have established internal policy to process and protect customers’ personal data including i) providing notice to consumers as to why and how their data is being collected and used; ii) making efforts to prevent loss or leakage of consumer data; and iii) providing consumers with choices in whether or not, and how, they receive promotional information from us. We do not distribute or sell our consumers’ personal data to other companies without consumers’ permission. Our consumers’ privatedataare primarily stored in the facilities of our cloud service providers in the United States. All consumer and behavioral data are only stored for a fixed period time in accordance with local laws and regulations and we will not hold consumers, personal information longer than is necessary for the purpose it was collected.
LEGAL PROCEEDINGS AND COMPLIANCE
Legal Proceedings
We are involved in legal proceedings or disputes from time to time in the ordinary course of business, concerning issues relating to, among others things, contractual disputes, product liability, employment, intellectual property and regulatory compliance matters. See ‘‘Risk Factors—Risks Relating to Our Business and Industry.’’
Product liability legal proceedings
In July 2018 and December 2019, two customers filed law suits with Cosori US in California and Florida, respectively. The customers alleged that Cosori US designed, marketed and placed pressure cookers with defects, which caused bodily injury and damages to the customers. The customers claimed for compensatory damages and economic damages as the court may deem just and proper. In August 2019 and April 2020, we settled these two proceedings in the aggregate
– 201 – BUSINESS amount of US$451,000 pursuant to mutually agreed settlement agreements. The settlements expressly released all past, present, or future liabilities, claims, lawsuits, demands, obligations, causes of actions, or rights of action for economic or noneconomic damages, disbursements, or for compensation based on torts, contract, breach of warranty, strict liability or other recovery basis. Pursuant to the settlement agreements, we expressly denied any liability that may arise from relevant customers for using our pressure cookers. In addition, we received correspondence from attorneys representing four pressure cooker customers requesting documents relating to the pressure cooker in January 2018 and February, April and August, 2019, respectively. In these correspondences, customers alleged to have suffered bodily injuries caused by pressure cookers we sold. Their attorneys requested us to forward the letters to our insurance carrier, send them copies of our insurance coverage and preserve all documents relating to the pressure cookers. We made timely responses to these attorneys and requested for details of the alleged injuries and purchase proof in 2018 and 2019. Since then, we only received one follow-up correspondence from the attorney representing one of these four customers in July 2020, alleging that the pressure cooker caused the customer’s bodily injury. We promptly responded to the attorney of this customer and requested for proof of the alleged injuries. As of the Latest Practicable Date, we had not received any follow up correspondence. Except for this, as of the Latest Practicable Date, we did not receive any additional inquiries from or notice of action with respect to these four customers, nor did we receive any product liability claims or complaints from other customers that materially and adversely affect our business. Our Directors consider that the settlement amount made for these law suits would not have a material adverse effect on our business, financial condition or results of operations.
We believe claims relating to pressure cookers will not have any material adverse financial and reputational impact on us. During the Track Record Period, we purchased two general liability and two umbrella insurance policies that cover bodily injury and personal injury liabilities, subject to certain terms and conditions. Each of our general liability insurance has a general aggregate coverage limit of US$2.0 million with coverage for personal injury limiting at US$1.0 million. Our umbrella insurance policies have a general aggregate coverage limit of US$5.0 million and US$6.0 million, respectively, with coverage for personal injury capped at US$1.0 million under each policy. Subsequent to the Track Record Period and as of the Latest Practicable Date, we purchased a new commercial general liability insurance policy with coverage limit of US$2.0 million for each occurrence, subject to certain terms and conditions. The new policy became effective in July 2020 and will expire in July 2021. We believe the amount coverage under such insurance is sufficient to cover our potential liabilities. Our pressure cooker also obtained ETL Intertek Certification, which recognizes that our pressure cookers meet certain performance criteria and mandatory requirements, including safety requirement. Further, our pressure cooker is rated 4.2 stars on Amazon, which is above average ratings for pressure cooker on Amazon.
We have adopted the following safety control measures for product safety and to prevent risks from product liability claims:
. Design safety control. Our R&D team takes product performance and operating safety as key factors in product design. We prudently select materials and components in our
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products to ensure such materials and components meet national safety standard. In addition, we test our sample products to inspect their proper performance and safety operation.
. Supplier safety control. We prudently select our suppliers by reviewing their past experience and production quality. Our quality control, R&D and procurement departments will jointly participate in the selection of suppliers. We generally require suppliers to enter into quality and safety assurance agreement with us. The suppliers generally will be held liable for any safety violation.
. Delivery safety control. Our quality control department performs final quality and safety check before we accept products from suppliers. The final quality safety check is to ensure our products satisfy national safety standard. Should there be any deviation from national safety standard, we will reject the products and ask the suppliers to re-work the products.
Patent infringement disputes
In June 2019, we filed a patent suit against a third party in United States District Court for the Central District of California (the ‘‘Court’’). The third party is a Chinese company that manufactures similar camping lanterns to ours, while its patent was obtained on a later date than ours. As we sell lanterns on Amazon.com, the third party alleged that our camping lanterns infringed its patent and sent a ‘‘notice of patent infringement’’ to Amazon, resulting in an automatic system delist of our relevant products on Amazon. Upon unsuccessful communication with the third party to withdraw its improper notice, we asserted claims against the third party for inequitable conduct, intentional interference with prospective economic advantage, and a declaratory action for patent invalidity. Specifically, we sought a temporary restraining order and preliminary injunction mandating the third party to revoke its notice on Amazon.com, damages amounting to all our lost revenue resulting from the third party’s improper notice, an order invalidating the third party’s patent, an order finding the third party’s patent unenforceable and all costs and attorney’s fees related to our claim. As of the Latest Practicable Date, the listing of our camping lanterns was restored. We settled the case with the third party in July 2020 with no payment obligation and the case was dismissed.
Intellectual Property disputes
In November 2017, a third party brought a lawsuit against us, claiming that our ‘‘collapsible lantern’’ registered on June 2, 1998 infringed the patent of their ‘‘collapsible lantern with automatic shut-off feature’’ that registered on February 29, 2000. We had a legal opinion from our US litigation lawyer suggesting that we had favorable chances in the litigation. However, considering that (i) intellectual property lawsuits and claims brought against us, whether successful or not, can be complex, costly, time-consuming in the United States, which may require significant resources and attention from our management and technical staff to defend; (ii) collapsible lantern is not our
– 203 – BUSINESS key products, which contributed approximately 9.1% and 3.5%, respectively, to our total revenue in 2017 and 2018, we made a business decision in 2018 to settle the case with the plaintiff. Pursuant to the settlement agreement entered into by and between the plaintiff and us, it has been agreed that the full settlement amount is US$225,000 and all of the claims and causes of action arising out of the lawsuit brought by the plaintiff against us will be fully and forever released and discharged. As of the Latest Practicable Date, the settlement agreement was fully performed. Our Directors are of the view that the settlement does not have any material adverse impact on our reputation and results of operations.
In view of the intellectual property disputes, we have adopted the following internal control policies to ensure product safety and to protect our intellectual property rights and trade secrets:
(i) we have strengthened patent and technical review during the R&D process of our products by conducting patent searches and engaging independent third party laboratories to check for potential patent issues, so that we could promptly detect potential patent or other technical issues before launching the products;
(ii) we have significantly increased headcount for our technical team by increasing patent engineers from one to four, and increasing technicians from 70 to 180; and
(iii) we have signed confidentiality agreements with employees. In addition, we have and will continue to provide training to our employees to raise their awareness on the importance of patent and trade secret protection.
Except as disclosed above, during the Track Record Period and up to the Latest Practicable Date, to the best knowledge of our Directors after having made reasonable enquiries, there were no litigation or arbitration proceedings pending or threatened against us or any of our Directors which would have a material adverse effect on our financial condition or operating results.
Non-compliance
Failure to make adequate social insurance and housing provident fund contribution
Incident and reasons
During Track Record Period and up to the Latest Practicable Date, certain of our PRC subsidiaries failed to make adequate social insurance and housing provident fund contributions for some employees as required by the relevant PRC laws and regulations. Such non-compliance incidents occurred primarily due to (i) the lack of understanding by the responsible personnel of the requirements under the relevant PRC laws and regulations; (ii) there were differences in implementation or interpretations of the relevant PRC laws and regulations by local government authorities; and (iii) in some cases, certain employees voluntarily made the decision to not make such contributions in lieu of receiving cash payments.
Legal consequences and impacts
According to the relevant PRC laws and regulations, we may be ordered to pay social insurance fund contribution arrears and be subject to an overdue penalty at a daily interest rate of 0.05% on any delinquent payment. If we fail to pay within a given period as required by the local social insurance authorities, the relevant governmental authority may impose a penalty ranging from
– 204 – BUSINESS one to three times of the amount of the unpaid contributions. In respect of the housing provident fund contribution, according to the relevant PRC laws and regulations, the relevant governmental authority may require us to make the unsubscribed contribution within a given period and, if we fail to do so within the given period, may apply to a PRC court for an order to enforce the payment. As advised by our PRC legal advisers, the relevant governmental authorities will only impose penalties on us if we fail to pay the outstanding social insurance and housing provident fund within the prescribed time period upon demand. As of the Latest Practicable Date, we had not received any notification from the relevant PRC authorities requiring us to pay shortfalls with respect to social insurance and housing provident funds. During the Track Record Period and up to the Latest Practicable Date, we had not been subject to any administrative penalties, nor were we aware of any material employee complaints or involved in any material labor disputes with our employees with respect to social insurance and housing provident funds.
Our PRC subsidiaries have obtained written and oral confirmations from local social insurance and housing provident fund authorities, namely, the Human Resources and Social Security Bureaus, the Social Insurance Fund Bureau and Bureau of Community Development Governance and Social Services, the Management Centers of Social Insurance Fund and the sub-district Social Security Offices of the cities where our subsidiaries are registered, as well as the Enterprise credit information publicity report (企業信用信息公示報告) from National Enterprise Credit Information Publicity System, each stating that no administrative penalty has been imposed.
Our PRC Legal Advisers are of the view that the likelihood that we would be subject to material administrative penalties by relevant authorities is remote. We made provisions in the total amount of approximately US$0.2 million, US$0.3 million, US$0.3 million and US$0.1 million, respectively, for the outstanding amount of social insurance and housing provident fund contribution in 2017, 2018, 2019 and the six months ended June 30, 2020, which we believe are sufficient. We believe we have made sufficient provision for the outstanding social insurance and housing provident fund and we will make full payment to the relevant authorities upon demand. As such, our Directors are of the opinion that these incidents will not have a material adverse impact on our business or results of operations.
Internal Control measures to ensure ongoing compliance
As of the Latest Practicable Date, we had enhanced internal control measures to ensure full compliance with the relevant laws and regulations on social insurance fund and housing provident fund. These measures include: (i) we established internal rules at headquarter level to monitor proper and timely social insurance and housing provident fund payment and required that our human resources department shall open the required accounts for social insurance and housing provident fund; (ii) we shall retain PRC legal advisers to provide trainings to our employees on social insurance and housing provident fund related laws and regulations; (iii) our human resource department shall submit monthly reports to the our Directors in respect of the status of the social insurance and housing provident funds contributions to ensure the full payment and contribution in the future; (iv) we shall communicate with local human resources regularly, social insurance and housing provident fund authorities to get regular updates related to laws on relevant social insurance and housing provident fund; and (v) we shall conduct legal compliance training of employees to ensure they are aware of relevant social insurance and housing provident fund laws
– 205 – BUSINESS and regulations. We designated certain human resources staff to closely monitor the implementation of such measure, in particular, the payment status of social insurance and housing provident fund to ensure full contribution for all our employees. After reviewing the above internal control measures, our Directors are of the view that the above measures are adequate and will effectively ensure a proper internal control system to prevent future similar non-compliance incidents. In addition, having considered the nature and reasons for the historical non-compliance incidents above and the advice from our PRC Legal Advisers, and after reviewing the enhanced internal control procedures of our Group, nothing has come to the attention of the Joint Sponsors that our Group’sinternal control measures are not adequate and effective.
RISK MANAGEMENT
We have established a risk management system consisting of relevant policies and procedures that we believe are appropriate for our business operations. Pursuant to our risk management policy, our key risk management objectives include: (i) identifying different types of risks; (ii) assessing and prioritizing the identified risks; (iii) developing appropriate risk management strategies for different types of risks; (iv) identifying, monitoring and managing risks and our risk tolerance level; and (v) execution of risk response measures.
Our Board oversees and manages the overall risks associated with our business operations. Moreover, our audit committee will review and supervise our financial reporting process and internal controls system. The audit committee consists of three members, namely Mr. Gu Jiong, Mr. Fong Wo, Felix and Mr. Tan Wen. For qualifications and experience of the members of the audit committee, please refer to the section headed ‘‘Directors and Senior Management’’ in this prospectus.
During the Track Record Period and up to the Latest Practicable Date, we did not engage in any significant hedging activity.
CORPORATE GOVERNANCE MEASURES
In addition, it is the responsibility of our Board to ensure that we maintain a sound and effective internal control and corporate governance system to safeguard the Shareholders’ interest and our assets at all time. As such, we have adopted a series of corporate governance measures which are set out in the section headed ‘‘Relationship with Our Controlling Shareholders— Corporate Governance Measures’’ in this prospectus.
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OUR CONTROLLING SHAREHOLDERS
Immediately following the completion of the Capitalization Issue and the Global Offering assuming the Over-allotment Option is not exercised and without taking into account any Shares which may be allotted and issued upon the exercise of any options which may be granted under the Share Option Scheme, Karis I LLC, Karis II LLC, Caerus BVI and Arceus BVI will hold an aggregate of approximately 69.6130% of the issued share capital of our Company.
Each of Karis I LLC and Karis II LLC is wholly owned by North Point Trust Company L.L.C., the trustee of the Annuity Trusts, on trust for the benefit of the Annuity Trusts, which were established by Ms. Yang for the ultimate benefit of the Family Trusts, pursuant to certain arrangements. Ms. Yang, as both the settlor and the trustee, established Family Trust I and Family Trust II for the benefit of any children born to or adopted by Ms. Yang and their respective issue, and Mr. Ryan Xu, Ms. Yang’s child, during his lifetime, and any charitable organizations to be subsequently determined by the independent trustee (if any) at its discretion upon its appointment, respectively. Pursuant to the Annuity Trusts, Ms. Yang, as the powerholder, has the power to appoint additional trustees and remove and replace North Point Trust Company L.L.C., and as the sole manager of Karis I LLC and Karis II LLC, has the authority to make all decisions in relation to them. Ms. Yang is deemed to be interested in both Karis I LLC and Karis II LLC, and hence the Shares held by them. For details of the Annuity Trusts and Family Trusts, please refer to the section headed ‘‘History, Reorganization and Corporate Structure—Reorganization—(B) Establishment of the Annuity Trusts and the Family Trusts’’ in the prospectus.
Caerus BVI is wholly owned by Mr. Yang Yuzheng. Arceus BVI is wholly owned by Mr. Yang Hai. Ms. Yang, Mr. Yang Yuzheng and Mr. Yang Hai are family members of one another, and are therefore deemed to be interested in any Shares in which one another is interested. Ms. Yang, Mr. Yang Yuzheng and Mr. Yang Hai, through North Point Trust Company L.L.C (as the trustee of the Annuity Trusts), Karis I LLC, Karis II LLC, Caerus BVI and Arceus BVI, will together be entitled to exercise or control the exercise of 30% or more of the voting rights at the general meeting of our Company. Accordingly, Ms. Yang, Mr. Yang Yuzheng, Mr. Yang Hai, Karis I LLC, Karis II LLC, Caerus BVI, Arceus BVI and North Point Trust Company L.L.C. are regarded as a group of Controlling Shareholders.
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INDEPENDENCE FROM OUR CONTROLLING SHAREHOLDERS
Our Directors believe that our Group is capable of carrying on its business independently from our Controlling Shareholders and/or their respective associates after the Listing, having taken into consideration the following factors:
Management independence
Our daily operation and management decisions are made by our Board and our senior management. Our Board consists of seven Directors, comprising three executive Directors, one non-executive Director and three independent non-executive Directors. Ms. Yang is our chief executive officer, executive Director and chairperson. Mr. Yang Hai is our vice president and executive Director. Mr. Yang Yuzheng is our non-executive Director. Notwithstanding that Ms. Yang, Mr. Yang Hai and Mr. Yang Yuzheng are our Controlling Shareholders, our Directors are of the view that our Company is capable of maintain management independence due to the following reasons:
(i) Each of our Directors is aware of his/her fiduciary duties as a Director which require, among other things, that he/she acts for the benefit and in the best interests of our Company and does not allow any conflict between his/her duties as a Director and his/her personal interest;
(ii) In the event that there is a potential conflict of interest arising out of any transaction to be entered into between our Group and our Directors or their respective close associates, the interested Director(s) shall abstain from voting at the relevant Board meetings of our Company in respect of such transactions and shall not be counted in the quorum. The provisions of the Articles also ensure that matters involving a conflict of interests which may arise from time to time will be managed in line with accepted corporate governance practice;
(iii) Our Company has also appointed three independent non-executive Directors, comprising over one-third of our Board, to provide a balance between the number of executive Directors, non-executive Director and independent non-executive Directors to ensure that there is a strong independent element on our Board and with a view to promoting the best interests of our Company and Shareholders taken as a whole. The independent non-executive Directors have diversified skills and experience in their respective fields of expertise and our Directors believe that our independent non-executive Directors are able to bring impartial and sound judgement to the decision-making process of our Board and protect the interest of our Company and Shareholders as a whole; and
(iv) we have adopted corporate governance measures to manage conflicts of interest, if any, between our Group and our Controlling Shareholders, which would support our independent management. For details, please refer to paragraphs headed ‘‘Corporate Governance Measures’’ in this section.
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In light of the above, our Directors are satisfied that they are able to perform their roles in our Company independently, and our Directors are of the view that our Company is capable of managing its business independently from our Controlling Shareholders after the Listing.
Operational independence
Our Group has established our own organizational structure comprising individual departments, each with specific areas of responsibilities. We do not rely on our Controlling Shareholders or their associates and have our independent access to our major suppliers. We have established our own customer bases and ourselves negotiated and concluded agreements with our customers, and do not rely on our Controlling Shareholders and their associates for access to customers. None of our Controlling Shareholders or their associates has been our major supplier or customer during the Track Record Period. We hold all relevant licenses and assets necessary to operate our business, and have sufficient capital and employees to operate our business independently.
Further, our Group does not have any transactions with any of our connected persons including our Controlling Shareholders, which will constitute continuing connected transactions of our Company under the Listing Rules upon the Listing.
Our Group is therefore able to operate independently from our Controlling Shareholders after the Listing.
Financial independence
Our Group has an independent financial system and relies principally on cash from operations to carry on its business and bank facilities during the Track Record Period. This is expected to continue after the Listing. During the Track Record Period, our Controlling Shareholders provided certain guarantees and pledges for the loans of our Group. Please refer to note 23 to the Accountants’ Report in Appendix I in this prospectus for details. All pledges or guarantees provided by our Controlling Shareholders for our Group’s borrowings will either be released or be replaced by corporate guarantees to be provided by our Group itself upon the occurrence of the earlier of the Listing or the repayment of the loans in accordance with the respective loan agreements. It is expected that guarantees provided by our Controlling Shareholders for the banking facilities of US$22.4 million as at October 31, 2020, being the latest practicable date for indebtedness, would be replaced by corporate guarantees to be provided by our Group itself upon the Listing. In the circumstances, we believe we are able to obtain financing from third parties or from our internally generated funds without reliance on our Controlling Shareholders.
Having considered the above factors, our Directors consider that there is no financial dependence on our Controlling Shareholders.
In light of the above, our Directors are of the view that our Group does not unduly rely on our Controlling Shareholders and/or their respective associates, and our Group is considered independent in all material aspects including finance, management and operations of our Controlling Shareholders.
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RULE 8.10 OF THE LISTING RULES
The Controlling Shareholders and our Directors do not have any interest in a business apart from our Group’s business which competes or is likely to compete, directly or indirectly, with our Group’s business, and would require disclosure pursuant to Rule 8.10 of the Listing Rules.
CORPORATE GOVERNANCE MEASURES
In order to manage any potential conflict of interests arising from the possible competing business between our Group and our Controlling Shareholders and to safeguard the interests of our independent Shareholders, we have adopted the following measures:
(i) our Board will ensure that any material conflict or potential conflict of interests involving our Controlling Shareholders will be reported to our independent non-executive Directors as soon as practicable. A Director shall absent himself/herself from participation in the board meeting (nor shall he/she be counted in the quorum) and voting on any resolutions of our Board approving any contract, arrangement or other proposal in which he/she or any of his/her close associates is materially interested;
(ii) each Director is aware of his/her fiduciary duties as a Director, which require, among other things, him/her to act for the benefit of our Company and our Shareholders as a whole and not to allow any conflict of interests between his/her duties as a Director and his/her personal interests;
(iii) we have appointed Innovax Capital Limited as our compliance adviser upon the Listing, which will provide advice and guidance to us with respect to compliance with the applicable laws and regulations, in particular the Listing Rules; and
(iv) pursuant to the Corporate Governance Code, our Directors, including our independent non-executive Directors, will be able to seek independent professional advice from external parties in appropriate circumstances at our Company’scosts.
Our Company expects to comply with the Corporate Governance Code which sets out the principles of good corporate governance in aspects such as directors’ responsibilities and their appointment, re-selection and removal, board composition, remuneration of directors and senior management, accountability and audit, and communication with shareholders. Our Company will state in our interim and annual reports whether we have complied with such code provisions, and will provide details of, and reasons for, any deviation from it in the corporate governance reports attached to our annual reports.
Our Directors consider that the above corporate governance measures are adequate and effective to manage any potential conflict of interests between our Group and our Controlling Shareholders and to protect the interests of our Shareholders.
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BOARD OF DIRECTORS
Our Board currently consists of seven Directors comprising three executive Directors, one non-executive Director and three independent non-executive Directors. The functions and duties of our Board include, but are not limited to, convening the general meetings, reporting on the performance of our Board’s work at the general meetings, implementing the resolutions passed at the general meetings, determining business and investment plans, formulating our annual financial budget and final accounts, formulating our proposals for profit distributions, and formulating proposals for increase or reduction of our capital as well as exercising other powers, functions and duties as conformed by our Articles.
The following table sets forth the information regarding the members of our Board:
Date of Date of Relationship with Joining Appointment other Directors and Name Age Position Roles and Responsibilities Our Group as Director senior management
Yang Lin 47 Chairperson, chief Responsible for overseeing overall October January 9, Daughter of Mr. Yang (楊琳)..... executive officer and strategic planning and 2006 2019 Yuzheng and sister executive Director overseeing general management of Mr. Yang Hai and daily operation of our Group
Yang Hai 45 Vice president and Responsible for overseeing sales, December May 27, Son of Mr. Yang (楊海)..... executive Director marketing and online operation 2011 2020 Yuzheng and brother of our Group of Ms. Yang
Chen Zhaojun 43 Chief financial officer, Responsible for overseeing July 2018 May 27, None (陳兆軍)... vice president and financial management, internal 2020 executive Director control and compliance matters of our Group
Yang Yuzheng 77 Non-executive Director Responsible for providing advice July 2015 May 27, Father of Ms. Yang and (楊毓正)... on the management of our 2020 Mr. Yang Hai Group
Fong Wo, Felix 70 Independent non- Responsible for supervising the December December 1, None (方和)..... executive Director management of our Group and 2020 2020 providing independent judgement to our Board
Gu Jiong 48 Independent non- Responsible for supervising the December December 1, None (顧炯)..... executive Director management of our Group and 2020 2020 providing independent judgement to our Board
Tan Wen 46 Independent non- Responsible for supervising the December December 1, None (檀文)..... executive Director management of our Group and 2020 2020 providing independent judgement to our Board
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DIRECTORS
Executive Directors
Ms. Yang Lin (楊琳), aged 47, is the founder of our Group and an executive Director. Ms. Yang is also the chairperson of our Board and our chief executive officer responsible for overall strategic planning and overseeing general management and daily operation of our Group. Ms. Yang holds directorships in each of the subsidiaries of our Group except Ecomine HK and Etekcity Macau. She is also the chairperson of the nomination committee and a member of the remuneration committee of our Company.
Ms. Yang has more than 15 years of experience in the small home appliance and smart home device industry. Prior to founding our Group in 2006, from January 2005 to March 2007, Ms. Yang worked at Community CPA & Associates Inc. with last position served as an office manager, where she was principally responsible for preparing financial statements and management proprietary report, tax filling and business consultation for business and individual clients. In anticipation of the business potential of the small home appliances and electronic gadgets market, Ms. Yang first commenced the trading business of small home appliances and electronic gadgets through establishing L&H Y US in the United States in October 2006.
Ms. Yang obtained a master’s degree in law from East China University of Political Science and Law (華東政法大學) in the PRC in December 2004.
Ms. Yang was a director of Shanghai Tuogu Information Technology Co., Ltd (上海拓古信息 技術有限公司), a company established in the PRC which had principally engaged in provision of information technology services before its cessation of business. As confirmed by Ms. Yang, during her tenure, as the said company had ceased business and had not conducted the annual inspection, its business license was revoked on December 19, 2003. Ms. Yang confirmed that (i) the said company was solvent immediately prior to the revocation of business license; (ii) there was no wrongful act on her part leading to the revocation of business license of the said company; (iii) she is not aware of any actual or potential claim which has been or could potentially be made against her as a result of the revocation of business license of the said company; and (iv) no misconduct or misfeasance had been involved on her part in the revocation of business license of the said company. On August 14, 2020, the said company was deregistered.
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Ms. Yang was previously a director of the following companies at the time of their respective dissolution:
Place of Nature of Date of Dissolution Name of Company Incorporation Business Business License Status Reasons of Dissolution
Etekcity Company Limited . United Kingdom Investment June 5, 2018 Striking off Cessation of business holding
Etekcity Corporation(1) . . . . United States Investment April 6, 2016 Dissolved by members’ No business operation holding voluntary winding up
Note:
(1) Etekcity Corporation and Etekcity US are two separate entities with the same company name. Etekcity Corporation was incorporated under the laws of the State of California, while Etekcity US was incorporated under the laws of the State of Iowa.
Ms. Yang confirmed that (i) to the best of her knowledge, information and belief after making reasonable enquiries, each of the above companies was solvent immediately prior to its dissolution; (ii) there is no wrongful act on her part leading to the dissolution of the above companies; (iii) she is not aware of any actual or potential claim that has been or will be made against her as a result of the dissolution of the above companies; and (iv) no misconduct or misfeasance had been involved on her part in the dissolution of the above companies.
Ms. Yang is the sister of Mr. Yang Hai, our executive Director and the daughter of Mr. Yang Yuzheng, our non-executive Director.
Mr. Yang Hai (楊海), aged 45, is an executive Director. Mr. Yang Hai is also our vice president principally responsible for overseeing sales, marketing and online operation of our Group. He is also a member of the remuneration committee and the nomination committee of our Company.
Mr. Yang has more than 17 years of experience in the communication technology industry. Prior to joining our Group in 2011 from June 2003 to September 2006, Mr. Yang worked as a software engineer at Asiainfo Technologies (China) Inc. (亞信科技有限公司),wherehewas principally responsible for billing system development. From September 2006 to June 2011, he worked at Ericsson (China) Communications Co., Ltd as a software engineer responsible for gateway server development. In December 2011, Mr. Yang Hai joined Etekcity US and has since served as our vice president.
Mr. Yang obtained a bachelor’s degree in thermal energy and power engineering from Southeast University (東南大學) in the PRC in June 1996. He further obtained a master’sdegreein engineering from Shanghai Jiaotong University (上海交通大學) in the PRC in March 1999.
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Mr. Yang Hai was a supervisor of Shanghai Tuogu Information Technology Co., Ltd (上海拓 古信息技術有限公司), a company established in the PRC which had principally engaged in provision of information technology services before its cessation of business. As confirmed by Mr. Yang Hai, during his tenure, as the said company had ceased business and had not conducted the annual inspection, its business license was revoked on December 19, 2003. Mr. Yang Hai confirmed that (i) the said company was solvent immediately prior to the revocation of business license; (ii) there was no wrongful act on his part leading to the revocation of business license of the said company; (iii) he is not aware of any actual or potential claim which has been or could potentially be made against him as a result of the revocation of business license of the said company; and (iv) no misconduct or misfeasance had been involved on his part in the revocation of business license of the said company. On August 14, 2020, the said company was deregistered.
Mr. Yang Hai was previously a director of the following company at the time of its dissolution:
Date of Place of Nature of Dissolution/ Name of Company Incorporation Business Revocation Status Reasons of Dissolution
Chongqing Gongzhou PRC Provision of August 7, 2017 Deregistration Cessation of business Technology Co Ltd information (重慶共舟科技有限公司)...... technology
Mr. Yang Hai confirmed that (i) to the best of his knowledge, information and belief after making reasonable enquiries, the above company was solvent immediately prior to its dissolution; (ii) there is no wrongful act on his part leading to the dissolutions of the above company; (iii) he is not aware of any actual or potential claim that has been or will be made against him as a result of the dissolutions of the above company; and (iv) no misconduct or misfeasance had been involved on his part in the dissolution of the above company.
Mr. Yang Hai is the brother of Ms. Yang Lin, our executive Director and the son of Mr. Yang Yuzheng, our non-executive Director.
Mr. Chen Zhaojun (陳兆軍), aged 43, is an executive Director. Mr. Chen is also our chief finance officer and vice president principally responsible for overseeing financial management, internal control and compliance matters of our Group.
Mr. Chen has more than 17 years of experience in the accounting and business management industry. Prior to joining our Group in 2018, from September 2003 to June 2004 Mr. Chen worked as a senior project manager of investment department in ZTE Corporation (stock code: 763), a multinational company principally engaged in the manufacturing of telecom equipment whose shares are listed on the Stock Exchange. In July 2004, Mr. Chen joined MOBI Development Co., Ltd. (‘‘MOBI’’) (stock code: 947) as a finance manager, a company principally engaged in the manufacturing and sales of wireless communication antennas and base station radio frequency sub- systems whose shares are listed on the Stock Exchange, where he was subsequently promoted to the chief finance officer in August 2009 and was appointed as an executive director in July 2016. On
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July 13, 2018, Mr. Chen was re-designated from an executive director to a non-executive director and resigned as the chief finance officer on the same date. Mr. Chen then joined Shenzhen Chenbei in July 2018, and has served as our chief finance officer and vice president since then. In March 2019, Mr. Chen resigned as the non-executive director of MOBI.
Mr. Chen obtained a bachelor’sdegreeandamaster’s degree both in economics from Xiamen University (廈門大學) in the PRC in July 1999 and July 2002, respectively. He also obtained a master’s degree in business administration from the Hong Kong University of Science and Technology in November 2014. Mr. Chen passed the exam of certified public accountants in the PRC in October 2006 and has been a member of the Association of Chartered Certified Accountants since February 2015.
Non-executive Director
Mr. Yang Yuzheng (楊毓正), aged 77, is a non-executive Director, and is principally responsible for providing advice on the management of our Group.
Mr. Yang Yuzheng has been retired since April 1999. Prior to his retirement, he had worked as a public servant in a number of government authorities, including United Front Revolutionary Committee of Industry and Communication of Maoming City, Guangdong Province (廣東省茂名市 工交戰線革委), Organization Department of County Committee of Tongzi County, Guizhou Province (貴州省桐梓縣委組織部), Commission for Discipline Inspection of Tongzi County, Guizhou Province (貴州省桐梓縣紀律檢查委員會), United Front Work Department of the County Committee of Tongzi County, Guizhou Province (貴州省桐梓縣委統戰部), Commission of Ethnic and Religious Affairs of Tongzi County, Guizhou Province (貴州省桐梓縣民族宗教事務委員會), Bureau of Land and Resources of Tongzi County, Guizhou Province (貴州省桐梓縣國土資源局) and Bureau of Natural Resources of Tongzi County, Guizhou Province (貴州省桐梓縣自然資源局) for around 30 years.
Mr. Yang Yuzheng graduated from the South-Central Minzu University (中南民族大學) (formerly known as South-Central Minzu College (中南民族學院)) majoring in Chinese language in the PRC in July 1967.
Mr. Yang Yuzheng is the father of Ms. Yang Lin and Mr. Yang Hai, both are our executive Directors.
Independent Non-executive Directors
Mr. Fong Wo, Felix (方和), BBS, JP, aged 70, was appointed as our independent non- executive Director on December 1, 2020. Mr. Fong is responsible for supervising the management of our Group and providing independent judgement to our Board. He is also the chairman of the remuneration committee and a member of the audit committee and the nomination committee of our Company.
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Mr. Fong has practiced law for more than 32 years. Mr. Fong was admitted as a barrister and solicitor in Ontario, Canada in 1980, a solicitor in England and Wales in 1986, and in Hong Kong in 1987. He is a member of the Law Societies of Hong Kong, Upper Canada and England. Since August 1988, Mr. Fong has been with King & Wood Mallesons (formerly known as Robert Lee & Fong, Felix Fong & Hon, Fong & Ng, Arculli Fong & Ng and King & Wood) specializing in the areas of corporate and finance. From May 2000 to December 2008, Mr. Fong also served as a non- executive director of Cinda International Holdings Limited (stock code: 111), a financial institution principally engaged in corporate finance advisory, securities broking and asset management whose shares are listed on the Stock Exchange. From May 2010 to May 2016, Mr. Fong served as an independent non-executive director of China Oilfield Services Limited (中海油田服務有限公司), a company dually listed on the Stock Exchange (stock code: 2883) and Shanghai Stock Exchange (stock code: 601808) which is principally engaged in offshore oil and gas exploration, development and production. From April 2011 to July 2018, he served as an independent non-executive director of China Investment Development Limited (中國投資開發有限公司) (formerly known as Temujin International Investments Limited) (stock code: 204), a company principally engaged in investment in listed and unlisted securities whose shares are listed on the Stock Exchange. From October 2010 to March 2020, he served as an independent non-executive director of Evergreen International Holdings Limited (長興國際(集團)控股有限公司) (stock code: 238), a company principally engaged in the manufacturing and sales of menswear whose shares are listed on the Stock Exchange. From June 2012 to May 29, 2020, he served as an independent non-executive director of Sheen Tai Holdings Group Company Limited (順泰控股集團有限公司) (stock code: 1335), a company principally engaged in the manufacturing and sales of cigarette packaging materials whose shares are listed on the Stock Exchange. From May 2017 to June 9, 2020, he served as an independent non-executive director of Wuxi Biologics (Cayman) Inc. (藥明生物技術有限公司) (stock code: 2269), a company principally engaged in the provision of biologics services whose shares are listed on the Stock Exchange.
As of the Latest Practicable Date, Mr. Fong is an independent non-executive director of Bank of Shanghai (Hong Kong) Limited (上海銀行(香港)有限公司)(‘‘Bank of Shanghai’’), a company incorporated in Hong Kong with limited liability, and of the following companies whose shares are listed on the Stock Exchange:
Stock Appointment Date Company Code
December 2019 Television Broadcasts Limited (電視廣播有限公司) 511 June 2015 . . . Xinming China Holdings Limited (新明中國控股有限公司) 2699 January 2007 . Guangdong Land Holdings Limited (粵海置地控股有限公司) 124 (formerly known as Kingway Brewery Holdings Limited) September 2006 Greenland Hong Kong Holdings Limited (綠地香港控股有限公司) 337 (formerly known as SPG Land (Holdings) Limited)
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Mr. Fong obtained a bachelor’s degree in engineering from McMaster University in Canada in June 1974 and a Juris Doctor degree from Osgoode Hall Law School of York University in Canada in June 1978. Mr. Fong is appointed by the Ministry of Justice of the PRC (中華人民共和國司法 部) as one of the China-appointed Attesting Officers in Hong Kong.
Mr. Fong was previously a director of the following companies at the time of their respective dissolution:
Place of Nature of Reasons of Name of Company Incorporation Business Date of Dissolution Means of Dissolution Dissolution
Superview Properties Limited . . . . Hong Kong Property holding January 24, 2003 Dissolved by Striking Off Cessation of business Winful Asia Limited Hong Kong Investment February 17, 2006 Dissolved by Striking Off Cessation of business (盈豐亞洲有限公司)...... Marley Properties Limited ...... Hong Kong Property holding October 29, 2010 Dissolved by deregistration Cessation of business Baoleide Investment Consultancy PRC Investment and December 26, 2013 Deregistration Cessation of business (Beijing) Co., Ltd consultancy (寶萊德投資顧問(北京)有限公司) Artbox Productions Limited . . . . . Hong Kong Investment October 3, 2014 Dissolved by deregistration Cessation of business ACE Global Investments Limited Hong Kong Investment October 24, 2014 Dissolved by Striking Off Cessation of business (匯信金融投資有限公司)..... ACE Million Limited Hong Kong Investment June 19, 2015 Dissolved by deregistration Cessation of business (寶年萊策略有限公司)...... China Network Intelligence Hong Kong Investment December 4, 2015 Dissolved by deregistration Cessation of business (CNI) Limited (普萊德策略管理有限公司). . . . Richard Liu Foundation Limited. . . Hong Kong Charity June 10, 2016 Dissolved by deregistration Cessation of business Tota Limited Hong Kong Online training November 4, 2016 Dissolved by deregistration Cessation of business (在線培訓有限公司)......
Mr. Fong confirmed that (i) to the best of his knowledge, information and belief after making reasonable enquiries, each of the above companies was solvent immediately prior to its dissolution; (ii) there is no wrongful act on his part leading to the dissolutions of the above companies; (iii) he is not aware of any actual or potential claim that has been or will be made against his as a result of the dissolutions of the above companies; and (iv) no misconduct or misfeasance had been involved on his part in the dissolutions of the above companies.
Mr. Gu Jiong (顧炯), aged 48, was appointed as an independent non-executive Director on December 1, 2020. Mr. Gu is responsible for supervising the management of our Group and providing independent judgement to our Board. He is also the chairman of the audit committee and a member of the remuneration committee and the nomination committee of our Company.
From July 1995 to April 2004, Mr. Gu worked at Ernst & Young’s Shanghai office and was the senior manager of audit department when he left the firm. From April 2004 to December 2009, Mr. Gu joined UTStarcom Telecom Co., Ltd. and its holding company UTStarcom Holdings Corp. (formerly known as UTStarcom. Inc.) (ticker symbol: UTSI), whose shares are listed on NASDAQ and is a global telecom infrastructure provider specialized in the provision of packet optical transport and broadband access products to network operators, where he was responsible for accounting and financial matters, and was the finance controller (財務總監) when he left the
– 217 – DIRECTORS AND SENIOR MANAGEMENT company in December 2009. From January 2010 to August 2013, Mr. Gu served as the chief financial officer in BesTV New Media Co., Ltd. (stock code: 600637) (currently known as Oriental Pearly Media Co., Ltd (東方明珠新媒體股份有限公司)), whose shares are listed on Shanghai Stock Exchange and principally engaged in the provision of technical services, content services and marketing services for television terminals, computer terminals and mobile terminals through a media source platforms where he was responsible for the financial matters of this company. From January 2016 to October 2016 and from October 2016 to January 2019, Mr. Gu was a non- executive director and an alternative director to Hui To Thomas of Shaw Brothers Holdings Limited (stock code: 953), a company listed on the Stock Exchange, respectively. From June 2019 to November 2020, Mr. Gu was an independent non-executive director of Tu Yi Holding Company Limited (stock code: 1701), a company listed on the Stock Exchange. From August 2013 to October 2015, Mr. Gu served as the chief financial officer of CMC Capital Partners (華人文化產業 投資基金), an investment fund specializing in media and entertainment investments inside and outside the PRC. Since October 2015, Mr. Gu has been the director and chief financial officer of CMC Inc. (華人文化有限責任公司)(‘‘CMC’’) (formerly known as CMC Holdings Limited), an investment platform focused on the media and entertainment investments.
As of the Latest Practicable Date, Mr. Gu is the independent non-executive director of Amlogic (Shanghai) Co., Ltd (晶晨半導體(上海)股份有限公司) (stock code: 688099), a company which involves in the bulk purchase distribution of electronic parts and electronic communications equipment whose shares are listed on the Shanghai Stock Exchange, and of the following companies whose shares are listed on the Stock Exchange:
Stock Appointment Date Company Code
April 2019 . . . Mulsanne Group Holding Limited 1817 September 2018 DaFa Properties Group Limited (大發地產集團有限公司) 6111 April 2018 . . . Ascletis Pharma Inc. (歌禮製藥有限公司) 1672 June 2015 . . . Xinming China Holdings Limited (新明中國控股有限公司) 2699 June 2015 . . . Chen Xing Development Holdings Ltd (辰興發展控股有限公司) 2286
Despite the fact that Mr. Gu has been appointed as a director and chief financial officer of CMC and an independent non-executive director of six listed companies, Mr. Gu has confirmed the followings:
(i) his involvement as a director and chief financial officer of CMC principally requires him to monitor overall accounting management of and provide strategic financial advice to CMC and its PRC subsidiaries (the ‘‘CMC Group’’) when needed, rather than to involve in the daily operations which are maintained and supported by a team of other directors and full-time accounting, operational and administrative staff of the CMC Group. He further confirmed that generally he will spend approximately 70% to 80% of his total working time per year for handling matters of CMC Group;
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(ii) his involvement as an independent non-executive director of the abovementioned listed companies principally requires him to provide independent judgement to the board of directors, and none of his current commitment as an independent non-executive director would require his full time involvement and he does not participate in the day-to-day operations of the abovementioned listed companies;
(iii) he did not encounter any difficulties in managing his time to multiple companies and he is confident that he will be able to discharge his duties in our Company with his experience in being responsible for multiple roles in the past;
(iv) none of the CMC Group and the abovementioned listed companies that he has directorship in has complaint about his performance or has any issue with the devotion of his time to these companies since the date he was appointed as a director, chief financial officer or independent non-executive director of these companies; and
(v) he has maintained a consistently high attendance in board meetings, meetings of the board committees and general meetings of the abovementioned listed companies during the respective relevant financial periods reported in the latest available annual reports. He has also attended all the board meetings of CMC in the most recent financial year.
Based on the foregoing, Mr. Gu is of the view that he can allocate sufficient time to serve as our independent non-executive Director. Nevertheless, our Board will continue to closely monitor the time allocation of Mr. Gu and the other independent non-executive Directors such as the attendance of our Board and committee meetings and participation in discussions of important matters of our Company to make sure that they will have sufficient time to focus on the matters of our Group. Where necessary, our Board will (i) individually discuss with the independent non- executive Directors on the possibility to reduce the number of external commitments and job-duties; and (ii) review the composition of our Board by way of replacement of independent non-executive Directors to ensure that the independent non-executive Directors are able to devote sufficient time to discharge their duties. Pursuant to the Corporate Governance Code, our Board will also (i) regularly review the contribution required from our Directors to perform their respective responsibilities to us, and whether each Director is devoting sufficient time in performing their responsibilities; and (ii) at the time when it proposes a resolution to elect an individual as an independent non-executive Director at the general meeting, set out the reasons in the circular to our Shareholders and/or explanatory statement accompanying the notice of the relevant general meeting why our Board believes such individual should be elected, the reasons why such individual is considered to be independent by our Board and, if required under the Corporate Governance Code, explain why such individual who is considered to be overboarded would still be able to devote sufficient time to our Board.
Mr. Gu obtained a bachelor’s degree in financial management from Fudan University (復旦大 學) in the PRC in July 1995. He is currently a non-practicing member of The Chinese Institute of Certified Public Accountants (中國註冊會計師協會).
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Mr. Gu was previously a director of the following companies at the time of their respective dissolution:
Place of Nature of Reasons of Name of Company Incorporation Business Date of Dissolution Means of Dissolution Dissolution
Shanghai Huahan Tiyu Cultural PRC Organization of September 6, 2019 Deregistration Cessation of business Development Company Limited Sports related (上海華翰體育文化發展 project 有限公司)......
Shanghai Huacheng Tiyu Culture PRC Organization of January 30, 2019 Deregistration Cessation of business Communication Company Sports related Limited (上海華騁體育文化 project 傳播有限公司) ......
Mr. Gu confirmed that (i) to the best of his knowledge, information and belief after making reasonable enquiries, each of the above companies was solvent immediately prior to its dissolution; (ii) there is no wrongful act on his part leading to the dissolutions of the above companies; (iii) he is not aware of any actual or potential claim that has been or will be made against his as a result of the dissolutions of the above companies; and (iv) no misconduct or misfeasance had been involved on his part in the dissolutions of the above companies.
Mr. Tan Wen (檀文), aged 46, was appointed as an independent non-executive Director on December 1, 2020. Mr. Tan is responsible for supervising the management of our Group and providing independent judgement to our Board. He is also a member of the audit committee, the remuneration committee and the nomination committee of our Company.
Mr. Tan has over 20 years of experience in the field of investment banking and domestic and foreign venture capital investment focusing on healthcare and retail and consumer sectors. From February 2000 to August 2003, Mr. Tan worked as a business development manager at Singapore Computer Systems Limited, an IT system service provider, where he was responsible for market and industry research, and business development, investment, merger and acquisition in e-commerce area. From August 2003 to May 2005, Mr. Tan worked as a technology investment manager at Singapore Technologies Dynamics Pte Ltd (‘‘STD’’), an engineering systems service provider, where he was responsible for market and industry research, and business development, investment, merger and acquisition in emerging technology area. STD was a subsidiary of Singapore Technologies Engineering Ltd (stock code: S63), a company principally engaged in offering services and products specializing in the aerospace, electronics, land systems and marine sectors whose shares are listed on the Singapore Stock Exchange. From May 2005 to July 2007, Mr. Tan served as an associate director of China Euro Securities Co., Ltd (華歐國際證券有限責任公司). From June 2007 to October 2013, he served as a vice president at Capital Today Growth (HK) Limited principally responsible for originating, evaluating investment opportunities and monitoring the existing portfolio companies. Since October 2013, Mr. Tan served as the managing director of the Shanghai office of Industrial Innovation Capital Management Co., Ltd (興證創新資本管理有限 公司), a subsidiary of Industrial Securities Co., Ltd (興業證券股份有限公司) (stock code: 01377) (‘‘Industrial Securities’’). Industrial Securities is a company principally engaged in the provision
– 220 – DIRECTORS AND SENIOR MANAGEMENT of financial services and whose shares are listed on the Shanghai Stock Exchange. Since December 2015, Mr. Tan served as the director of Elite Color Environmental Resources Science & Technology Co., Ltd (優彩環保資源科技股份有限公司) (stock code: 002998) (‘‘Elite Color’’), a company principally engaged in the manufacturing, sales and research and development of polyester fiber whose shares are listed on the Shenzhen Stock Exchange. Since May 18, 2020, Mr. Tan served as the director of Fujian Snowman Co., Ltd (福建雪人股份有限公司) (stock code: 002639), a company principally engaged in the manufacturing of ice machine whose shares are listed on the Shenzhen Stock Exchange.
Mr. Tan obtained a bachelor’s degree in electronic materials and components from Tianjin University (天津大學) in the PRC in July 1995. He then obtained a master’s degree in business administration from the National University of Singapore in Singapore in March 2000. He subsequently obtained a doctor’s degree in global economics from Fudan university (復旦大學)in the PRC in January 2018. Mr. Tan was qualified as a Financial Risk Manager as certified by the Global Association of Risk Professionals in April 2006 and has been a non-practicing member of the Chinese Institute of Certified Public Accountants (中國註冊會計師協會) since June 2014. He was also certified as a chartered financial analyst of the Association for Investment Management and Research (currently known as CFA Institute) in September 2003.
Mr. Tan was previously a director or principal of the following companies at the time of their respective dissolution:
Place of Nature of Date of Means of Reasons for Name of Company Incorporation Business Dissolution Dissolution Dissolution
Birch Risen International Limited Hong Kong Consulting July 23, 2010 Deregistration Cessation of business (樺升國際有限公司)...... Shanghai Xingzheng Aoyang Equity PRC Investment July 12, 2017 Deregistration Cessation of business Investment Management Co., Ltd (上海興證澳洋股權投資管理有限公司)...... Wuhan Xingwu Investment Management PRC Investment June 14, 2018 Deregistration Cessation of business Partnership LLP (武漢興武投資管理合夥企業(有限合夥))...... Fujian Xingzheng Xinghang Equity PRC Investment August 27, 2018 Deregistration Cessation of business Investment Management Co., Ltd (福建興證興行股權投資管理有限公司)...... Xiamen Xingzheng Preferred Equity PRC Investment September 20, Deregistration Cessation of business Investment Fund Management Co., Ltd 2018 (廈門興證優選股權投資基金管理有限公司). . . . Capital Tody (China) Co., Ltd PRC Investment October 5, 2018 Deregistration Cessation of business (今日資本(中國)有限公司)...... Zhangzhou Xingzheng Pianzaihuang Equity PRC Investment December 3, 2018 Deregistration Cessation of business Investment Management Co., Ltd (漳州興證片仔癀股權投資管理有限公司)..... Fujian Xingzheng Capital Management Co., Ltd PRC Investment December 24, 2018 Deregistration Cessation of business (福建興證創富股權投資管理有限公司)...... Pingtan Xinghang Longqing Equity PRC Investment June 13, 2019 Deregistration Cessation of business Investment Partnership LLP (平潭興杭隆慶股權投資合夥企業(有限合夥)) . . .
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Mr. Tan confirmed that (i) to the best of his knowledge, information and belief after making reasonable enquiries, each of the above companies was solvent immediately prior to its dissolution; (ii) there is no wrongful act on his part leading to the dissolutions of the above companies; (iii) he is not aware of any actual or potential claim that has been or will be made against his as a result of the dissolutions of the above companies; and (iv) no misconduct or misfeasance had been involved on his part in the dissolutions of the above companies.
Disclosure Required under Rule 13.51(2) of the Listing Rules
Save as disclosed above, none of our Directors:
(i) held any other positions in our Company or other members of our Group as of the Latest Practicable Date;
(ii) had any other relationship with any Directors, senior management or substantial shareholders or Controlling Shareholders of our Company as of the Latest Practicable Date; and
(iii) held any other directorships in listed public companies in the three years prior to the Latest Practicable Date and other major appointments and professional qualifications.
Save as disclosed in the section headed ‘‘Substantial Shareholders’’ in this prospectus and ‘‘Statutory and General Information—C. Further Information about our Directors, Management and Substantial Shareholders’’ in Appendix IV to this prospectus, none of our Directors has any interest in the Shares within the meaning of Part XV of the SFO or is a director or an employee of a company which has an interest or short position in the Shares and underlying Shares of our Company. Each of our Directors has confirmed that none of them is engaged in, or interested in, any business (other than our Group) which, directly or indirectly, competes or may compete with our business.
Save as disclosed above, to the best of the knowledge, information and belief of our Directors after having made all reasonable enquiries, there was no other matter with respect to the appointment of our Directors that needs to be brought to the attention of our Shareholders and there was no information relating to our Directors that is required to be disclosed pursuant to Rule 13.51(2) of the Listing Rules as of the Latest Practicable Date.
SENIOR MANAGEMENT
Ms. Yang Lin (楊琳). Please refer to ‘‘Directors—Executive Directors’’ above in this section for details of biography of Ms. Yang.
Mr. Yang Hai (楊海). Please refer to ‘‘Directors—Executive Directors’’ above in this section for details of biography of Mr. Yang Hai.
Mr. Chen Zhaojun (陳兆軍). Please refer to ‘‘Directors—Executive Directors’’ above in this section for details of biography of Mr. Chen Zhaojun.
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COMPANY SECRETARY
Ms. Zhang Xiao (張瀟), aged 33, was appointed as our company secretary on May 27, 2020.
Ms. Zhang is a manager of SWCS Corporate Services Group (Hong Kong) Limited, a professional services provider specializing in corporate services, and has over six years of experience in the corporate secretarial field. Ms. Zhang has been admitted as an associate member of both The Hong Kong Institute of Chartered Secretaries and The Chartered Governance Institute (formerly known as The Institute of Chartered Secretaries and Administrators) in the United Kingdom in 2019.
Ms. Zhang obtained a bachelor’s degree in Computer Science from The Chinese University of Hong Kong in 2010 and a master’s degree in corporate governance from The Open University of Hong Kong in 2018.
BOARD COMMITTEES
Audit Committee
An audit committee was established by our Company pursuant to a resolution of our Board on December 1, 2020 with written terms of reference in compliance with the Corporate Governance Code. The primary duties of the audit committee are to make recommendations to our Board on the appointment and dismissal of the external auditor, monitor and review the financial statements and information and oversee the financial reporting system, risk management and internal control systems of our Company. The members of the audit committee are Mr. Gu Jiong, Mr. Fong Wo, Felix and Mr. Tan Wen, all of whom are independent non-executive Directors. Mr. Gu Jiong is the chairman of the audit committee.
Remuneration Committee
A remuneration committee was established by our Company pursuant to a resolution of our Board on December 1, 2020 with written terms of reference in compliance with the Corporate Governance Code. The primary duties of the remuneration committee are to make recommendation to our Board on the overall remuneration policy and structure for all Directors and senior management of our Group, review remuneration and ensure that none of our Directors determine their own remuneration. The members of the remuneration committee are Mr. Fong Wo, Felix, Mr. Gu Jiong, Mr. Tan Wen, Ms. Yang and Mr. Yang Hai. Mr. Fong Wo, Felix is the chairman of the remuneration committee.
Nomination Committee
A nomination committee was established by our Company pursuant to a resolution of the Board on December 1, 2020 with written terms of reference in compliance with the Corporate Governance Code. The primary duties of the nomination committee are to review the structure, size, composition and diversity of our Board at least annually and make recommendation to our Board
– 223 – DIRECTORS AND SENIOR MANAGEMENT regarding candidates to fill vacancies on our Board and/or in senior management. The members of the nomination committee are Ms. Yang, Mr. Gu Jiong, Mr. Fong Wo, Felix, Mr. Tan Wen and Mr. Yang Hai. Ms. Yang is the chairperson of the nomination committee.
COMPENSATION OF THE DIRECTORS AND SENIOR MANAGEMENT
Our Directors and senior management receive compensation in the form of salaries bonuses, allowances, benefits in kind and Pension Scheme contributions.
The aggregate remuneration paid to our Directors for the year ended December 31, 2017, 2018 and 2019 and six months ended June 30, 2020 were approximately US$431,000, US$640,000, US$857,000 and US$449,000, respectively.
The aggregate remuneration paid to the five highest paid individuals of our Group, excluding our Directors, for the year ended December 31, 2017, 2018 and 2019 and six months ended June 30, 2020 were approximately US$358,000, US$306,000, US$284,000 and US$247,000, respectively.
No remuneration was paid by our Group to our Directors or the five highest paid individuals as an inducement to join or upon joining our Group or as a compensation for loss of office during the Track Record Period.
Under the arrangement currently in force, the aggregate amount of remuneration payable to our Directors for the year ending December 31, 2020 is estimated to be approximately US$1.15 million (excluding any discretionary bonus).
THE PRE-IPO SHARE AWARD SCHEME AND THE SHARE OPTION SCHEME
We have adopted the Pre-IPO Share Award Scheme and conditionally adopted the Share Option Scheme. The principal terms of Pre-IPO Share Award Scheme and the Share Option Scheme are summarized in the section headed ‘‘Statutory and General Information—D. Other Information— 1. Pre-IPO Share Award Scheme’’,and‘‘—2. Share Option Scheme’’ in Appendix IV to this prospectus, respectively.
COMPLIANCE ADVISER
Pursuant to Rule 3A.19 of the Listing Rules, our Company has appointed Innovax Capital Limited as our compliance adviser. The compliance adviser will advise us on the following matters pursuant to Rule 3A.23 of the Listing Rules:
(i) the publication of any regulatory announcement, circular or financial report;
(ii) where a transaction, which might be a notifiable or connected transaction, is contemplated including share issues and share repurchases;
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(iii) where our Company proposes to use the proceeds of the Global Offering in a manner different from that detailed in this prospectus or where our business activities, developments or results deviate from any forecast, estimate or other information of this prospectus; and
(iv) where the Stock Exchange makes an inquiry of our Company regarding unusual movements in the price or trading volume of our Shares, the possible development of a false market in its securities, or any other matters.
The term of this appointment will commence on the Listing Date and is expected to end on the date on which we comply with Rule 13.45 of the Listing Rules on the distribution of our annual report in respect of the financial results of the first full financial year commencing after the Listing Date.
CORPORATE GOVERNANCE CODE
Board Diversity
We have adopted a board diversity policy which sets out the approach to achieve and maintain an appropriate balance of skills, experience and diversity perspectives of our Board that are relevant to our business growth. Pursuant to our board diversity policy, selection of Board candidates will be based on a range of diversity perspectives, including but not limited to gender, age, cultural and educational background, professional qualifications, skills, knowledge, and industry experience. The ultimate decision will be based on merit and contribution that the selected candidates will bring to our Board.
Our Board comprises seven members, including three executive Directors, one non-executive Director and three independent non-executive Directors. Our Directors have a balanced mix of knowledge and experiences, including business management, strategic development, direct selling and social commerce, public administration and management, finance, auditing and accounting experiences. Our Board members also obtained degrees in various majors including law, thermal energy and power engineering, economics, business administration, Chinese language and literature, engineering, financial management, and electronic materials and components. Furthermore, the ages of our Directors range from 43 years old to 77 years old. We have also taken, and will continue to take steps to promote gender diversity at all levels of our Company, including but without limitation at the Board and senior management levels. While we recognize that gender diversity at the Board level can be improved given its current composition of six-male Directors, we will continue to apply the principle of appointments based on merits with reference to our board diversity policy as a whole.
We are also committed to adopting similar approach to promote diversity of the management (including but not limited to the senior management) of the Company to enhance the effectiveness of our corporate governance.
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Our nomination committee is responsible for ensuring the diversity of our Board. After the Listing, our nomination committee will review the board diversity policy (including gender balance) from time to time to ensure its continued effectiveness and we will disclose the implementation of the board diversity policy in our corporate governance report on an annual basis.
Chairperson and chief executive officer
Pursuant to code provision A.2.1 of the Corporate Governance Code, companies listed on the Stock Exchange are expected to comply with, but may choose to deviate from the requirement that the responsibilities between the chairperson and the chief executive officer should be segregated and should not be performed by the same individual. We do not have a separate chairperson and chief executive officer and Ms. Yang currently performs these two roles concurrently. Our Board believes that vesting the roles of both the chairperson and chief executive officer in the same person has the benefit of ensuring consistent leadership within our Group for more effective and efficient overall strategic planning for our Group. Our Board considers that the balance of power and authority within our Group will not be impaired by the present arrangement and the current structure will enable our Company to make and implement decisions more promptly and effectively. Our Board will from time to time review and consider splitting the roles of chairperson of our Board and the chief executive officer of our Company to ensure appropriate and timely arrangements are in place to meet changing circumstances.
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SUBSTANTIAL SHAREHOLDERS
So far as our Directors are aware, immediately following completion of the Global Offering and the Capitalization Issue (without taking into account any Shares which may be issued under the Over-allotment Option or the exercise of any options may be granted under the Share Option Scheme), the following persons will have or be deemed or taken to have beneficial interests and/or short position in the Shares or the underlying Shares which would be required to be disclosed to our Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or be directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of our Group:
Approximate Approximate percentage of interest Number of percentage of Number of Shares in our Company Shares as of interest in our immediately after the immediately after the the Latest Company as of Global Offering and Global Offering and Practicable the Latest the Capitalization the Capitalization Name Nature of interest Date(1) Practicable Date Issue(1) Issue
North Point Trust Trustee 507,551 (L) 48.2174% 406,040,800 (L) 36.1534% Company L.L.C.(2) .....
Karis I LLC(2) . . . Beneficial owner 304,531 (L) 28.9305% 243,624,800 (L) 21.6921%
KarisIILLC(2) . . . Beneficial owner 203,020 (L) 19.2869% 162,416,000 (L) 14.4613%
Ms. Yang(2)(5). . . . Grantor of the Annuity 977,284 (L) 92.8421% 781,827,000 (L) 69.6130% Trusts and interest jointly held with other persons
Caerus BVI(3) . . . . Beneficial owner 459,649 (L) 43.6667% 367,719,200 (L) 32.7413%
Mr. Yang Interest in controlled 977,284 (L) 92.8421% 781,827,000 (L) 69.6130% Yuzheng(3)(5) .. corporation and interest jointly held with other persons
Arceus BVI(4). . . . Beneficial owner 10,084 (L) 0.9580% 8,067,200 (L) 0.7183%
Mr. Yang Hai(4)(5) . Interest in controlled 977,284 (L) 92.8421% 781,827,000 (L) 69.6130% corporation and interest jointly held with other persons
Mr. Xu Bo(6) . . . . Interest of spouse 977,284 (L) 92.8421% 781,827,000 (L) 69.6130%
Ms. Li Jisu(7) . . . . Interest of spouse 977,284 (L) 92.8421% 781,827,000 (L) 69.6130%
Ms. Chen Interest of spouse 977,284 (L) 92.8421% 781,827,000 (L) 69.6130% Shuyong(8) ....
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Notes:
(1) The letter ‘‘L’’ denotes the person’s long position in the Shares.
(2) Each of Karis I LLC and Karis II LLC is wholly owned by North Point Trust Company L.L.C., the trustee of the Annuity Trusts, on trust for the benefit of the Annuity Trusts, which were established by Ms. Yang for the ultimate benefit of the Family Trusts, pursuant to certain arrangements. Ms. Yang, as both the settlor and the trustee, established Family Trust I and Family Trust II for the benefit of any children born to or adopted by Ms. Yang and their respective issue, and Mr. Ryan Xu, being Ms. Yang’s child, during his lifetime, and any charitable organizations to be subsequently determined by the independent trustee (if any) at its discretion upon its appointment, respectively. Pursuant to the Annuity Trusts, Ms. Yang, as the powerholder, has the power to appoint additional trustees and remove and replace North Point Trust Company L.L.C., and as the sole manager of Karis I LLC and Karis II LLC, has the authority to make all decisions in relation to them. Ms. Yang is deemed to be interested in both Karis I LLC and Karis II LLC, and is therefore deemed to be interested in any Shares in which each of Karis I LLC and Karis II LLC is interested.
(3) Caerus BVI is wholly owned by Mr. Yang Yuzheng. Mr. Yang Yuzheng is therefore deemed to be interested in any Shares in which Caerus BVI is interested.
(4) Arceus BVI is wholly owned by Mr. Yang Hai. Mr. Yang Hai is therefore deemed to be interested in any Shares in which Arceus BVI is interested.
(5) Ms. Yang, Mr. Yang Yuzheng and Mr. Yang Hai are family member of one another, and are therefore deemed to be interested in any Shares in which one another is interested.
(6) Mr. Xu Bo is the spouse of Ms. Yang. Under the SFO, Mr. Xu Bo is deemed to be interested in any Shares in which Ms. Yang is interested.
(7) Ms. Li Jisu is the spouse of Mr. Yang Yuzheng. Under the SFO, Ms. Li Jisu is deemed to be interested in any Shares in which Mr. Yang Yuzheng is interested.
(8) Ms. Chen Shuyong is the spouse of Mr. Yang Hai. Under the SFO, Ms. Chen Shuyong is deemed to be interested in any Shares in which Mr. Yang Hai is interested.
Save as disclosed above, our Directors are not aware of any other person who will, immediately following the completion of the Global Offering and the Capitalization Issue (without taking into account any Shares which may be issued under the Over-allotment Option or the exercise of any options may be granted under the Share Option Scheme), have beneficial interests or short positions in any of our Shares or underlying Shares, which would be required to be disclosed to us under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who is, directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in the circumstances at general meetings of any member of our Group. Our Directors are not aware of any arrangement which may at a subsequent date result in a change of control of our Company.
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CORNERSTONE INVESTMENTS
As part of the International Offering, our Company, the Joint Sponsors and the Joint Global Coordinators have entered into cornerstone investment agreements (each a ‘‘Cornerstone Investment Agreement’’, and together the ‘‘Cornerstone Investment Agreements’’)withthe cornerstone investors set out below (each a ‘‘Cornerstone Investor’’, and together the ‘‘Cornerstone Investors’’), pursuant to which, the Cornerstone Investors have agreed to subscribe for their respective Offer Shares at the Offer Price. Assuming that the Offer Price is HK$5.10 per Share (being the mid-point of the indicative Offer Price range), the total cornerstone investments by Cornerstone Investors shall amount to an aggregate of US$94.66 million, for the subscription of 143,887,000 International Offer Shares in total. The aggregate amount of the investment contributed by the Cornerstone Investors does not include brokerage, SFC transaction levy, and Stock Exchange trading fee which the Cornerstone Investors will pay in respect of the International Offer Shares to be subscribed by them.
NUMBER OF INTERNATIONAL OFFER SHARES TO BE SUBSCRIBED BY THE CORNERSTONE INVESTORS
The information about the number of Offer Shares to be subscribed for by all of the Cornerstone Investors based on the total subscription price payable by all of the Cornerstone Investors (subject to the rounding down to the nearest full board lot of 1,000 Shares) and the relevant assumption of the Offer Price, is set out below:
Assuming that the Offer Price of HK$4.68 (being the low-end of the indicative range of the Offer Price) Percentage to the enlarged number of our Shares in issue immediately upon Percentage to the initial completion of the Global number of our International Percentage to the initial Offering and the Offer Shares number of our Offer Shares Capitalization Issue Assuming Assuming Assuming Number of Assuming the Over- Assuming the Over- Assuming the Over- Offer Shares the Over- allotment the Over- allotment the Over- allotment agreed to be allotment Option is allotment Option is allotment Option is Amount of subscribed Option is not exercised in Option is not exercised in Option is not exercised in Name of the Cornerstone Investors investment for(Note) exercised full exercised full exercised full (US$ million) (%) (%) (%) (%) (%) (%)
GaolingFund,L.P.(‘‘Gaoling Fund’’) and YHG Investment, L.P. (‘‘YHG’’) 59.33 98,286,000 38.9 33.3 35.0 30.4 8.8 8.4 Meridian Future Limited (‘‘Meridian Future’’) 20.00 33,130,000 13.1 11.2 11.8 10.3 2.9 2.8 Orchid China Master Fund Limited (‘‘Orchid China’’) and LMA SPC 10.00 16,565,000 6.6 5.6 5.9 5.1 1.5 1.4
Total 89.33 147,981,000 58.6 50.1 52.7 45.8 13.2 12.6
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Assuming that the Offer Price of HK$5.10 (being the mid-point of the indicative range of the Offer Price) Percentage to the enlarged number of our Shares in issue immediately upon Percentage to the initial completion of the Global number of our International Percentage to the initial Offering and the Offer Shares number of our Offer Shares Capitalization Issue Assuming Assuming Assuming Number of Assuming the Over- Assuming the Over- Assuming the Over- Offer Shares the Over- allotment the Over- allotment the Over- allotment agreed to be allotment Option is allotment Option is allotment Option is Amount of subscribed Option is not exercised in Option is not exercised in Option is not exercised in Name of the Cornerstone Investors investment for(Note) exercised full exercised full exercised full (US$ million) (%) (%) (%) (%) (%) (%)
Gaoling Fund and YHG 64.66 98,286,000 38.9 33.3 35.0 30.4 8.8 8.4 Meridian Future 20.00 30,401,000 12.0 10.3 10.8 9.4 2.7 2.6 Orchid China and LMA SPC 10.00 15,200,000 6.0 5.2 5.4 4.7 1.4 1.3
Total 94.66 143,887,000 56.9 48.8 51.2 44.5 12.9 12.3
Assuming that the Offer Price of HK$5.52 (being the high-end of the indicative range of the Offer Price) Percentage to the enlarged number of our Shares in issue immediately upon Percentage to the initial completion of the Global number of our International Percentage to the initial Offering and the Offer Shares number of our Offer Shares Capitalization Issue Assuming Assuming Assuming Number of Assuming the Over- Assuming the Over- Assuming the Over- Offer Shares the Over- allotment the Over- allotment the Over- allotment agreed to be allotment Option is allotment Option is allotment Option is Amount of subscribed Option is not exercised in Option is not exercised in Option is not exercised in Name of the Cornerstone Investors investment for(Note) exercised full exercised full exercised full (US$ million) (%) (%) (%) (%) (%) (%)
Gaoling Fund and YHG 70.00 98,286,000 38.9 33.3 35.0 30.4 8.8 8.4 Meridian Future 20.00 28,088,000 11.1 9.5 10.0 8.7 2.5 2.4 Orchid China and LMA SPC 10.00 14,044,000 5.6 4.8 5.0 4.3 1.3 1.2
Total 100.00 140,428,000 55.6 47.6 50.0 43.4 12.6 12.0
Note: Calculated based on the exchange rate as disclosed in this prospectus for reference only. The actual investment amount of each Cornerstone Investor in Hong Kong dollars may vary due to the actual exchange rate as provided in the respective Cornerstone Investment Agreements.
The actual number of our International Offer Shares to be allocated to each of the Cornerstone Investors may be affected by reallocation, further details on which is set forth in the section headed ‘‘Structure of the Global Offering—Hong Kong Public Offering—Reallocation’’ in this prospectus, and will be disclosed in our announcement of results of allocations of our Offer Shares under the Global Offering on or around Thursday, December 17, 2020.
Our Company is of the view that the cornerstone investments signify the confidence of the Cornerstone Investors in its business and prospects. It also ensures a reasonable size of solid commitment at the beginning of the marketing period of the Global Offering which helps to raise the profile of our Company.
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To the best knowledge of our Company, (i) each of the Cornerstone Investors and their respective ultimate beneficial owners is an Independent Third Party, is not our connected person, our associate (as defined under the Listing Rules) or our existing Shareholders; (ii) none of the Cornerstone Investors is accustomed to take instructions from our Company, our subsidiaries, directors and chief executive of our Company, our Controlling Shareholders, our substantial Shareholders, existing Shareholder or any of their respective close associates; (iii) none of the subscription of the relevant Offer Shares by any of the Cornerstone Investors is financed by our Company, our subsidiaries, directors and chief executive of our Company, our Controlling Shareholders, our substantial Shareholders, existing Shareholder or any of their respective close associates; and (iv) the Cornerstone Investors are independent from each another. There are no side arrangements or agreements between our Company and the Cornerstone Investors or any benefit, direct or indirect, conferred on the Cornerstone Investors by virtue of or in relation to the abovementioned cornerstone investments, other than a guaranteed allocation of the relevant Offer Shares at the final Offer Price. To the best knowledge, information and belief of the Joint Sponsors after making reasonable enquiries and based on the confirmations of the Cornerstone Investors, the Joint Sponsors confirm that the Cornerstone Investors are not required to obtain any consent, permit, approval and waiver from the Stock Exchange or on any other stock exchanges on which the shares of the Cornerstone Investors may be listed, if applicable, to subscribe for the relevant Offer Shares.
None of the Cornerstone Investors will subscribe for any Offer Shares under the Global Offering other than pursuant to the Cornerstone Investment Agreements. Immediately following completion of the Global Offering and the Capitalization Issue, the Cornerstone Investors will not have any representation on the Board, nor will any of the Cornerstone Investors become a substantial shareholder (as defined under the Listing Rules) of our Company. Pursuant to Rule 8.08(3) of the Listing Rules, no more than 50% of the Shares in public hands on the Listing Date can be beneficially owned by the three largest public Shareholders. The Cornerstone Investors do not have any preferential rights under the Cornerstone Investment Agreements compared with other public Shareholders, other than a guaranteed allocation of the relevant Offer Shares at the Offer Price. There will be no delayed delivery of the Offer Shares and no deferred settlement arrangement for all of the Cornerstone Investors under the Cornerstone Investment Agreements. Each of the Cornerstone Investors undertakes to settle the payment pursuant to their respective Cornerstone Investment Agreements before the Listing becomes unconditional.
The investment contributed by the Cornerstone Investors will form part of the International Offering. The International Offer Shares to be subscribed for by the Cornerstone Investors (i) will be fully paid prior to Listing; (ii) will rank pari passu in all respects with the other fully paid Shares in issue upon completion of the Global Offering and the Capitalization issue; and (iii) will be counted towards the public float of our Company under Rule 8.08 of the Listing Rules.
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INFORMATION ON THE CORNERSTONE INVESTORS
We set forth below a brief description of each of the Cornerstone Investors, which has been provided by the respective Cornerstone Investors:
Gaoling Fund and YHG
Gaoling Fund and YHG have agreed to acquire an aggregate of 98,286,000 Offer Shares at the Offer Price.
Gaoling Fund and YHG are limited partnerships formed under the laws of the Cayman Islands. Hillhouse Capital Advisors, Ltd. (‘‘Hillhouse Capital’’) serves as the sole investment manager of Gaoling Fund and the general partner of YHG.
Founded in 2005, Hillhouse Capital is a global firm of investment professionals and operating executives who are focused on building and investing in high quality business franchises that achieve sustainable growth. Independent proprietary research and industry expertise, in conjunction with world-class operating and management capabilities, are key to Hillhouse Capital’sinvestment approach. Hillhouse Capital partners with exceptional entrepreneurs and management teams to create value, often with a focus on enacting innovation and technological transformation. Hillhouse Capital invests in the healthcare, consumer, TMT, advanced manufacturing, financial and business services sectors in companies across all equity stages. Hillhouse Capital and its group members manage assets on behalf of institutional clients. To the best of the knowledge, information and belief of our Company after making reasonable enquiries, Gaoling Fund and YHG will use its own fund as its source of funding for the subscription.
Meridian Future
Meridian Future has agreed to acquire such number of Offer Shares (rounded down to the nearest full board lot) which may be purchased with US$20.00 million at the Offer Price.
Meridian Future, a limited liability company incorporated under the laws of the British Virgin Islands, is principally engaged in investment holding which is an entity beneficially owned by Orchid Asia VII, L.P. as to 93% and Orchid Asia VII Co-Investment, Limited as to 7%. Managing a current portfolio size of more than US$1.3 billion, Orchid Asia VII, L.P. is in turn managed by Orchid Asia V Group Management, Limited (‘‘Orchid Asia’’). Orchid Asia is wholly-owned by Orchid Asia V Group, Limited, which is in turn wholly-owned by Ms. Lam Lai Ming, and is controlled by Mr. Li Gabriel by virtue of his directorship therein. Orchid Asia is a private equity group with an investment focus on the PRC and Asia. Mr. Li Gabriel is the managing partner and an investment committee member of Orchid Asia Group Management, Limited. He is currently also a director of Trip.com Group Limited (stock code: TCOM.NQ), and Qeeka Home (Cayman) Inc. (stock code: 1739.HK). Ms. Lam Lai Ming is the spouse of Mr. Li Gabriel. To the best of the knowledge, information and belief of our Company after making reasonable enquiries, Orchid Asia will use its own fund as its source of funding for the subscription of the relevant Offer Shares.
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Orchid China and LMA SPC
Orchid China and LMA SPC have agreed to acquire such number of Offer Shares (rounded down to the nearest full board lot) which may be purchasedwithUS$10.00millioninaggregateat the Offer Price in the proportion of 75% and 25% of the total investment amount.
Orchid China is an investment fund which was established in 2008 with an investment focus on securities of companies listed on the Stock Exchange and other major stock exchanges, in particular, in the consumer products and services, technology and internet sectors. The share capital of Orchid China is divided into two classes of shares, namely (i) the non-voting participative shares, which are held by numerous investors including funds of funds, family offices and high net worth individual which are not entitled to participate in the management and investment decision of Orchid China; and (ii) the voting non-participative shares, and Orchid China Management (Cayman) Limited (‘‘Orchid China Management’’) holds 100% of the voting non-participative shares of Orchid China. Pursuant to an investment management agreement entered into between Orchid China and Orchid China Management, Orchid China Management is entitled to make all investment decisions on behalf of Orchid China. Orchid China Management is an exempted company incorporated under the laws of the Cayman Islands. Orchid China Management manages assets on behalf of clients such as fund of funds, family offices and high net worth individuals with a current investment portfolio size of approximately US$207 million. Orchid China Management is ultimately owned by Ms. Or Ching Han and is jointly controlled by Ms. Or Ching Han and her spouse, Mr. Wong Edmond Taikong, by virtue of their directorships in the voting non-participative shareholder of Orchid China Management. Mr. Wong Edmond Taikong has extensive experience in strategy consulting. He was the vice president and head of North Asia at Gartner Consulting, where he assisted technology companies in developing market entry and product strategies as well as a number of investment firms in conducting market due diligence.
LMA SPC, a Cayman Islands incorporated segregated portfolio company which holds a number of segregated portfolios, including MAP164 Segregated Portfolio. MAP164 Segregated Portfolio is managed by Lighthouse Investment Partners, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission which is in turn advised by Orchid China Management, which is responsible for advising on the management of the assets of MAP164 Segregated Portfolio pursuant to an investment advisory agreement entered into between them. To the best of the knowledge, information and belief of our Company and after making reasonable enquiries, Orchid China and LMA SPC will use their own fund as their source of funding for the subscription of the relevant Offer Shares.
CONDITIONS PRECEDENT
The obligations of the Cornerstone Investors to subscribe for the International Offering Shares under the Cornerstone Investment Agreements are subject to, among other things, the following conditions precedent:
(a) the Hong Kong Underwriting Agreement and the International Underwriting Agreement being entered into and having become effective and unconditional (in accordance with their respective original terms or as subsequently waived or varied by agreement of the
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parties thereto) by no later than the time and date as specified in the Hong Kong Underwriting Agreement and the International Underwriting Agreement, and neither of the Hong Kong Underwriting Agreement and the International Underwriting Agreement having been terminated;
(b) the Offer Price having been agreed upon between the Company and the Joint Global Coordinators (on behalf of the Underwriters);
(c) the Listing Committee having granted the approval for the listing of, and permission to deal in, our Shares (including the Offer Shares agreed to be subscribed for by the Cornerstone Investors) and such approval, permission or waiver having not been revoked prior to the commencement of dealings in the Shares on the Stock Exchange;
(d) no laws (as defined therein) shall have been enacted or promulgated by any governmental authority (as defined therein) which prohibits the consummation of the transactions contemplated in the Global Offering or therein and there shall be no orders or injunctions from a court of competent jurisdiction in effect precluding or prohibiting consummation of such transactions; and
(e) the respective representations, warranties, undertakings, and confirmations of the Cornerstone Investor under the Cornerstone Investment Agreements are accurate and true in all respects and not misleading and that there is no material breach of the Cornerstone Investment Agreements on the part of the Cornerstone Investors.
RESTRICTIONS ON DISPOSAL BY THE CORNERSTONE INVESTORS
Each of the Cornerstone Investors has agreed that it will not, whether directly or indirectly, at any time during the period of six months following the Listing Date (the ‘‘Lock-up Period Restriction’’) dispose of, in any way, any Shares or any interest in any company to be subscribed by the Cornerstone Investors pursuant to the Cornerstone Investment Agreements save for transfers to any of its wholly-owned subsidiaries who will be bound by the same obligations of such Cornerstone Investor, including the Lock-up Period Restriction.
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AUTHORIZED AND ISSUED SHARE CAPITAL
The following is a description of the authorized and issued share capital of our Company in issue and to be issued as fully paid or credited as fully paid immediately before and after completion of the Global Offering and the Capitalization Issue:
Authorized share capital: HK$
2,000,000,000Shares...... 20,000,000
Assuming that the Over-allotment Option is not exercised and without taking into account any Shares which may be issued upon exercise of any options which may be granted under the Share Option Scheme, the share capital of our Company immediately following the completion of the Capitalization Issue and the Global Offering will be as follows:
Issued share capital: HK$
1,052,631Sharesinissueatthedateofthisprospectus...... 10,526.31
Shares to be issued, fully paid or credited as fully paid:
841,052,169 Shares to be issued pursuant to the Capitalization Issue . . . . 8,410,521.69 281,000,000SharestobeissuedpursuanttotheGlobalOffering...... 2,810,000
1,123,104,800 Total...... 11,231,048
Assuming the Over-allotment Option is exercised in full and without taking into account any Shares which may be issued upon exercise of any options which may be granted under the Share Option Scheme, the share capital of the Company immediately following the completion of the Capitalization Issue and the Global Offering will be as follows:
Issued share capital: HK$
1,052,631Sharesinissueatthedateofthisprospectus...... 10,526.31
Shares to be issued, fully paid or credited as fully paid:
841,052,169 Shares to be issued pursuant to the Capitalization Issue . . . . 8,410,521.69 281,000,000SharestobeissuedpursuanttotheGlobalOffering...... 2,810,000 42,150,000 Shares to be issued upon exercise of the Over-allotment 421,500 Optioninfull......
1,165,254,800 Total...... 11,652,548
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ASSUMPTIONS
The above table assumes that the Global Offering has become unconditional and the Shares are issued pursuant to the Global Offering and the Capitalization Issue. It takes no account of any Shares, which may be allotted and issued pursuant to the exercise of the options which may be granted under the Share Option Scheme or which may be allotted and issued or repurchased by our Company under the general mandates of any Shares referred to below.
MINIMUM PUBLIC FLOAT
At least 25% of the total number of issued Shares must at all times be held by the public. The 281,000,000 Offer Shares represent 25.0199% of the issued share capital of our Company upon Listing.
RANKING
Our Shares are ordinary shares in our share capital and rank pari passu with all Shares currently in issue or to be issued and, in particular, will rank in full for all dividends or other distributions declared, made or paid on our Shares in respect of a record date which falls after the date of issue of such Share.
PRE-IPO SHARE AWARD SCHEME
We have adopted the Pre-IPO Share Award Scheme. The principal terms of the Pre-IPO Share Award Scheme are summarized in ‘‘Statutory and General Information—D. Other Information—1. Pre-IPO Share Award Scheme’’ in Appendix IV to this prospectus.
SHARE OPTION SCHEME
We conditionally adopted the Share Option Scheme. Summaries of the principal terms of the Share Option Scheme are set out in the section headed ‘‘Statutory and General Information—D. Other Information—2. Share Option Scheme’’ in Appendix IV to this prospectus.
ISSUING MANDATE
Subject to the Global Offering becoming unconditional, our Directors have been granted by the shareholders a general and unconditional mandate to allot, issue or deal with Shares with a total nominal value of not more than the sum of:
(a) 20% of the aggregate number of Shares in issue and to be issued immediately following completion of the Global Offering and the Capitalization Issue (excluding any Shares which may be allotted and issued upon the exercise of the Over-allotment Option and the options which may be granted under the Share Option Scheme); and
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(b) the aggregate number of Shares repurchased by our Company (if any) pursuant to the repurchase mandate as referred to below.
The issuing mandate will expire at the earliest of:
. the conclusion of the next annual general meeting of our Company; or
. the expiration of the period within which our Company required by the Articles or any applicable laws of the Cayman Islands to hold its next annual general meeting; or
. when varied or revoked by an ordinary resolution of the Shareholders in general meeting.
For more information on this issuing mandate, please refer to the section headed ‘‘Statutory and General Information—A. Further Information about our Company and its Subsidiaries—3. Written Resolutions of all the Shareholders passed on December 1, 2020’’ in Appendix IV to this prospectus.
REPURCHASE MANDATE
Subject to the Global Offering becoming unconditional, the Directors have been granted by the Shareholders a general mandate to exercise all the powers of our Company to repurchase not more than 10% of the aggregate number of the Shares in issue immediately following completion of the Global Offering and the Capitalization Issue (excluding Shares that may be allotted and issued pursuant to exercise of the Over-allotment Option or the Options which may be granted under the Share Option Scheme).
The repurchase mandate only relates to repurchases made on the Stock Exchange, or on any other stock exchange on which the Shares may be listed (and which are recognized by the SFC and the Stock Exchange for this purpose), and which are in accordance with the Listing Rules and all other applicable laws, regulations and rules.
The repurchase mandate will expire at the earliest of:
. the conclusion of the next annual general meeting of our Company; or
. the expiration of the period within which our Company is required by its Articles or any applicable laws of the Cayman Islands to hold its next annual general meeting; or
. when varied or revoked by an ordinary resolution of the Shareholders in general meeting.
For more information on this repurchase mandate, please refer to the section headed ‘‘Statutory and General Information—A. Further Information about our Company and its Subsidiaries—3. Written Resolutions of all the Shareholders passed on December 1, 2020’’ in Appendix IV to this prospectus.
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CIRCUMSTANCES UNDER WHICH GENERAL MEETING AND CLASS MEETING ARE REQUIRED
As a matter of Cayman Companies Law, an exempted company is not required by law to hold any general meetings or class meetings on an annual or regular basis. The holding of a general meeting or class meeting is prescribed for under the articles of association of a company. Accordingly, we will hold general meetings as prescribed for under the Articles, a summary of which is set out in the section headed ‘‘Summary of the Constitution of the Company and Cayman Islands Company Law’’ in Appendix III in the prospectus.
Our Company has only one class of Shares, namely ordinary Shares, each of which ranks pari passu with the other Shares.
Pursuant to the Cayman Companies Law and the terms of the Memorandum and the Articles, ourCompanymayfromtimetotimebyordinaryresolutions of Shareholders (i) increase its share capital; (ii) consolidate and divide its capital into shares of larger amount; (iii) divide its Shares into several classes; (iv) subdivide its Shares into shares of smaller amount; and (v) cancel any Shares which have not been taken. In addition, our Company may, subject to the provisions of the Cayman Companies Law, reduce the share capital or capital redemption reserve by our Shareholders passing a special resolution. Besides, all or any of the special rights attached to the Shares or any class of shares may be varied, modified or abrogated either with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. For more information, please refer to the section headed ‘‘Summary of the Constitution of the Company and Cayman Islands Company Law’’ in Appendix III in this prospectus.
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You should read this section in conjunction with our audited consolidated financial statements, including the notes thereto, as set forth in the Accountants’ Report in Appendix I to this prospectus. The Accountants’ Report has been prepared in accordance with the HKFRSs. You should read the entire Accountants’ Report and not merely rely on the information contained in this section.
The following discussion and analysis contain certain forward-looking statements that reflect the current views with respect to future events and financial performance. These statements are based on assumptions and analysis made by us considering our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate under the circumstances. However, whether actual outcomes and developments will meet our expectations and projections depends on several risks and uncertainties some of which are beyond our control. For further information, please refer to the section headed ‘‘Risk Factors’’ in this prospectus.
OVERVIEW
We are one of the market players in the small home appliance online market in the United States. According to the Frost & Sullivan Report, among small home appliance retailers, we ranked third in terms of retail sales value generated through Amazon and fifth through all online channels in 2019 in the United States. Our air purifiers ranked first and our air fryers ranked second in their respective categories, both in terms of retail sales value generated through Amazon in 2019 in the United States. Our products are sold to users in a number of countries, primarily the United States, Canada, the United Kingdom, Germany, France, Spain, Italy and Japan. Our business primarily focuses on the online marketing and sales of self-designed and -developed small home appliances and smart home devices under our increasingly recognized brands. We sell our products primarily through e-commerce marketplaces, mainly Amazon, the largest e-commerce marketplace in the United States. With our mission to ‘‘build a better living’’, we are dedicated to continuously improving consumers’ daily lives in small but meaningful ways with innovative, user-friendly products.
We primarily design, develop and sell small home appliances and smart home devices under our three core brands, namely, ‘‘Levoit’’ for home environment appliances, ‘‘Etekcity’’ for smart home gadgets, health monitoring devices, outdoor recreation products and personal care products, and ‘‘Cosori’’ for kitchen appliances and dining ware.
Our revenue increased from approximately US$85.2 million in 2017 to approximately US$144.8 million in 2018 and further to approximately US$171.9 million in 2019, representing a CAGR of approximately 42.0%. In 2017, 2018 and 2019, approximately 99.4%, 99.3% and 99.2%, respectively, of our total revenue was generated from Amazon under both Vendor Central and Seller Central programs. Our net profit also recorded growth from approximately US$1.9 million in 2017 to approximately US$4.4 million in 2018 and further to approximately US$6.4 million in 2019, representing a CAGR of approximately 83.5%.
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In 2020, the COVID-19 pandemic has caused an unprecedented impact on the global economy. With consumers spending more time at home during the lockdown as part of social distancing measures to contain the spread of COVID-19, the pandemic has indeed accelerated the growth of online shopping. In addition, according to the Frost & Sullivan Report, there has been an increase in consumers’ awareness in maintaining a healthy home environment and better life quality. As such, we sold an increased number of air purifiers and air fryers in the six months ended June 30, 2020 as compared to the same period in 2019. Therefore, during the six months ended June 30, 2020 together with successful marketing and advertising strategies in previous years, we benefitted from the favorable market trends of online shopping of home products and managed to grow our business rapidly. Our revenue increased substantially by 71.7% from USD75.3 million for the six months ended June 30, 2019 to USD129.3 million for the same period in 2020. Our net profits recorded even stronger growth from USD2.0 million for the six months endedJune30,2019toUSD22.5millionforthesameperiodin2020,representinganincreaseof 1,025.0%.
BASIS OF PRESENTATION
Our Company was incorporated in the Cayman Islands as a limited liability company on January 9, 2019. Subsequent to the Reorganization, our Company became the holding company of the companies now comprising our Group, details of which are set out in the section headed ‘‘History, Reorganization and Corporate Structure’’ in this prospectus.
The historical financial information has been prepared in accordance with Hong Kong Financial Reporting Standards (‘‘HKFRSs’’) (which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (‘‘HKASs’’) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’) and accounting principles generally accepted in Hong Kong. All HKFRSs effective for the accounting period commencing from January 1, 2020, together with the relevant transitional provisions, have been adopted on a consistent basis by the Group in the preparation of the historical financial information throughout the Track Record Period and in the period covered by the Interim Comparative Financial Information. The Group early adopted the Amendment to HKFRS 16 Covid-19-Related Rent Concessions for rent concessions occurring as a direct consequence of the covid-19 pandemic after January 1, 2020 and the amendment did not have any significant impact on the financial position and performance of the Group.
The historical financial information has been prepared under the historical cost convention, except for derivative financial instruments which have been measured at fair value.
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SIGNIFICANT FACTORS AFFECTING OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Group’s financial condition and results of operations have been and will continue to be affected by several factors, including those set out below:
Our Relationship with Amazon
Our revenue generated from Amazon’s Seller Central program amounted to approximately US$77.5 million, US$102.4 million, US$83.2 million and US$45.6 million, respectively, representing approximately 91.0%, 70.7%, 48.4% and 35.3% of our total revenue for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively. Our revenue generated from Amazon’s Vendor Central program amounted to approximately US$7.2 million, US$41.4 million, US$87.3 million and US$79.1 million, respectively, representing approximately 8.4%, 28.6%, 50.8% and 61.2% of our total revenue for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively. Amazon as our bulk purchase customer was our largest customer during the Track Record Period and will continue to contribute a substantial majority of our total revenue in the foreseeable future. As such, our profitability, performance and financial results rely on, among other things, the continued strong business relationship between our Group and Amazon.
Our ability to capture market opportunities with new products and enhance our results of operations
Our ability to compete successfully in the small home appliance and smart home device markets depends heavily on our capability to continuously introduce innovative new or enhanced products and technologies. During the Track Record Period, our revenue growth was largely driven by the introduction of new products including air purifiers and humidifiers in early 2017 and air fryers in October 2018.
We may from time to time launch new product categories. The introduction of new product categories may subject us to additional risks and challenges. As we may not have sufficient experience and relevant customer data for these new product categories, it may be difficult for us to anticipate and respond to customer demands and preferences. We may misjudge customer demands, resulting in excessive inventories and possible inventory write- down. We may also experience higher return rates on new product categories, receive more customer complaints and face costly product liability claims, which would harm our brand and reputation as well as our financial performance. Furthermore, we may not be able to negotiate favorable terms with suppliers for our new products. We may need to price aggressively to gain market share or remain competitive in the new categories. It may be difficult for us to achieve profitability in the new product categories and our profit margin, if any, may be lower than we anticipate, which would adversely affect our overall profitability and results of operations. We cannot assure you that we will be able to recoup our investments in introducing these new product categories.
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Our research and development capabilities
For the three years ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2019 and 2020, we incurred research and development costs of approximately US$1.8 million, US$4.0 million, US$8.2 million, US$3.8 million and US$4.6 million, respectively. Our products are the fruits of our research and development efforts to enhance the user experience and make the most of our products’ innovative features. We plan to increase our revenue and profitability by continuing to expand and upgrade our products portfolio and product offerings, and by charging premium prices for our products with more sophisticated and advanced technologies.
However, our research and development efforts may not be successful or yield the anticipated level of economic benefits. Even if our research and development efforts are successful, we may not be able to apply these newly developed technologies to products that will be accepted by the market or apply them in a timely manner to take advantage of the opportunities presented in the market. The level of economic benefit that can be derived from newly developed technologies or products may also be affected by our research and development cost. We may invest substantial amount in developing new products, such as to hire additional research and development personnel. If the sales of new products cannot cover the additional research and development cost, we may not recoup our investment as expected. If any of the aforesaid occurs, it may have a material adverse effect on our business, financial condition, results of operations and future development.
Maintaining the trusted brand image of our products
Since our inception, we built our brand names ‘‘Levoit’’, ‘‘Etekcity’’ and ‘‘Cosori’’ leveraging our core competencies. Our brands have received recognition from retail customers on Amazon. Any loss of trust in our products could harm the value of our brands, which could materially reduce our revenue and profitability. Our ability to maintain our position as a trusted brand for small home appliances and smart home devices depends on various factors, such as continued offering of quality and innovative products to our customers, as well as increasing brand awareness through marketing and brand promotion activities.
In particular, the maintenance of our reputation and our brand image depends on the reviews from, and satisfaction of, our customers. Any reviews posted on the e-commerce marketplace where our products are listed, or user perceptions regarding the defective or unsatisfactory experience of our products, even if factually incorrect or based on isolated incidents, could damage our reputation, diminish the value of our brand, undermine the trust and credibility we have established and have a negative impact on our ability to attract new consumers or retain our current consumers.
If we are unable to maintain our reputation, enhance our brand recognition or increase positive awareness of our products, it may be difficult to maintain and grow our customer base, and our business and growth prospects may be materially and adversely affected.
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Trade restrictions under Sino-U.S. trade war could materially and adversely affect our business, financial condition and results of operations
The United States has been our primary market during the Track Record Period. As a result of the Sino-U.S. trade war, a number of our products were subject to additional tariffs. In September 2018, the United States Trade Representative initiated a tariff exclusion process for certain products. Once obtained, the tariff exclusion could apply from the original date of the additional duties and expire one year from the publication of the notice of product exclusion. Among our products which are subject to additional tariffs, some are included in the product exclusion list and enjoy exemptions from additional tariffs, such as thermometers, multi-meters and air purifiers, the exemptions enjoyed by which expired or will expire on July 31, 2020, October 1, 2020 and December 31, 2020, respectively. As a result, our customs duties incurred increased from US$1.2 million in 2017 to US$4.9 million in 2018, and further to US$5.5 million in 2019. Our customs duties decreased from US$2.9 million in the first half of 2019 to US$2.2 million in the first half of 2020 after air purifiers were exempted; and a tax reimbursement in the amount of US$2.3 million and US$0.1 million was recorded in 2019 and the first half of 2020, respectively.
For illustrative purpose only, had the additional US customs duties of 25% been imposed since January 1, 2018, assuming the product exclusion list was not published and other variables held constant, our customs duties expenses would have increased by approximately US$4.2 million, US$4.2 million and US$2.0 million in 2018, 2019 and the first half of 2020, respectively for products which subject to additional tariff, including but not limited to air purifiers and filters, thermometers, outlets and salt lamps.
It is uncertain whether any further tariff measures will be taken and whether the tariff exclusion process remains available in the future. Any further trade restrictions imposed by the United States on small home appliances and smart home devices could significantly increase the import costs of our products manufactured in the PRC, and thus make our product less competitive. In addition, if the tariff exclusion cannot be renewed or extended, we may not receive tax reimbursement in the future. As a result, our business, financial condition and results of operations could be materially and adversely affected.
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Fluctuations in procurement costs
We primarily rely on subcontractors to manufacture finished products and, to a much lesser extent, procure certain raw materials and components for in-house manufacturing. Our ability to procure finished products, semi-finished goods and raw materials from our subcontractors and suppliers at commercially reasonable prices affects our profitability. The majority of our products including but not limited to air purifiers and air fryers are mainly manufactured by our subcontractors. During the Track Record Period, subcontracting cost included in cost of sales amounted to US$25.6 million, US$49.4 million, US$70.9 million and US$49.4 million, accounting for 50.7%, 55.6%, 67.7% and 73.2% of our total cost of sales, respectively. We may experience operational difficulties with our subcontractors such as increases in manufacturing costs, disruptions in their manufacturing operations due to natural disasters, raw material shortages, or any outbreak of epidemics such as the outbreak of COVID-19 in 2020. Significant price in subcontracting cost may affect our financial results if we are unable to pass along the increased purchase costs to our customers at the time and in the manner we expect.
The following sensitivity analysis illustrates the impact of the hypothetical fluctuations in our subcontracting cost on our profit before tax during the Track Record Period:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2020 (Decrease)/ (Decrease)/ (Decrease)/ (Decrease)/ Changes in increase in increase in increase in increase in subcontracting profit before Profit profit before Profit profit before Profit profit before Profit cost tax before tax tax before tax tax before tax tax before tax US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
–15%...... 3,844 6,980 7,415 12,761 10,631 17,565 7,411 34,539 –10%...... 2,563 5,699 4,943 10,289 7,087 14,021 4,941 32,069 –5%...... 1,281 4,417 2,472 7,818 3,544 10,421 2,470 29,598 0%...... — 3,136 — 5,346 — 6,934 — 27,128 +5%...... (1,281) 1,855 (2,472) 2,874 (3,544) 3,390 (2,470) 24,658 +10%...... (2,563) 573 (4,943) 403 (7,087) (153) (4,941) 22,187 +15%...... (3,844) (708) (7,415) (2,069) (10,631) (3,697) (7,411) 19,717
For illustrative purpose, for the Track Record Period, it is estimated that we would achieve breakeven on our profit before tax if our subcontracting cost increased by approximately 12.2%, 10.8%, 9.8% and 54.9% for the corresponding period, respectively, with all other variables remaining constant.
Our cost of sales has also been impacted by fluctuations in foreign currency exchange rates as a result of our global operations. The recent tension between China and the United States over trade may intensify the fluctuationsinU.S.dollarsandRenminbi,whichmay affect our results of operations and financial condition.
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Currency fluctuation
Our consolidated financial results are affected by currency exchange rate fluctuations. We mainly conduct our operations in the United States and the PRC. All of our products were manufactured in the PRC during the Track Record Period for international sales to countries including without limitation the United States, Canada, the United Kingdom, Germany, France, Spain, Italy and Japan. Fluctuations in exchange rates between U.S. dollars and other currencies in which we conduct business could affect our results of operations and financial condition. We seek to limit our foreign currency exposure by trying to minimize our net foreign currency position. Most of our sales are denominated in U.S. dollars, with the remaining mainly denominated in currencies of the countries to which we sell our products. We pay our subcontractors and suppliers (including those located in the PRC) mainly in U.S. dollars and Renminbi. As some of our cost of sales incurred in China are denominated in Renminbi, our cost of sales in U.S. dollar terms is affected by fluctuations of the U.S. dollar against Renminbi. A depreciation of the U.S. dollar against Renminbi generally has a negative impact on our gross profit while an appreciation of the U.S. dollar generally has a positive impact on our gross profit. When market conditions permit, we may seek to mitigate the impact of a depreciation of the U.S. dollar by increasing our products’ selling prices. However, we may not be able to do so, and even if we are able to do so, the price- competitiveness of our products may be affected.
Our financial information is presented in U.S. dollars. In connection with the preparation of our financial information, the results of operations of subsidiaries, which are initially prepared in their respective local functional currencies, such as the Renminbi and EUR, are translated into U.S. dollars. As a result, changes in the exchange rate between our functional currencies, particularly Renminbi as one of our major operating currencies, and the U.S. dollar, could materially impact our reported results of operations and distort period to period comparisons. In particular, to the extent that foreign currency-denominated (i.e., non-U.S. dollar) monetary assets do not equal the amount of our foreign currency-denominated monetary liabilities, foreign currency gains or losses could arise and materially impact our financial statements. During the Track Record Period, we recorded a currency exchange loss of US$60,000 and US$63,000 for the year ended December 31, 2017 and the six months ended June 30, 2020, and a currency exchange gain of approximately US$58,000 and US$0.4 million for the years ended December 31, 2018 and 2019, respectively. As a result of such foreign currency fluctuations, it could be more difficult to detect underlying trends in our business and results of operations.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the historical financial information requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.
Our significant accounting policies and accounting judgements and estimates are set forth in notes 2.4 and 3 to our financial statements included in the Accountants’ Report in Appendix I to this prospectus. We set forth below the accounting policies, judgements and estimates that we believe are the most critical to our financial information or that involve the most significant judgements and estimates used in the preparation of our financial statements.
Significant accounting policies
Revenue recognition
Revenue from contracts with customers
Revenue from contracts with customers is recognized when control of goods or services is transferred to the customers, at an amount that reflects the consideration to which our Group expects to be entitled in exchange for those goods or services.
When the consideration in a contract includes a variable amount, the amount of consideration isestimatedtobethattowhichourGroupwillbeentitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty with the variable consideration is subsequently resolved.
When the contract contains a financing component which provides the customer with a significant benefit of financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction between our Group and the customer at contract inception. When the contract contains a financing component which provides our Group a significant financial benefit for more than one year, revenue recognized under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of thepromisedgoodsorservicesisoneyearorless, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in HKFRS 15.
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Sale of products
Our Group sells our products to customers via retailers of our Group (‘‘Vendor Central program’’) or to consumers over third-party online retail platforms such as Amazon (‘‘Seller Central program’’). Revenue from contracts with customers is recognized when control of the goods are transferred to the customer at an amount that reflects the consideration to which our Group expects to be entitled in exchange for those goods.
Revenue from the sale of products is recognized at the point in time when control of the goods is transferred to the customer, generally on the receipt of products by customers for Seller Central program and on delivery of products for Vendor Central program.
Some contracts for the sale of products provide customers with rights of return or promotion rebates. The rights of return and promotion rebates give rise to variable consideration.
(i) Rights of return
For contracts which provide a customer with a right to return the goods within a specified period, the expected value method is used to estimate the goods that will not be returned because this method best predicts the amount of variable consideration to which our Group will be entitled. The requirements in HKFRS 15 on constraining estimates of variable consideration are applied in order to determine the amount of variable consideration that can be included in the transaction price. For goods that are expected to be returned, instead of revenue, a refund liability is recognized. A right-of-return asset (and the corresponding adjustment to cost of sales) is also recognized for the right to recover products from a customer.
(ii) Promotion rebates
For Vendor Central program, our Group can provide the retailer promotion rebates to encourage the retailer to do promotion for our Group’s products. Our Group provides the type of promotion, the desired start and end dates of the promotion, the products subject to the promotion, and the funding amount. The retailer may at any time and in their discretion reject any promotion. Promotion rebates are offset against amounts payable by the customer. To estimate the variable consideration for the expected future discounts, the expected value method is used for contracts with more than one products orders. The selected method that best predicts the amount of variable consideration is primarily driven by the promotion plan and historical promotion rebates. The requirements on constraining estimates of variable consideration are applied and a refund liability for the expected future promotion rebates is recognized.
Refund liabilities
A refund liability is recognized for the obligation to refund some or all of the consideration received (or receivable) from a customer and is measured at the amount our Group ultimately expects it will have to return to the customer. Our Group updates its estimates of refund liabilities (and the corresponding change in the transaction price) at the end of each Track Record Period.
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Leases
Our Group assesses at contract inception whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
Group as a lessee
Our Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. Our Group recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
(a) Right-of-use assets
Right-of-use assets are recognized at the commencement date of the lease (that is the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and any impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease terms and the estimated useful lives of the assets as follows:
Officesandwarehouses...... 16– 78 months Machineryandequipment...... 5– 10 years
If ownership of the leased asset transfers to our Group by the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.
(b) Lease liabilities
Lease liabilities are recognized at the commencement date of the lease at the present value payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by our Group and payments of penalties for termination of a lease, if the lease term reflects our Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as an expense in the period in which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Group uses its incremental borrowing rate (‘‘IBR’’) at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease
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liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in lease payments (e.g., a change to future lease payments resulting from a change in an index or rate) or a change in assessment of an option to purchase the underlying asset.
(c) Short-term leases and leases of low-value assets
Our Group applies the short-term lease recognition exemption to its short-term leases of office premises and staff dormitory (that is those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the recognition exemption for leases of low-value assets to leases of office equipment that is considered to be of low value.
Lease payments on short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis over the lease term.
Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined on the first-in, first-out basis and, in the case of work in progress and finished goods, comprises direct materials, direct labor and an appropriate proportion of overheads. Net realizable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.
Income tax
Income tax comprises current and deferred tax. Income tax relating to items recognized outside profit or loss is recognized outside profit or loss, either in other comprehensive income or directly in equity.
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of each of the Track Record Period, taking into consideration interpretations and practices prevailing in the countries in which our Group operates.
Deferred tax is provided, using the liability method, on all temporary differences at the end of each of the Track Record Period, between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, except:
. when the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
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Deferred tax assets are recognized for all deductible temporary differences, and the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilized, except:
. when the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at the end of each of the Track Record Period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the end of each of the Track Record Period and are recognized to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of each of the Track Record Period.
Deferred tax assets and deferred tax liabilities are offset if and only if our Group has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
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Impairment of goodwill
Our Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires our Group to make an estimate of the expected future cash flows from the cash-generating units and also to choose a suitable discount rate in order to calculate thepresentvalueofthosecashflows.
Impairment testing of goodwill
Goodwill acquired through business combinations is allocated to products processing cash- generating unit for impairment testing.
The recoverable amount of the products processing cash-generating unit was determined based on a value in use calculation using cash flow projections based on financial budgets covering a five-year period approved by management. The pre-tax discount rate applied to the cash flow projections was 14% and cash flows beyond the five-year period were extrapolated using a long term growth rate of 3% in 2017. At the end of 2018, revenue of the products such as lighting products processed by the cash-generating unit started to decrease and management expected a decrease in revenue of 40% in 2019 and 45% in 2020 and for revenue to remain stable in the following years, which caused the recoverable amount of the cash-generating unit to fall lower than its carrying amount by approximately US$812,000. In the opinion of the directors, an impairment of goodwill of US$261,000 was recognised in 2018. The related trademarks with carrying amount of US$715,000 (note 16) was fully impaired since they are no longer used.
Assumptions were used in the value in use calculation of the products processing cash- generating unit for the Track Record Period. The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill:
Long term growth rate—The long term growth rate is based on the historical data and management’s expectation on the future market.
Pre-tax discount rate—The pre-tax discount rate reflects specific risks relating to the cash- generating unit, which is determined using the capital asset pricing model with reference to the beta coefficient and company specific risk premium.
The values assigned to the key assumptions on market development of the products processing cash-generating unit and discount rate are consistent with external information sources.
As at December 31, 2017, the recoverable amount of the cash-generating unit exceeds its carrying amount by US$536,000 and the directors did not identify an impairment for this cash- generating unit.
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Decrease in the long term growth rate of 6% or rise in the pre-tax discount rate of 4% (with other assumptions remaining unchanged) would result in decrease in the cash-generating unit’s recoverable amount to equal to its carrying amount.
In the opinion of the Directors, except for the above, any reasonably possible change in the other key assumptions on which the recoverable amount is based would not cause the cash- generating unit’s carrying amount to exceed its recoverable amount as at December 31, 2017.
APPLICATION OF HKFRS 9, HKFRS 15 AND HKFRS 16
All HKFRSs effective for the accounting period commencing from January 1, 2019, including HKFRS 9, ‘‘Financial instruments’’ (‘‘HKFRS 9’’), HKFRS 15, ‘‘Revenue from contracts with customers’’ (‘‘HKFRS 15’’) and HKFRS16, ‘‘Leases’’ (‘‘HKFRS 16’’), together with the relevant transitional provisions, have been early adopted by the Group in the preparation of the historical financial information and applied consistently throughout the Track Record Period.
Given that the Track Record Period spans from January 1, 2017 to December 31, 2019, by which time HKFRS 9, HKFRS 15 and HKFRS 16 would be mandatorily applied, we have adopted HKFRS 9, HKFRS 15 and HKFRS 16 in lieu of HKAS 39 ‘‘Financial Instruments: Recognition and Measurement’’ (‘‘HKAS 39’’), HKAS 18 ‘‘Revenue’’ (‘‘HKAS 18’’) and HKAS 17 ‘‘Leases’’ (‘‘HKAS 17’’) in the preparation of our historical financial statements, such that our historical financial information prepared under HKFRS 9, HKFRS 15 and HKFRS 16 is comparable on a period-to-period basis.
The impacts of the adoption of these new standards were made by assessing the related matters that would be treated differently under the old and new standards. According to the assessment, HKFRS 9, HKFRS 15 and HKFRS 16 have no significant impact on our financial position and performance during the Track Record Period compared to HKAS 39, HKAS 18 and HKAS 17.
For other new and revised financial reporting standards that have been issued and are not yet effective and have not been early adopted, please refer to Note 2.3 to the Accountants’ Report set out in Appendix I to this prospectus.
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SUMMARY OF RESULTS OF OPERATIONS
Consolidated statements of profit or loss
The following table sets forth our consolidated statements of profit or loss during the Track Record Period, as extracted from the Accountants’ Report in Appendix I to this prospectus. Potential investors should read this section in conjunction with the Accountants’ Report and not merely on the information contained in this section.
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000
REVENUE...... 85,210 144,758 171,919 75,250 129,254 Costofsales...... (50,512) (88,980) (104,685) (46,021) (67,486)
Grossprofit...... 34,698 55,778 67,234 29,229 61,768
Other income and gains ...... 150 353 1,182 504 185 Selling and distribution expenses (21,852) (34,101) (37,779) (16,556) (19,525) Administrative expenses ...... (8,443) (13,538) (21,253) (9,792) (13,139) Impairment losses on financial assets,net...... (4) (65) (36) (18) (227) Otherexpenses...... (767) (2,135) (1,131) (363) (1,291) Financecosts...... (646) (946) (1,283) (629) (643)
PROFIT BEFORE TAX ...... 3,136 5,346 6,934 2,375 27,128
Incometaxexpense...... (1,269) (985) (562) (395) (4,647)
PROFIT FOR THE YEAR/ PERIOD...... 1,867 4,361 6,372 1,980 22,481
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PRINCIPAL COMPONENTS OF CONSOLIDATED STATEMENTS OF PROFIT OR LOSS
Revenue
We are one of the market players in the small home appliance online market in the United States and we sell our products largely through Amazon, the largest e-commerce marketplace in the United States.
The following table sets forth the breakdown of our revenue by sales channels for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 % to total %tototal % to total %tototal % to total US$’000 revenue US$’000 revenue US$’000 revenue US$’000 revenue US$’000 revenue
Amazon Seller Central . . 77,509 91.0 102,362 70.7 83,201 48.4 43,733 58.1 45,600 35.3 Vendor Central . 7,173 8.4 41,400 28.6 87,284 50.8 30,870 41.0 79,125 61.2 Others(1) ...... 528 0.6 996 0.7 1,434 0.8 647 0.9 4,529 3.5
Total:...... 85,210 100.0 144,758 100.0 171,919 100.0 75,250 100.0 129,254 100.0
Note:
(1) Others include chain retailers, other e-commerce marketplaces and our online shopping websites.
In 2017, 2018, 2019 and the six months ended June 30, 2020, we primarily sold our products via Amazon e-commerce marketplace, generating revenue of approximately US$84.7 million, US$143.8 million, US$170.5 million and US$124.7 million, respectively, representing approximately 99.4%, 99.3%, 99.2% and 96.5%, respectively, of our total revenue. Our products were sold through Amazon’s Seller Central and Vendor Central programs.
We commenced selling our products to retail customers through Amazon’s Seller Central program in 2011. Under the Seller Central program, we directly sell to our retail customers through the Amazon e-commerce marketplace. We recognize our revenue generated from the Seller Central program generally on the receipt of goods by retail customers. In 2017, 2018, 2019 and the six months ended June 30, 2020, we generated revenue under the Seller Central program of approximately US$77.5 million, US$102.4 million, US$83.2 million and US$45.6 million, respectively, representing approximately 91.0%, 70.7%, 48.4% and 35.3%, respectively, of our total revenue.
We have been an Amazon Vendor in the United States, a by-invite-only program, since 2017, in light of the market acceptance of our products. Under the Vendor Central program, Amazon makes bulk purchase orders from us and then sells to its customers through Amazon e-commerce marketplace. We recognize our revenue generated from the Vendor Central program generally on the delivery of goods to Amazon. During the Track Record Period, revenue generated under the
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Vendor Central program amounted to approximately US$7.2 million, US$41.4 million, US$87.3 million and US$79.1 million, representing approximately 8.4%, 28.6%, 50.8% and 61.2% of our total revenue, respectively. The increases were mainly due to (i) increases in sales volume of products and (ii) increases in number of products sold to Amazon through the Vendor Central program. Generally, we do not place a product for sale through both the Seller Central program and the Vendor Central program in the United States to avoid unnecessary competition between the two.
During the Track Record Period, the general decrease in the percentage of sales under the Seller Central program to our total revenue was primarily due to our strategic move to sell more of our products under the Vendor Central program in the United States, which we believe has significantly uplifted our brand awareness and enhanced customers’ confidence in our products. We can enjoy premium marketing resources exclusive to vendors on the Vendor Central program, and have gained valuable market insight and marketing support through our continuous communications with the representatives from Amazon. In addition, under the Vendor Central program, we do not incur separate costs including sales commission and fulfillment fees, and have more advertising opportunities available as an Amazon Vendor, which allows us to drive demand through campaigns specifically designed to boost traffic to Amazon product pages. For the details of the arrangement under Vendor Central program, please refer to the section headed ‘‘Business—Our Relationship with Amazon’’. As such, if we continue to strategically move the sales of our key products to the Vendor Central program, we expect, our revenue contribution from Amazon, as our largest customer, under the Vendor Central program in the United States to further increase.
In the meantime, we also sell a small portion of our products to other customers through other channels, including chain retailers, other e-commerce marketplaces and our own online shopping websites. Our revenue generated from sales to these customers amounted to approximately US$0.5 million, US$1.0 million, US$1.4 million and US$4.5 million, respectively, representing approximately 0.6%, 0.7%, 0.8% and 3.5% of our total revenue for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively.
The following table sets forth the breakdown of our revenue by geographic location for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 Average Average Average Average Average selling selling selling selling selling Units Revenue price Units Revenue price Units Revenue price Units Revenue price Units Revenue price US$’000 US$ US$’000 US$ US$’000 US$ US$’000 US$ US$’000 US$ North America(1) United States . . . 3,265,152 71,582 21.9 4,437,385 115,246 26.0 4,859,832 136,045 28.0 2,093,521 59,309 28.3 3,181,794 99,028 31.1 Canada and others. . . . . 90,131 1,761 19.5 158,688 5,740 36.2 282,323 12,589 44.6 109,396 4,670 42.7 209,751 10,633 50.7 Europe(1)(2) ...... 596,648 11,733 19.7 848,261 22,391 26.4 838,269 21,976 26.2 390,335 10,607 27.2 517,630 17,125 33.1 Asia(1)(3) ...... 1,717 134 78.0 34,072 1,381 40.5 34,242 1,309 38.2 14,680 664 45.2 45,370 2,468 54.4
Total ...... 3,953,648 85,210 21.6 5,478,406 144,758 26.4 6,014,666 171,919 28.6 2,607,932 75,250 28.9 3,954,545 129,254 32.7
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Notes:
(1) For the purpose of this table, geographic locations refer to a combination of the locations of our accounts with the sales channels and the locations of customers.
(2) Includes the United Kingdom, Germany, Spain, France and Italy. (3) Includes Japan and Vietnam.
During the Track Record Period, North America, mainly the United States, was our largest market. North America contributed to more than 70% of revenue during the Track Record Period. Through the e-commerce marketplaces of Amazon, our products were sold to customers in Europe, primarily in Germany and the United Kingdom. Europe was our second largest market during the Track Record Period, represented approximately 13.8%, 15.5%, 12.8% and 13.3% of our total revenue respectively.
The following table sets forth the breakdown of our revenue by brand for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 %tototal % to total % to total %tototal % to total US$’000 revenue US$’000 revenue US$’000 revenue US$’000 revenue US$’000 revenue
Levoit...... 14,638 17.2 54,064 37.3 67,410 39.2 26,808 35.6 60,387 46.7 Etekcity...... 66,194 77.7 80,338 55.5 63,444 36.9 31,826 42.3 36,464 28.2 Cosori...... 3,546 4.2 9,581 6.6 40,966 23.8 16,529 22.0 32,348 25.0 Others(1) ..... 832 0.9 775 0.6 99 0.1 87 0.1 55 0.1
Total:...... 85,210 100.0 144,758 100.0 171,919 100.0 75,250 100.0 129,254 100.0
Note:
(1) Others include the Eteki and Zestkit brands that are also owned by us.
The products sold under our brands ‘‘Levoit,’’ ‘‘Etekcity’’ and ‘‘Cosori’’ represented the majority of our sales of small home appliances and smart home devices, the aggregate revenue of which represented approximately 99.1%, 99.4%, 99.9% and 99.9% of our total revenue for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively.
Products under the ‘‘Levoit’’ brand primarily focus on home environment appliances including but not limited to air purifiers, humidifiers and vacuum cleaners. Products under the ‘‘Etekcity’’ brand focus on smart home gadgets, outdoor recreation products, health monitoring devices and personal care products, which include scales, smart switches and outlets, air mattress and others. Products under the ‘‘Cosori’’ brand focus on kitchen appliances and dining ware including air fryers, air fryer toaster ovens, electric kettles and others.
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The following table sets forth the breakdown of units sold and revenue by product category for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 Average Average Average Average Average selling selling selling selling selling Units Revenue price Units Revenue price Units Revenue price Units Revenue price Units Revenue price US$’000 US$ US$’000 US$ US$’000 US$ US$’000 US$ US$’000 US$
Home environment appliances . 165,773 10,335 62.3 777,447 48,202 62.0 1,222,703 64,431 52.7 441,276 25,174 57.0 1,113,927 59,785 53.7 Kitchen appliances & dining ware...... 717,898 11,888 16.61,080,518 18,539 17.21,446,886 48,105 33.2 539,227 19,387 36.0 1,182,079 39,145 33.1 Health monitoring devices . . . 903,349 17,771 19.7 1,230,303 24,878 20.2 1,436,767 25,251 17.6 750,103 14,124 18.8 1,027,220 19,182 18.7 Home improvement devices . . 704,559 18,004 25.6 801,233 19,908 24.8 500,627 9,339 18.7 207,329 4,070 19.6 112,561 2,074 18.4 Outdoor recreation products . . 768,334 14,499 18.9 771,298 19,388 25.1 628,581 12,792 20.4 295,106 6,241 21.1 205,439 3,641 17.7 Tools...... 475,258 7,798 16.4 599,507 8,499 14.2 631,801 8,299 13.1 304,984 4,445 14.6 262,695 3,962 15.1 Others...... 218,477 4,915 22.5 218,100 5,344 24.5 147,301 3,702 25.1 69,907 1,809 25.9 50,624 1,465 28.9
Total: ...... 3,953,648 85,210 21.6 5,478,406 144,758 26.4 6,014,666 171,919 28.6 2,607,932 75,250 28.9 3,954,545 129,254 32.7
Home environment appliances primarily include air purifiers and humidifiers, which generated most revenue in 2018, 2019 and the six months ended June 30, 2020, representing approximately 33.3%, 37.5% and 46.3%, respectively, of our total revenue. Levoit air purifier was our bestseller in the category which accounted for approximately 71.9%, 76.2%, 67.0% and 70.7% of revenue in the home environment appliance category, respectively, for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020. The number of Levoit air purifiers sold increased from 87,894 units in 2017, to 473,698 units in 2018 and further to 564,571 units in 2019 and from 204,095 units during the six months ended June 30, 2019 to 501,070 during the six months ended June 30, 2020.
The average selling price of products under our home environment category decreased in 2019 and the first half of 2020, which was mainly due to (i) more products being sold under the Vendor Central program at bulk purchase price; and (ii) the faster increase in sale volume of products with lower selling price, including air humidifiers and air purifiers filters.
Kitchen appliances and dining ware includes air fryers, toaster ovens, and electric kettles. In 2017 and 2018, our Cosori pressure cooker was our bestseller which accounted for approximately 21.9% and 27.5%, respectively, of revenue in this category. The number of Cosori pressure cookers sold increased from 40,310 units in 2017 to 92,159 units in 2018. Cosori air fryers were introduced in the fourth quarter of 2018 and quickly became a bestseller in 2019 which accounted for 57.6% of revenue in this category with a sales volume of 388,789 units in 2019. The sales of Cosori air fryers continued to increase with a sales volume of 289,137 units merely for the first half of 2020. The average selling price of products under kitchen appliances and dining ware category increased significantly in 2019 due to the launch of our air fryers. The average selling price in the first half of 2020 also decreased compared with that of the same period in 2019, which was mainly due to (i) more products in the category being sold under the Vendor Central program; and (ii) the faster increase in sale volume of products with lower selling price, including kitchen scales.
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Health monitoring devices primarily comprise body weight scales, smart fitness scales, blood pressure monitors and others. Etekcity body weight scale was one of our best selling products. The number of body weight scale sold recorded a general increasing trend. Revenue contributable to Etekcity body weight scales increased by approximately 36.7% or US$6.3 million from 2017 to 2018. At the fourth quarter of 2018, smart fitness scale was introduced to the market. Its sales revenue increased significantly by US$2.9 million from US$1.5 million in 2018 to US$4.4 million in 2019 and further increased to US$4.7 million merely for the first half of 2020.
Home improvement devices primarily comprise smart switches and outlets. This category constituted approximately 21.1%, 13.8%, 5.4% and 1.6% of our total revenue in 2017, 2018, 2019 and the first half of 2020, respectively, and the average selling price was on decreasing trend during the Track Record Period. The decrease in the revenue contribution and the average selling price was mainly due to (i) the keen competition for products such as smart switches, outlets and salt lamps; and (ii) our increasing focus on our premium key products.
Outdoor recreation products mainly comprise air mattresses, air pumps, camping lanterns, luggage scales and others. Revenue contribution from this category accounted for 17.0%, 13.4%, 7.4% and 2.8% of our total revenue during the Track Record Period, respectively. The sales volume and average selling price of products, in particular camping lanterns and air mattresses, were on decreasing trend since 2018. The decrease was due to low entry barrier, hence resulting keen competition in the category and was worsened during the pandemic where outdoor activities and travelling were significantly reduced.
Tools primarily comprise thermometers, digital laser thermometers and multi-meters. Revenue generated from this category accounted for 9.2%, 5.9%, 4.8% and 3.1% of our total revenue during the Track Record Period, respectively.
During the Track Record Period, we have been adjusting its product mix to improve overall average selling prices by focusing on premium products category such as home environment appliances which recorded highest average selling prices. Since the launch of air fryers, the average selling prices of kitchen appliances and dining ware also increased significantly from US$17.2 per unit in 2018 to US$33.2 per unit in 2019. As a result of our increasing efforts to boost sales of premium product categories, we were able to increase our overall average selling price from US$21.6 per unit in 2017 to US$26.4 per unit in 2018 to US$28.6 per unit in 2019 and further to US$32.7 per unit in the first half of 2020.
Six months ended June 30, 2020 compared to six months ended June 30, 2019
We recorded robust revenue growth by 71.7%, or US$54.0 million, from US$75.3 million during the six months ended June 30, 2019 to US$129.3 million during the six months ended June 30, 2020. This was mainly driven by the strong sales of various home products in terms of quantities sold, including Levoit air purifiers under the category of home environment appliances, which number of units sold increased significantly by 175.0% from 0.4 million units in the first half of 2019 to 1.1 million units in the first half of 2020; Cosori air fryers under the category of kitchen appliances & dining wares, which number of units sold increased significantly by 140.0%
– 258 – FINANCIAL INFORMATION from 0.5 million units in the first half of 2019 to 1.2 million units in the first half of 2020; and Etekcity body weight scales and smart fitness scales under the category of health monitoring devices, which number of units sold increased moderately by 25.0% from 0.8 million units in the first half of 2019 to 1.0 million units in the first half of 2020, when consumers in the US and worldwide spent more time shopping online with increased demand for home products. As a result of our successful marketing and advertising strategies in previous years, our key products, such as Levoit air purifiers and Cosori air fryers, achieved high rankings on Amazon in 2019, which enabled us to capture the robust consumer demand for home products and to benefit from the favorable market trends.
Our overall sales volume also increased significantly albeit to a lesser extent by 53.8% compared to our revenue growth from 2.6 million units during the six months ended June 30, 2019 to 4.0 million units during the six months ended June 30, 2020, which was due to (i) differences in our product mix with higher proportion of revenue contributed by more expensive products including Levoit air purifiers and Cosori air fryers whereas lower price items such as smart switches and outlets under the category of home improvement devices decreased significantly by 45.7% in terms of quantities sold and by 49.0% in terms of revenue owing to the low entry barriers to sell these products, thereby resulting in keen competition in this category; and (ii) an increase in overall average selling price from US$28.9 per unit in the first half of 2019 to US$32.7 per unit in the first half of 2020, because of higher proportion of revenue from premium product categories, home environment appliances and kitchen appliances and dining ware from 59.2% of total revenue to 76.5%.
Our revenue from the sales of air mattresses, camping lanterns and luggage scales in the outdoor category, which was mostly branded under Etekcity, decreased significantly by 30.4% in terms of quantities sold and 41.7% in terms of revenue as a result of reduced outdoor activities and travelling during the COVID-19 pandemic. Notwithstanding the adverse impact of the pandemic on our outdoor products, our revenue from Etekcity still managed to increase by 14.8% from US$31.8 million in the first half of 2019 to US$36.5 million in the first half of 2020 because our health monitoring devices of Etekcity recorded strong revenue growth of 35.8% in the first half of 2020. On the other hand, our Levoit and Cosori brands recorded substantial growth in revenue by 125.3% and 95.7%, respectively, due to increased demand for our key products, air purifiers and air fryers. Compared with the stronger growth of Levoit and Cosori, the revenue contribution of Etekcity decreased from 42.3% of total revenue in the first half of 2019 to 28.2% in the first half of 2020 whereas Levoit became our largest brand in terms of revenue contribution.
During the six months ended June 30, 2020, our revenue contribution from Vendor Central program continued to increase from 41.0% in the first half of 2019 to 61.2% in the first half of 2020 due to (i) the significant revenue growth of our key home products in Levoit and Cosori, which were mostly sold through the Vendor Central program in the United States; and (ii) our strategicmovetosellsomemodelsofoursmartfitness scales and body weight scales through the Vendor Central program in 2020.
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In spite of the increasing revenue contribution from the Vendor Central program and our strategic move to sell more products through Vendor Central program in the United States, our sales through the Seller Central program still managed to increase from US$43.7 million in the first half of 2019 to US$45.6 million in the first half of 2020 because of revenue growth in countries other than the United States, where products were sold through the Seller Central program.
Year ended December 31, 2019 compared to the year ended December 31, 2018
We recorded moderate revenue growth by 18.7%, or US$27.1 million, from US$144.8 million in 2018 to US$171.9 million in 2019. This was mainly driven by the sales of our various key products mainly Cosori air fryers and electric kettles under the kitchen appliances and dining ware category, which were newly introduced in October 2018, and Levoit air purifiers and humidifiers under the home environment appliance category. Our revenue from the Cosori and Levoit brands increased by US$31.4 million and US$13.3 million in 2019, respectively, and our kitchen appliances and dining ware and home environment appliances category also reflected similar growth by US$29.6 million and US$16.2 million in 2019, respectively.
Our sales volume increased to a lesser extent by 9.1% compared to our revenue growth from 5.5 million units from 2018 to approximately 6.0 million units in 2019 which was due to differences in our product mix with a higher proportion of revenue contributed by more premium products in 2019 including air purifiers and air fryers.
However, sales of several products under the Etekcity brand such as air mattresses and outlets, which were mainly sold under the Seller Central program, decreased due to keen competition in the market and our focus on more premium products, thereby reducing the revenue in the category of home improvement devices and outdoor recreation products in aggregate from approximately US$39.3millionin2018toapproximatelyUS$22.1millionin2019whilethesalesvolumein aggregate decreased from approximately 1.6 millionunitsin2018toapproximately1.1million units in 2019.
Due to our strategic move to sell most of our key products under the Levoit and Cosori brands through the Vendor Central program in 2019, Vendor Central program exceeded Seller Central program in terms of revenue contribution with revenue confirmation sales under the Vendor Central program increased significantly from 28.6% in 2018 to 50.8% of our total revenue in 2019.
Year ended December 31, 2017 compared to the year ended December 31, 2018
We recorded robust revenue growth by 70.0%, or US$59.6 million, from US$85.2 million in 2017 to US$144.8 million in 2018. This was mainly driven by the launch of our Levoit air purifiers and humidifiers in March and February 2017, respectively, and various subsequent products upgrades. Our sales in Levoit air purifiers quickly picked up and became our bestseller in the category of home environment appliances in 2018. Our sales in Levoit air purifiers, further strengthened later in the North American market amid the California wildfires in October 2018, the most destructive fires in the history of California which caused the air quality in Northern
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California to deteriorate. Our revenue in the home environment appliances category increased significantly from approximately US$10.3 million in 2017 to approximately US$48.2 million in 2018, representing a growth of approximately 368.0%.
Other categories including kitchen appliances and dining ware, health monitoring devices and outdoor recreation products also recorded moderate growth during the year ended December 31, 2018 which were mainly driven by the increased sales volume of various products such as Cosori pressure cookers, Etekcity body weight scales, smart fitness scales and air mattresses.
Our sales volume in 2018 increased to a lesser extent by 37.5% compared to our revenue growth from 4.0 million units in 2017 to 5.5 million units in 2018, which was due to differences in our product mix with a higher proportion of revenue contributed by more premium products in 2018 including air purifiers and humidifiers.
In 2018, both our Seller Central and Vendor Central recorded rapid growth in revenue because wewereinvitedbyAmazontobean‘‘Amazon Vendor’’ in 2017 due to the general increase in sales volume of our products across most categories. Several models of our products including Levoit air purifiers, Cosori pressure cookers and Etekcity kitchen scales were sold under the Vendor Central program in 2018 leading revenue contribution from Vendor Central as a percentage of our total revenue to increase from 8.4% in 2017 and 28.6% in 2018.
Cost of Sales
Our cost of sales primarily consists of (i) subcontracting cost (ii) procurement cost of raw materials and components for our in-house production, (iii) Amazon fulfillment fees, (iv) freight and insurance, and (v) customs duties.
The following table sets forth the breakdown of our cost of sales by nature for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 US$’000 % US$’000 % US$’000 % US$’000 % US$’000 %
Subcontracting cost . . . 25,627 50.7 49,434 55.6 70,872 67.7 28,009 60.9 49,407 73.2 Amazon fulfillment fee . 16,748 33.2 22,123 24.9 18,712 17.9 9,992 21.7 8,393 12.4 Freight and insurance cost...... 3,233 6.4 4,575 5.1 5,671 5.4 2,770 6.0 3,774 5.6 Rawmaterialcost.... 3,604 7.1 6,981 7.8 4,291 4.1 1,957 4.3 1,638 2.4 Customsduties...... 767 1.5 3,766 4.2 3,325 3.2 2,366 5.1 2,724 4.0 Others...... 533 1.1 2,101 2.4 1,814 1.7 927 2.0 1,550 2.4
Total ...... 50,512 100.0 88,980 100.0 104,685 100.0 46,021 100.0 67,486 100.0
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During the Track Record Period, the majority of our product production was outsourced to subcontractors, including the production of our key products, air purifiers, humidifiers and air fryers, to gain flexibility in better resource allocation and allow us to devote more efforts and resources to product design and development. Therefore, subcontracting cost refers to the cost at which we procured finished products from our subcontractors.
We manufactured a small portion of our products at our Dongguan Production Base. Raw material cost therefore refers to the cost we purchased raw materials for our own production, which mainly include the raw materials for salt lamps, camping lanterns and outlets during the Track Record Period.
Amazon fulfillment fees were charged by Amazon under the Seller Central program as our products were first delivered to Amazon warehouses and Amazon would fulfill the orders for us by arranging and delivering the products to our retail customers. Amazon fulfillment fee was a per-unit fee, calculated based on the category, the dimensions and weight of the products.
Customs duties were imposed when we imported our products into overseas destinations, primarily the United States, Germany and Netherlands during the Track Record Period.
Six months ended June 30, 2020 compared to six months ended June 30, 2019
Our cost of sales increased by approximately 46.7% from US$46.0 million in the first half of 2019 to US$67.5 million in the first half of 2020, primarily attributable to (i) a substantial increase in subcontracting cost of approximately 76.4% from US$28.0 million in first half of 2019 to US$49.4 million in the first half of 2020 due to strong sales of our key products such as air purifiers and air fryers, which production was mostly outsourced; and (ii) an increase in freight and insurance cost by approximately 35.7% from US$2.8 million in the first half of 2019 to US$3.8 millioninthefirsthalfof2020duetotheincreased sales volume. Such increases were partially offset by a decrease of Amazon fulfilment fee by 16.0% from US$10.0 million in the first half of 2019 to US$8.4 million in the first half of 2020 because of the change in our product mix sold through the Seller Central program during the first half of 2020 in the United States including different types of scales such as kitchen scales, luggage scales and some model of body weight scales of Etekcity, which were smaller in term of dimensions and weight of products as compared to that in the first half of 2019.
Year ended December 31, 2019 compared to the year ended December 31, 2018
Our cost of sales increased by approximately17.6%fromUS$89.0millionin2018to US$104.7 million in 2019, primarily due to (i) an increase in subcontracting cost of approximately 43.5% from US$49.4 million to US$70.9 million and (ii) an increase in freight and insurance cost by approximately 23.9% or US$1.1 million both as a result of the increased sales volume of our key products and the increase in cost of sales was partially offset by (i) a decrease in Amazon fulfillment fee as a result of the reduced volume under Seller Central program; and (ii) a decrease in customs duties by approximately US$0.5 million from 2018 to 2019, as a result of reimbursement on customs duties received. Various of our products including air purifiers,
– 262 – FINANCIAL INFORMATION thermometers and multi-meters were included in the product exclusion list published by the United States and we therefore recorded reimbursement on customs duties previously paid for these products.
Year ended December 31, 2017 compared to the year ended December 31, 2018
Our cost of sales increased by approximately76.2%fromUS$50.5millionin2017to US$89.0 million in 2018, primarily attributable to (i) an increase in subcontracting cost by approximately 93.0% from US$25.6 million to US$49.4 million, which resulted from a significant increase in the sales of home environment appliances and kitchen appliances and dining ware in 2018; (ii) an increase in raw material cost from US$3.6 million to US$7.0 million for our in-house production; and (iii) a significant increase in customs duties from US$0.8 million to US$3.8 million due to the imposition of additional tariffs of up to 25% on certain of our products such as air purifiers, pressure cookers, WiFi outlets, thermometers, multimeters and various scales and outlets.
Gross profit and Gross Profit Margin
During the Track Record Period, our gross profit amounted to US$34.7 million, US$55.8 million, US$67.2 million and US$61.8 million, respectively. Our gross profit margin remained relatively stable at approximately 40.7%, 38.5%, 39.1% and 47.8% for the year ended December 31, 2017, 2018 and 2019 and six months ended June 30, 2020, respectively.
The following table sets forth the breakdown of our gross profit and gross profit margin by sales channels for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 Gross Gross Gross Gross Gross Gross profit Gross profit Gross profit Gross profit Gross profit profit margin profit margin profit margin profit margin profit margin US$’000 % US$’000 % US$’000 % US$’000 % US$’000 %
Amazon SellerCentral...... 31,806 41.0 38,185 37.3 28,847 34.7 14,338 32.8 19,137 42.0 Vendor Central ...... 2,749 38.3 17,208 41.6 38,019 43.6 14,565 47.2 40,235 50.8 Others(1) ...... 143 27.1 385 38.7 368 25.7 326 50.4 2,396 52.9
Total ...... 34,698 40.7 55,778 38.5 67,234 39.1 29,229 38.8 61,768 47.8
Note:
1. Others include chain retailers, other e-commerce marketplaces and our online shopping websites.
Under the Vendor Central program, we sell products at bulk purchase price directly to Amazon whereas under the Seller Central program, we sell products at retail price to shoppers on Amazon marketplace. Our gross profit reflects only our profitability after deducting the direct costs
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The gross profit margin from our sales through the Seller Central program was on a general decreasing trend while gross profit margin from our sales through the Vendor Central program was on a general increasing trend during the three years ended December 31, 2019 mainly because of the different product mix in each program.
During the six months ended June 30, 2020, our gross profit margin increased for the Vendor Central program as a result of continuous introduction of new products and the increasing revenue contribution from premium product categories of home environment appliances and kitchen appliances & dining ware in the first half of 2020.
Our gross profit margin increased significantly by 9.2 percentage point for the Seller Central program in the first half of 2020 as a result of the product mix with higher proportion of premium product categories of home environment appliances and kitchen appliances and dining ware sold through the Seller Central program in countries outside the United States.
The following table sets forth the breakdown of our gross profit and gross profit margin by geographic location for the period indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 Gross Gross Gross Gross Gross Gross profit Gross profit Gross profit Gross profit Gross profit profit margin profit margin profit margin profit margin profit margin US$’000 % US$’000 % US$’000 % US$’000 % US$’000 %
North America(1) ...... 29,389 40.1 44,322 36.6 58,359 39.3 23,760 37.1 52,989 48.3 Europe(2)(3) ...... 5,262 44.8 10,704 47.8 8,298 37.8 5,106 48.1 7,475 43.6 Asia(1)(3) ...... 48 35.8 752 54.5 577 44.0 363 54.6 1,304 52.8
Total ...... 34,698 40.7 55,778 38.5 67,234 39.1 29,229 38.8 61,768 47.8
Notes:
(1) For the purpose of this table, geographic locations refer to a combination of the locations of our accounts with the sales channels and the locations of customers.
(2) Includes the United Kingdom, Germany, Spain, France and Italy. (3) Includes Japan and Vietnam.
Gross profit margin decreased slightly by 3.5 percentage points in the North America during the year ended December 31, 2018 because of the downward price adjustments for certain products including air mattresses and outlets in response to increasing competition in the market and the imposition of additional customs duties in the United States on various products.
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The following table sets forth the breakdown of our gross profit and gross profit margin by brands for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 Gross Gross Gross Gross Gross Gross profit Gross profit Gross profit Gross profit Gross profit profit margin profit margin profit margin profit margin profit margin US$’000 % US$’000 % US$’000 % US$’000 % US$’000 %
Levoit...... 6,965 47.6 22,432 41.5 28,934 42.9 11,280 42.1 30,573 50.6 Etekcity...... 26,234 39.6 30,154 37.5 21,849 34.4 11,766 37.0 15,897 43.6 Cosori...... 1,247 35.2 2,932 30.6 16,442 40.1 6,182 37.4 15,291 47.3 Others(1) ...... 252 30.3 260 33.5 9 9.1 1 1.1 7 13.2
Total ...... 34,698 40.7 55,778 38.5 67,234 39.1 29,229 38.8 61,768 47.8
Note:
1. Others include the Eteki and Zestkit brands that are also owned by us.
Levoit was our most profitable brand during the Track Record Period, with gross profit margin at 47.6% in 2017, 41.5% in 2018, 42.9% in 2019 and 50.6% in the first half of 2020. The increasing trend after 2017 was mainly due to increasing revenue contribution from our key product, air purifiers which was ranked first in its respective category on Amazon in 2019.
Similarly, the gross profit margin of Cosori improved substantially during the Track Record Period from 35.2% in 2017 and 30.6% in 2018 to 40.1% in 2019 and further to 47.3% in the first half of 2020, after the launch of air fryers in the forth quarter of 2018. Air fryers quickly became our key products. Our air fryers ranked second in its product category in terms of retail sales generated through Amazon in 2019 in the United States.
On the other hand, the gross profit margin of Etekcity was decreasing during the three years ended December 31, 2019 from 39.6% in 2017 to 37.5% in 2018 and further to 34.4% in 2019 because Etekcity products were generally of lower selling prices with simpler features such as smart switches, outlets, air mattresses and scales. Competition among these products was keen during the three years ended December 31, 2019. Gross profit margin of Etekcity increased to 43.6% in the first half of 2020 due to increased sales from our body weight scales and smart fitness scales, which are more profitable than items such as switches, and outlets.
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The following table sets forth the breakdown of our gross profit and gross profit margin by product category for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 Gross Gross Gross Gross Gross Gross profit Gross profit Gross profit Gross profit Gross profit profit margin profit margin profit margin profit margin profit margin US$’000 % US$’000 % US$’000 % US$’000 % US$’000 %
Home environment appliances...... 4,645 44.9 21,537 44.7 28,871 44.8 11,008 43.7 30,563 51.1 Kitchen appliances & diningware...... 4,390 36.9 6,495 35.0 19,443 40.4 7,456 38.5 18,873 48.2 Health monitoring devices...... 7,344 41.3 9,852 39.6 9,310 36.9 5,576 39.5 8,771 45.7 Home improvement devices...... 7,793 43.3 5,856 29.4 1,287 13.8 906 22.3 330 15.9 Outdoor recreation products...... 6,148 42.4 7,610 39.2 4,264 33.3 2,258 36.2 940 25.8 Tools...... 3,047 39.1 2,919 34.3 3,057 36.8 1,526 34.3 2,032 51.3 Others...... 1,331 27.1 1,509 28.2 1,002 27.1 499 27.5 259 17.7
Total ...... 34,698 40.7 55,778 38.5 67,234 39.1 29,229 38.8 61,768 47.8
Home environment appliances, mainly air purifiers and humidifiers, was our most profitable product category during the Track Record Period. The gross profit margin dropped slightly from 44.9% in 2017 to 44.7% in 2018 and 44.8% in 2019 which was mainly a combined effect of the imposition of additional tariff of 25% on air purifiers and filters in mid-2018 and their subsequent inclusion in the product exclusion list in mid-2019.
During the Track Record Period, the gross profit margin of kitchen appliances and dining ware began to increase in 2018 after the launch of air fryers in the forth quarter of 2018 while the gross profit margin of health monitoring devices and home improvement devices were decreasing generally due to keen competition.
During the six months ended June 30, 2020, the gross profit margin in our home appliances- related categories such as home environment appliances, kitchen appliances and dining ware and health monitoring devices increased substantially due to strong consumer demand during the lockdown. On the other hand, with the reduced outdoor activities and travelling, both the gross profit and the gross profit margin of outdoor recreation products decreased.
With an aim to improve profitability, we have been expanding our product portfolio and strategically increasing our focus on products based on consumer demand to adjust our product mix, thereby enabling us to maintain stable overall gross profit margin during the three years ended
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December 31, 2019 despite the imposition of additional customs duties on various of our products and managed to increase our gross profit margin from 38.8% in the first half of 2019 to 47.8% in the first half of 2020.
Six months ended June 30, 2020 compared to six months ended June 30, 2019
Our gross profit increased significantly from US$29.2 million in the first half of 2019 to US$61.8 million in the first half of 2020, which was mainly due to (i) robust revenue growth as a result of strong consumer demand for our home products during the lockdown; (ii) increasing gross profit margin, from 38.8% in the first half of 2019 to 47.8% in the first half of 2020, due to overall higher average selling prices; and (iii) our key product, air purifiers, was included in the product exclusion list and enjoyed exemptions from additional tariffs since mid-2019. As the gross profit and gross profit margin of our key products in the categories of home environment appliances, kitchen appliances and dining ware and health monitoring devices increased substantially, the Vendor Central program through which these products were sold also recorded substantial increase by approximately 176.2% in terms of gross profit and 3.6 percentage point in terms of gross profit margin, respectively, in the first half of 2020.
Year ended December 31, 2019 compared to the year ended December 31, 2018
Our gross profit increased from US$55.8 million in 2018 to US$67.2 million in 2019, which was mainly due to (i) revenue growth of our key products; and (ii) increasing gross profit margin from 38.5% in 2018 to 39.1% in 2019 due to changes in our product mix, with a higher proportion of revenue contributed by more premium products such as the Cosori air fryers in 2019. Reimbursement on customs duties for our key products such as air purifiers from the United States also contributed positively to the gross profit margin in 2019.
Year ended December 31, 2018 compared to the year ended December 31, 2017
Our gross profit increased significantly from US$34.7 million in 2017 to US$55.8 million in 2018 mainly due to significant revenue growth of our key products which was partially offset by decreasing gross profit margin from 40.7% in 2017 to 38.5% in 2018 due to our downward pricing adjustments for certain products including air mattresses and outlets in response to increasing competition in the market. The imposition of customs duties in the United States on various categories of our products also adversely impacted our gross profit margin in 2018.
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Other income and gains
The table below sets forth a breakdown of our other income and gains for the year/period indicated.
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000
Other income Bankinterestincome...... 1 2226 Governmentgrants...... 2 85 187 144 85 Other income from our suppliers 126 204 522 —— Others...... 17 4 107 83 94
146 295 818 229 185
Gain Gain on disposal of property, plantandequipment...... 4 ———— Foreign exchange gains, net . . . — 58 364 275 —
Total...... 150 353 1,182 504 185
Other income from our suppliers mainly represents business promotion support and compensation for defective products or delay in delivery of products. In order to maintain a long- term and mutually-beneficial relationship with us, a few of our suppliers supported our marketing and promotional efforts with business promotion funds to boost sales for products they manufactured.
We received government grants to business enterprises for the purpose of encouraging local business development. There were no unfulfilled conditions or contingencies relating to these government grants during the Track Record Period. We also recorded currency exchange gains as we paid some of our suppliers in Renminbi and received U.S. dollars mainly from our customers, thereby benefiting from the depreciation of the Renminbi against the U.S. dollar.
Six months ended June 30, 2020 compared to six months ended June 30, 2019
Our other income and gains decreased by US$0.3 million from US$0.5 million in the first half of 2019 to US$0.2 million in the first half of 2020, primarily due to (i) a decrease in government grants; and (ii) the decrease in foreign exchange gains as a result of the weakening of the U.S. dollar in the first half of 2020.
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Year ended December 31, 2019 compared to the year ended December 31, 2018
Our other income and gains increased by approximately US$0.8 million from US$0.4 million for the year ended December 31, 2018 to US$1.2 million in 2019, primarily due to (i) an increase in other income from our suppliers by US$0.3 million; and (ii) increase in currency exchange gains, as a result of depreciation of RMB against the U.S. dollar.
Year ended December 31, 2018 compared to the year ended December 31, 2017
Our other income and gains increased by approximately US$0.2 million from US$0.2 million for the year ended December 31, 2017 to US$0.4 million in 2018. The increase primarily resulted from (i) an approximately US$0.1 million increase in government grants for research and development and stable employment promotion; (ii) foreign exchange gain of approximately US$0.1 million in 2018 due to the depreciation of the RMB against the U.S. dollar, and (iii) an increase of approximately US$0.1 million in other income from our suppliers primarily due to compensation on delayed delivery of products and damaged goods.
Selling and Distribution Expenses
Our selling and distribution expenses primarily consist of (i) marketing & advertising expenses; (ii) commission to platform; (iii) staff cost; and (iv) warehousing expenses. The following table sets forth the breakdown of our selling and distribution expenses for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 US$’000 % US$’000 % US$’000 % US$’000 % US$’000 %
Marketing & advertising expenses ...... 5,960 27.3 11,076 32.5 14,556 38.5 5,424 32.7 5,478 28.1 Commission to platform. . . . . 11,565 52.9 15,549 45.6 12,809 33.9 6,717 40.6 7,283 37.3 Staff cost...... 2,208 10.1 3,165 9.3 4,920 13.0 2,152 13.0 3,648 18.7 Warehousing expenses ...... 1,901 8.7 3,346 9.8 3,985 10.5 1,552 9.4 1,684 8.6 Others...... 218 1.0 965 2.8 1,509 4.1 711 4.3 1,432 7.3
Total ...... 21,852 100.0 34,101 100.0 37,779 100.0 16,556 100.0 19,525 100.0
Our selling and distribution expenses amounted to approximately 25.7%, 23.5%, 22.0% and 15.1% of our total revenue in 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively.
Marketing and advertising expenses mainly consist of expenses relating to our use of Amazon’s advertising features to promote our brands, such as EBC (Enhanced Brand Content), SEO (Search Engine Optimization) and ‘‘Deals’’, during the Track Record Period with a small remaining portion of marketing and advertising expenses incurred in connection with other sales channels.
Commission to platforms mainly represents sales commission charged by Amazon under the Seller Central program. Amazon charged commissionbasedonafixedpercentageofthesales amount which varies by product category.
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Warehousing expenses mainly represent the rental cost of (i) warehousing spaces for our products at Amazon warehouses before shipping to our retail customers under the Seller Central program; (ii) short-term leases of warehouses; and (iii) storage at ports.
We expect our selling and distribution expenses to increase as we expand our sales channels and geographic coverage. See ‘‘Business—Our Strategies’’ and ‘‘Future Plans and Use of Proceeds.’’
Six months ended June 30, 2020 compared to six months ended June 30, 2019
Our selling and distribution expenses increased by approximately 17.5% from US$16.6 million in the first half of 2019 to US$19.5 million in the first half of 2020, primarily due to (i) an increase in commission to platform by US$0.6 million or 9.0% as our sales generated through the Seller Central program increased; and (ii) an increase in staff cost due to expansion of our sales and marketing team to support our robust business growth in 2020.
Year ended December 31, 2019 compared to the year ended December 31, 2018
Our selling and distribution expenses increased by approximately 10.9% or US$3.7 million from approximately US$34.1 million for the year ended December 31, 2018 to approximately US$37.8 million, primarily due to (i) an increase in marketing and advertising expenses of approximately US$3.5 million as a result of subscription of new advertising package offered by Amazon; and (ii) an increase in staff cost as a result of the expanded sales and marketing team to support business expansion; which was partially offset by an approximately 17.4% decrease in commission to platform because our sales generated through the Seller Central program decreased by 18.8%.
Year ended December 31, 2018 compared to the year ended December 31, 2017
Our selling and distribution expenses increased by approximately 55.7% or US$12.2 million from US$21.9 million for the year ended December 31, 2017 to US$34.1 million for the year ended December 31, 2018, primarily due to (i) an increase in marketing and advertising expenses of approximately US$5.1 million reflecting our enhanced advertising activities; (ii) an approximately 34.4% increase in commission to platform as a result of the approximately 32.1% increase in revenue generated under Seller Central program; and (iii) an increase in warehousing expenses by approximately 76.0% for the handling of the overall increased sales volume.
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Administrative Expenses
Our administrative expenses primarily consist of (i) research and development expenses; (ii) administrative staff cost; (iii) professional fees; (iv) office expenses and (v) depreciation and amortization. The following table sets forth the breakdown of our administrative expenses for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 US$’000 % US$’000 % US$’000 % US$’000 % US$’000 %
Research and development expenses ...... 1,821 21.6 3,954 29.2 8,178 38.5 3,762 38.4 4,580 34.9 Administrative staff costs . . . . 3,141 37.2 4,113 30.4 4,948 23.3 2,459 25.1 2,749 20.9 Professional fees ...... 815 9.7 957 7.1 2,490 11.7 1,017 10.4 1,073 8.2 Listingexpenses...... ——607 4.5 879 4.2 395 4.0 2,247 17.1 Office expenses ...... 920 10.9 1,278 9.4 1,777 8.4 749 7.6 838 6.4 Depreciation & amortization . . 925 11.0 1,104 8.2 1,269 6.0 572 5.9 822 6.3 Traveling and entertainment expenses ...... 293 3.5 442 3.3 687 3.2 332 3.4 187 1.4 Others...... 528 6.1 1,083 7.9 1,025 4.7 506 5.2 643 4.8
Total:...... 8,443 100.0 13,538 100.0 21,253 100.0 9,792 100.0 13,139 100.0
Our research and development costs primarily include research and development staff costs, service fees paid to other partnering developers, testing and inspection fees, modules and material costs. We incurred research and development expenses to develop new products and upgrade our existing products from time to time to cater the evolving needs of our customers. In 2019, we commenced research and development activities on smart security solutions. We expect our research and development costs to increase along with our R&D initiatives related to product development and development of our VeSync appintoanIoTplatform.See‘‘Business—Our Strategies’’ and ‘‘Future Plans and Use of Proceeds.’’
Professional fees primarily consist of consultancy fees, auditing and tax advisory fees, legal advisory fees.
Six months ended June 30, 2020 compared to six months ended June 30, 2019
Our administrative expenses increased by approximately 33.7% from US$9.8 million in the first half of 2019 to US$13.1 million in the first half of 2020, primarily due to (i) an increase in research and development expenses by US$0.8 million from US$3.8 million in the first half of 2019 to US$4.6 million in the first half of 2020 to prepare for product upgrades and new products; and (ii) a significant increase by US$1.9 million or 468.9% in our professional fees mainly caused by listing expenses incurred in the preparation of the Listing.
Year ended December 31, 2019 compared to the year ended December 31, 2018
Our administrative expenses increased significantly by approximately 57.8% or US$7.8 million from US$13.5 million for the year ended December 31, 2018 to US$21.3 million for the year ended December 31, 2019. Such increase was primarily due to (i) an increase in research and
– 271 – FINANCIAL INFORMATION development expenses by US$4.2 million from US$4.0 million in 2018 to US$8.2 million in 2019 as a result of an increase in headcount of research and development personnel, mainly on new products such as air fryer, toaster oven and smart security solutions; and (ii) an increase in administrative staff cost by approximately US$0.8 million resulting from increase in headcount of administrative personnel to support business expansion, and (iii) an increase in professional fees by US$1.8 million in 2019 mainly caused by US$0.5 million legal fees incurred to handle two product liability legal proceedings in the United States, US$0.4 million service fees paid for management consulting services for enhancing operational efficiency; and US$0.3 million more listing expenses.
Year ended December 31, 2018 compared to the year ended December 31, 2017
Our administrative expenses increased by approximately 60.7% or US$5.1 million from US$8.4 million for the year ended December 31, 2017 to US$13.5 million for the year ended December 31, 2018. Such increase was primarily due to (i) the increase in research and development expenses as a result of increase in headcount of research and development personnel for new products development and upgrades of products, such as smart fitness scales, air fryers and air purifiers; (ii) the increase in administrative staff cost of approximately US$1.0 million as result of the increased headcount of administrative personnel to support business growth; and (iii) an increase in listing expenses of US$0.6 million.
Other expenses
Our other expenses amounted at US$0.8 million, US$2.1 million, US$1.1 million and US$1.3 million, respectively, for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020. It mainly comprises (i) tax surcharges, (ii) litigation compensation, (iii) impairment of intangible assets, (iv) impairment of goodwill, (v) liquidated damage in relation to a trade exhibition and (vi) foreign exchange loss.
Tax surcharges in relation to customs duty, sales tax, value-added tax and income tax accounted for approximately US$0.6 million, US$0.5 million, US$1.0 million and US$1.2 million for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively. The tax surcharges were incurred mainly due to adjustments in customs duties, late payment of sales tax and late filing of income tax and value-added tax.
Litigation compensation amounted at nil, US$0.7 million, US$0.1 million and nil, respectively, for the period ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, which was mainly due to the settlement for two product liability legal proceedings which happened in 2018 and 2019, and one intellectual property disputes in 2018. For details, please refer to ‘‘Business—Legal Proceedings and Compliance—Legal Proceedings’’.
In 2018, we recorded a one-off US$0.7 million impairment of intangible assets because certain trademarks of our intangible assets were no longer in use and US$0.3 million impairment of goodwill in Shenzhen Zhilun and Shenzhen Dedu because of the unsatisfactory sales performance of the products processed by them.
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Finance costs
Our finance costs primarily represent (i) interest on bank and other borrowings and (ii) interest on lease liabilities. The following table sets forth the breakdown of our finance costs for the periods indicated:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000
Interest on bank loans and other borrowings...... 495 737 862 454 248 Interest on lease liabilities . . . . 151 142 208 88 310 Interest on related parties and employees...... — 67 213 87 85
Total...... 646 946 1,283 629 643
Our interest on other borrowings represent interest on loans from non-bank institutions. During the Track Record Period, we borrowed funds from some of our employees and related parties, namely Ms. Jiang Junxiu and Mr. Chen Zhaojun, for our working capital needs in the PRC. Loans from employees and related parties have effective interest rates between 7.2% to 12% per annum. As advised by our PRC legal adviser, such borrowings from our employees and related parties did not contravene any mandatory provisions under PRC laws and regulations.
Six months ended June 30, 2020 compared to six months ended June 30, 2019
Our finance costs remained stable at US$0.6 million in the first half of 2019 and US$0.6 million in the first half of 2020. Interest on bank loans and other borrowings decreased due to repayment of bank loans during the six months ended June 30, 2020 while the interest on lease liabilities increased due to new leases secured for our new warehouse in the United States and new office in Germany during the six months ended June 30, 2020.
Year ended December 31, 2019 compared to the year ended December 31, 2018
Our finance costs increased by approximately 44.4% or US$0.4 million from US$0.9 million for the year ended December 31, 2018 to US$1.3 million for the year ended December 31, 2019, primarily due to increase in our bank loans.
Year ended December 31, 2018 compared to the year ended December 31, 2017
Our finance costs increased by approximately 50.0% or US$0.3 million from US$0.6 million for the year ended December 31, 2017 to US$0.9 million for the year ended December 31, 2018, primarily due to the increase in other borrowings.
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Income tax expense
Income tax expense represents current and deferred income tax expenses. We are subject to incometaxonanentitybasisontheprofitarisingin or derived from the tax jurisdictions in which we are domiciled and operate. The determination of current and deferred income taxes was based on the enacted tax rates in respective tax jurisdictions.
Certain of our subsidiaries located in the PRC were subject to PRC corporate income tax at a rate of 25% on the assessable profit generated during the Track Record Period. Our subsidiary Shenzhen Chenbei, currently qualified as a high and new technology enterprise under the PRC income tax law, has been entitled to preferential tax rate of 15% since 2018 and will continue to enjoy such preferential tax rate until 2020. We plan to reapply for such qualification and preferential tax rate. According to the EIT Law and the relevant regulations and rules promulgated by the State Taxation Administration, enterprises engaging in research and development activities are entitled to claim 150% of their research and development expenses before 2018 and 175% since 2018 as tax deductible expenses when determining their assessable profit for that year subject to certain conditions stipulated therein (‘‘R&D Deduction’’).
Our subsidiary, Chongqing Xiaodao, currently qualified small and micro-sized enterprise, is entitled to a preferential income tax rate of 5% on the taxable income less than or equal to RMB1,000,000 and a preferential income tax rate of 10% on the taxable income between RMB1,000,000 and RMB3,000,000, and will continue to enjoy such preferential tax rate until December 2021 so long as it continues to qualify as a small and micro-sized enterprise. If Chongqing Xiaodao cannot continue to enjoy the preferential tax treatment upon the expiry, the Group’s profitability will be adversely impacted as more income tax would be incurred by Chongqing Xiaodao at the standard income tax rate.
Pursuant to the relevant tax laws of the United States, federal corporation income tax was levied at the rate of up to 34% on the taxable income arising in the United States during the year ended December 31, 2017, and was levied at the rate of 21% on the taxable income arising in the United States during the year ended December 31, 2018 and 2019.
Our Hong Kong subsidiary was subject to Hong Kong profit tax at a rate of 16.5% on the estimated assessable profit arising in Hong Kong during the Track Record Period. Our European subsidiaries, which operated in Netherlands and Germany were subject to corporate income tax at a rate of 20% and 15%, respectively on taxable income.
During the three years ended December 31, 2019, we recorded income tax expenses of US$1.3 million, US$1.0 million and US$0.6 million, respectively, with an effective tax rate of 40.5%, 18.4%, 8.1%, respectively. For the first half of 2019 and 2020, we recorded income tax expenses of US$0.4 million and US$4.6 million, with an effective tax rate of 16.6% and 17.1%. As of the Latest Practicable Date, we did not have any dispute with any tax authority.
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Six months ended June 30, 2020 compared to six months ended June 30, 2019
Our income tax expenses increased significantly by US$4.2 million from US$0.4 million in the first half of 2019 to US$4.6 million in the first half of 2020 due to the significant increase in our profit before tax. Our effective tax rate, remained stable at 16.6% in the first half of 2019 and 17.1% in the first half of 2020. The effective income tax rates were lower than the income tax rates of the United States at 21% and the PRC at 25% because of (i) the tax savings of US$0.3 million from preferential income tax rates to subsidiaries in the PRC; and (ii) the increase in our research & development expenses which were eligible for R&D Deduction, resulting in the increase in additional deduction allowance for research and developments.
Year ended December 31, 2019 compared to the year ended December 31, 2018
Our income tax expenses decreased by approximately 40.0% or US$0.4 million from approximately US$1.0 million for the year ended December 31, 2018 to approximately US$0.6 million for the year ended December 31, 2019 and our effective tax rate decreased significantly from 18.4% in 2018 to 8.1% in 2019. Such decrease was primarily due to a combination of the following (i) the significant increase in our research and development expenses which were eligible for R&D Deduction, resulting in an increase in deduction allowance for research and development costs from US$0.3 million for the year ended December 31, 2018 to US$0.7 million for the year ended December 31, 2019; and (ii) the tax saving of US$0.5 million from preferential income tax rates to subsidiaries in the PRC.
Year ended December 31, 2018 compared to the year ended December 31, 2017
Our income tax expenses decreased by approximately 23.1% or US$0.3 million from approximately US$1.3 million for the year ended December 31, 2018 to approximately US$1.0 million for the year ended December 31, 2017, despite the overall increase in profit before tax from approximately US$3.1 million in 2017 to approximately US$5.3 million in 2018. This was primarily due to a combination of the followings (i) Shenzhen Chenbei was qualified as a high and new technology enterprise in 2018, resulting in the reduction of corporate income tax from 25% on profit generated from our PRC subsidiaries to 15%; and (ii) the reduction of US federal corporation income tax to 21% for the year ended December 31, 2018, compared with up to 34% for the year ended December 31, 2017. Our effective income tax rate was particularly high at approximately 40.5% in 2018 which was due to transfer pricing adjustment not deductible for tax. For details, please refer to the section headed ‘‘Business—Transfer Pricing Arrangements.’’
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Profit for the year/period and net profit margin
As a result of the foregoing, our profit for the year/period amounted to US$1.9 million, US$4.4 million, US$6.4 million, US$2.0 million and US$22.5 million, respectively, for the three years ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2019 and 2020. Our net profit margin was approximately 2.2%, 3.0%, 3.7%, 2.6% and 17.4% for the three years ended December 31, 2017, 2018 and 2019 and six months ended June 30, 2019 and 2020, respectively.
Our net profit margin was particularly high at 17.4% for the six months ended June 30, 2020, which was primarily due to (i) a significant increase in gross profit margin by 9.0 percentage point from 38.8% for the six months ended June 30, 2019 to 47.8% for the same period in 2020 as a result of higher proportion of sales from our home-appliances-related categories such as home environment appliances, kitchen appliances and dining ware and health monitoring devices in our product mix during the lockdown, which were our most profitable categories, from 78.0% of total revenue in the first half of 2019 to 91.4% of total revenue in the first half of 2020; and (ii) to a lesser extent, the increase in our selling and distribution expenses and administrative expenses due to a reduction in promotional activities held in the first half of 2020 and economies of scale for our fixed costs.
DISCUSSION OF CERTAIN KEY CONSOLIDATED BALANCE SHEET ITEMS
The below table sets forth selected information from our consolidated statements of financial positions as of the dates indicated. This information has been extracted form, and should be read together with, our consolidated financial information included in ‘‘Appendix I—Accountants’ Report’’.
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Total non-current assets . . . . . 7,013 6,718 12,728 15,604 Totalcurrentassets...... 31,730 45,761 75,922 84,317
Total assets ...... 38,743 52,479 88,650 99,921
Total non-current liabilities. . . 6,495 3,017 8,620 13,832 Totalcurrentliabilities...... 27,087 41,098 63,636 51,960
Total liabilities...... 33,582 44,115 72,256 65,792
Net assets ...... 5,161 8,364 16,394 34,129
ShareCapital...... —— 11 Sharepremium...... ——4,210 — Otherreserves...... 5,161 8,364 12,183 34,128
Total equity...... 5,161 8,364 16,394 34,129
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Right-of-use assets
Our right-of-use assets mainly consisted of office premises, warehouse and machine and equipment which generally have lease terms up to ten years. During the Track Record Period, we did not own any properties and we leased all of the properties from independent third parties, and the carrying amount of our right-of-use assets was approximately US$2.6 million, US$3.0 million, US$8.1 million and US$11.3 million, respectively.
Our right-of-use assets increased from approximately US$2.6 million as of December 31, 2017 to approximately US$3.0 million as of December 31, 2018, mainly due to new lease arrangements in relation to our office in Shenzhen and warehouse in the United States, which was partially offset by the depreciation incurred during the year. Our right-of-use assets further increased to approximately US$8.1 million as of December 31, 2019, primarily due to (i) renewal of lease agreement for office and warehouse in the United States and (ii) leases for our new offices in Shenzhen, Chongqing and Macau to support our business expansion. Our right-of-use assets increased from approximately US$8.1 million as of December 31, 2019 to approximately US$11.3 million as of June 30, 2020, primarily due to lease agreements for our new warehouse in the United States and new office in Germany.
Trade receivables
The table below sets forth the breakdown of our trade receivables as of the dates indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Tradereceivables...... 2,099 4,521 18,304 19,272 Impairment...... (525) (590) (424) (651)
Total...... 1,574 3,931 17,880 18,621
Our trade receivables mainly represent outstanding balance due from Amazon under Vendor Central program and bulk purchase chain retailers. The increasing trend in our trade receivables as of December 31, 2017, 2018 and 2019 and June 30, 2020 was mainly attributable to increase in revenue generated through the Vendor Central program during the Track Record Period.
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The following table sets forth the aging analysis of our trade receivables based on the transaction date and net of loss allowance as of the dates indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Within3months...... 1,037 3,836 17,756 18,055 3to6months...... 60 95 94 532 6to12months...... 33 — 30 34 1to2years...... 444 ———
Total...... 1,574 3,931 17,880 18,621
The credit period is generally one month, sometimes extending up to three months was granted to Amazon and other bulk purchase chain retailers. We seek to maintain strict control over our receivables. Overdue balances are reviewed regularly by senior management. As of December 31, 2017, the trade receivable balance of US$1.2 million was held as collateral for Amazon loans and such loans were repaid in 2018.
The following table sets forth the movements in the loss allowance for impairment of trade receivables as of the dates indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Atbeginningofyear...... 521 525 590 424 Disposal of a subsidiary . . . . . ——(202) — Impairmentloss,net...... 4 65 36 227
At the end of year ...... 525 590 424 651
We apply the HKFRS 9 simplified approach to measure expected credit losses which permits the use of lifetime expected loss provision for all trade receivables from customers other than the largest retailer, and have established a provision matrix to measure expected credit losses. The provision rates are based on days past due of these customers. For the largest retailer, the provision rate is based on the Moody’s credit rating.
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The table below sets forth our average trade receivables turnover days for the dates indicated:
Six months Year ended December 31, ended June 30, 2017 2018 2019 2020
Average trade receivables turnover days(1) ...... 48 24 45 40
Note:
(1) Average trade receivable turnover days are calculated as the average of the beginning and ending trade receivable balances for the year/period, divided by the revenue (excluding revenue from Amazon Seller Central) for that year/period, multiplied by 365 days or 182 days, where appropriate.
During the Track Record Period, our trade receivables turnover days were 48 days, 24 days, 45 days and 40 days, respectively and were within the credit period of generally one to three months granted to Amazon and other bulk purchase chain retailers. Our average trade receivables turnover days decreased from 48 days for the year ended December 31, 2017 to 24 days for the year ended December 31, 2018. Such decrease was primarily due to a substantial growth in sales through Amazon’s Vendor Central program, for which the credit period was generally 30 days in 2018. Our average trade receivables turnover days increased from 24 days for the year ended December 31, 2018 to 45 days for the year ended December 31, 2019 which was primarily due to a well-established relationship with Amazon so that credit period of 60 days was granted for certain products such as scales in 2019. Our trade receivables turnover days remained stable at 40 days for the six months ended June 30, 2020.
As of October 31, 2020, approximately US$16.9 million, or 90.5%, of the outstanding trade receivables as of June 30, 2020 have been subsequently settled.
Prepayments, other receivables and other assets
Our prepayments, other receivables and other assets mainly consist of (i) deposits and other receivables; (ii) prepayments; and (iii) other current assets. The following table sets forth the breakdown of our prepayments, other receivables and other assets as of the dates indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Deposits and other receivables. 3,841 3,869 4,563 6,081 Prepayments...... 800 1,496 1,239 2,505 Deferred listing expenses . . . . — 195 387 1,083 Othercurrentassets...... 30 25 1,226 850
Total...... 4,671 5,585 7,415 10,519
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Our deposits and other receivables mainly represent (i) export tax refund receivables and U.S. tariff refund receivables; and (ii) sales proceeds from end-customers under the Seller Central program pending settlement by Amazon, less any service fees charged. Other current assets mainly represent prepaid export VAT.
Our prepayment, other receivables and other assets increased from approximately US$4.7 million as of December 31, 2017 to approximately US$5.6 million as of December 31, 2018, which was primarily due to an increase in prepayments to our suppliers of approximately US$0.7 million. Our prepayment, other receivables and other assets further increased to approximately US$7.4 million as of December 31, 2019, primarily attributable to an increase in prepaid export VAT. Our prepayment, other receivables and other assets increased from US$7.4 million as of December 31, 2019 to US$10.5 million as of June 30, 2020. Such increase was primarily attributable to (i) an increase in prepayment to our suppliers of approximately US$1.3 million and (ii) an increase in deposits and other receivables of approximately US$1.5 million mainly due to a combined effect of an increase in deposits held by Amazon and decrease in export tax refund receivables in the PRC.
Inventories
Our inventories primarily include raw materials and finished goods. The following table sets forth the breakdown of our inventories as of the dates indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Rawmaterials...... 1,596 934 912 710 Workinprogress...... 190 272 31 133 Finishedgoods...... 20,421 24,805 33,517 39,311 22,207 26,011 34,460 40,154
Less: Provision for inventories (238) (591) (1,182) (2,230)
Total...... 21,969 25,420 33,278 37,924
Our inventories amounted to US$22.0 million, US$25.4 million, US$33.3 million and US$37.9 million as of December 31, 2017, 2018 and 2019 and June 30, 2020, respectively. We generally maintain inventories sufficient for our sales for at least three months. As of December 31, 2017, the inventories stored in Amazon fulfillment centers and the Group’s U.S. warehouse with a carrying amount of US$16.9 million were pledged for the Group’s loans granted by Amazon. As of December 31, 2018 and 2019 and June 30, 2020, the inventories owned by our U.S. subsidiaries with a carrying amount of US$20.8 million, US$28.1 million and US$19.5 million, respectively, were pledged for the Group’s bank loans.
The increasing trend in our inventories as of December 31, 2017, 2018 and 2019 and June 30, 2020 was primarily due to the growth of our business.
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The following table sets forth an aging analysis of our inventories net of provision as at the dates indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Within3months...... 16,243 16,534 24,560 31,828 3to6months...... 4.226 6,084 2,877 2,291 6to12months...... 1,263 1,685 3,377 1,894 Over12months...... 237 1,117 2,464 1,911
Total...... 21,969 25,420 33,278 37,924
As of December 31, 2017, 2018, 2019 and June 30, 2020, our inventories aged over one year, which mainly comprised air mattresses, salt lamps, pressure cookers and outlets, amounted to approximately US$0.2 million, US$1.1 million, US$2.5 million and US$1.9 million, representing 1.1 %, 4.4%, 7.4% and 5.0% of our inventories, respectively. We review the condition of our inventories and make provision for obsolete and slow-moving inventory items. We carry out an inventory review on a product-by-product basis at the end of each reporting period and make provision for obsolete or slow-moving items. Provision for impairment loss for obsolete inventories is made with reference to the aging of inventories and full provision for impairment loss of inventories aging over three years will be recognized. We made provision for inventories of approximately US$0.2 million, US$0.6 million, US$1.2 million and US$2.2 million, respectively, as of December 31, 2017, 2018 and 2019 and June 30, 2020, of which approximately US$0.2 million, US$0.4 million, US$1.0 million and US$1.5 million, respectively, were provision for inventories aged over one year. As of October 31, 2020, approximately 44.9% of our inventories aged over one year as of June 30, 2020 had been subsequently sold. Inventories are stated at the lower of cost and net realizable value. Our Group’s estimate of the net realizable value for inventories is based primarily on estimated selling prices less any estimated costs to be incurred up to completion and disposal.
The following table sets forth our inventory turnover days for the dates indicated:
Six months Year ended December 31, ended June 30, 2017 2018 2019 2020
Average inventory turnover days(1) ...... 101 97 102 96
Note:
(1) Average inventory turnover days are calculated as the average of the beginning and the ending inventory balances for the year/period divided by cost of sales for the corresponding period and multiplied by 365 days or 182 days, where appropriate.
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During Track Record Period, our average inventory turnover days were relatively stable at 101 days, 97 days, 102 days and 96 days, respectively, which was in line with our inventory management policy.
As of October 31, 2020, approximately US$28.5 million, or 75.0%, of our inventories as of June 30, 2020 had been subsequently sold.
Tax recoverable
As of December 31, 2017, 2018 and 2019 and June 30, 2020, our tax recoverable was amounted to approximately US$0.1 million, US$0.2 million, US$2.1 million and US$0.3 million, respectively. Our tax recoverable increased significantly to US$2.1 million as of December 31, 2019, primarily due to provisional tax paid by Yoowo HK, our Hong Kong subsidiary, which our Directors believe that we were eligible for a tax refund. Our tax recoverable decreased significantly to approximately US$0.3 million as of June 30, 2020, which was primarily due to utilization of such tax recoverable as our income tax increased significantly in Hong Kong and the United States during the six months ended June 30, 2020.
Trade payables
Our trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. During the Track Record Period, our trade payables were US$10.0 million, US$8.2 million, US$19.4 million and US$32.0 million, respectively.
Our trade payables decreased slightly from US$10.0 million as of December 31, 2017 to US$8.2 million as of December 31, 2018, which was primarily due to more purchases made in anticipation of strong demand as we launched a new marketing and promotion campaign with Amazon in the fourth quarter of 2017. Our trade payables increased significantly to US$19.4 million as of December 31, 2019 and further to US$32.0 million as of June 30, 2020, which was mainly due to our increased procurement from sub-contractors as a result of increased sales.
We mainly settle our bills with suppliers through bank transfer with credit period of not more than 90 days. The following table sets forth the aging analysis of our trade payables, based on the transaction date, as of the dates indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Within3months...... 8,522 7,370 18,010 28,874 3to12months...... 947 262 887 2,822 over1year...... 557 569 521 337
Total...... 10,026 8,201 19,418 32,033
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The following table sets forth the average trade payables turnover days for the dates indicated:
Six months Year ended December 31, ended June 30, 2017 2018 2019 2020
Average trade payables turnover days(1) ...... 47 37 48 69
Note:
(1) Average trade payable turnover days are calculated as the average of the beginning and ending trade payable balances for the year/period, divided by the cost of sales for that year/period, multiplied by 365 days or 182 days, where appropriate.
Our trade payables turnover days were 47 days, 37 days, 48 days and 69 days for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively, which fell within the range of credit periods granted by our suppliers. Our trade payables turnover days increased from approximately 48 days for the year ended December 31, 2019 to approximately 69 days for the six months ended June 30, 2020, because we made more purchases in June in preparation of promotion events of Amazon held in the second half this year.
As of October 31, 2020, approximately US$29.6 million, or 92.4%, of our trade payables outstanding as of June 30, 2020 had been subsequently settled. Our Directors confirmed that during the Track Record Period and up to the Latest Practicable Date, there was no material default in payment of trade payables.
Other payables and accruals
Our other payables and accruals amounted to US$4.3 million, US$10.2 million, US$14.4 million and US$9.0 million as of December 31, 2017, 2018 and 2019 and June 30, 2020, respectively.
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The following table sets forth the breakdown of our other payables and accruals as of the dates indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Contractliabilities...... 116 167 180 79 Refundliabilities...... 452 1,813 5,899 1,197 Interestpayable...... — 112 153 — Payrollpayable...... 1,357 2,258 2,492 2,487 Tax payables other than corporateincometax...... 1,933 4,875 5,080 2,737 Accrued listing expenses . . . . — 252 99 1,910 Otherpayables...... 440 680 464 603
Total...... 4,298 10,157 14,367 9,013
Refund liabilities
Our refund liabilities are recognized for the obligation to fund under the following two circumstances: (i) promotion rebates payable to Amazon under Vendor Central program, which represented nil, 72.9%, 95.6% and 89.6% of our refund liabilities, respectively, and (ii) expected return of goods, which represented 100.0%, 27.1%, 4.4% and 10.4% of our refund liabilities, respectively.
We recognize promotion rebates payable when we expect to provide sales rebate to Amazon through Vendor Central program as a measure to encourage Amazon to enhance promotion for our products. We believe such arrangement enabled us to develop a long-term mutually-beneficial relationship with Amazon, strengthening our product ranking and brand awareness. The sales rebate is generally incurred after we sell our products to Amazon. At the end of each financial year, we update the estimate of rebate payables to Amazon (with corresponding adjustments to revenue) with reference to various factors such as type of products, inventory level of Amazon, promotion plan and historical promotion rebate. As of December 31, 2017 and 2018, our refund liabilities provision had been largely utilized during the year. As of December 31, 2019, however, we estimated more refund liabilities with an addition of US$22.2 million because of our significant 110.9% increase in revenue through Vendor Central program from US$41.4 million in 2018 to US$87.3 million in 2019. Despite the strong growth in revenue generated through the Vendor Central program in the first half of 2020, our additions to refund liabilities decreased significantly as of June 30, 2020 to US$7.6 million because of the robust sales performance and customers’ demand in the first half of 2020 benefiting from the favorable online retail market trends in the United States during the COVID-19 pandemic in the first half of 2020, thereby requiring less promotional activities in the second half of 2020.
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The following table sets forth the movement of our refund liabilities as of the date indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
At beginning of year/period . . 122 452 1,813 5,899 Additions...... 3,116 9,132 22,209 7,611 Amounts utilized during the year/period...... (2,786) (7,771) (18,123) (12,313)
At the end of year/period . . . . 452 1,813 5,899 1,197
Our refund liabilities amounted to US$0.5 million, US$1.8 million, US$5.9 million and US$1.2 million as of December 31, 2017, 2018 and 2019 an June 30, 2020, respectively. The increasing trend in the refund liabilities from US$0.5 million as of December 31, 2017 to US$5.9 million as of December 31, 2019 was mainly driven by continuous increase in sales under Amazon Vendor Central program and an increase in promotion rebates payables to Amazon. For the three years ended December 31, 2019, the percentage of promotion rebates to Amazon under the Vendor Central program increased from 7.2% in 2017 to 12.4% in 2018 and further to 21.6% in 2019 of our revenue generated from Vendor Central program. Our refund liabilities decreased significantly from approximately US$5.9 million as of December 31, 2019 to approximately US$1.2 million as of June 30, 2020, primarily due to a decrease in the percentage of promotion rebates payables to Amazon under Vendor Central program to 5.5% of our revenue generated Vendor Central program, as less promotional activities were launched due to the robust sales and customers’ demand during the six months ended June 30, 2020. Our successful marketing and advertising strategies in previous years allowed us to achieve satisfactory rankings for our key products in 2019, which then enabled us to capture robust customer demand and benefit from the favourable market trends in 2020.
Payroll payables
Our payroll payables mainly represent salaries and bonuses payable to our staff and social insurance payable to the relevant government authorities in the PRC. Our balance of payroll payable increased from US$1.4 million as of December 31, 2017 to US$2.3 million as of December 31, 2018, and further increased to US$2.5 million as of December 31, 2019, primarily attributable to increase in headcount of our employees from 2017 to 2019. Our payroll payables remained relatively stable at US$2.5 million as of June 30, 2020.
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Tax payables other than corporate income tax
Our tax payables other than corporate income tax mainly represent sales tax, value-added tax and customs duties in different jurisdictions.
Our balance of tax payables other than corporate income tax increased from US$1.9 million as of December 31, 2017 to US$4.9 million as of December 31, 2018. Such increase was mainly due to increases in value-added tax payables as a result of increased sales. Our balance of tax payables other than corporate income tax further increased to approximately US$5.1 million as of December 31, 2019, primarily due to value-added tax payables. Our balance of tax payables other than corporate income tax decreased from approximately US$5.1 million as of December 31, 2019 to approximately US$2.7 million as of June 30, 2020, primarily due to settlement of value-added tax and sales tax.
In August 2020, Etekcity US received a letter from the tax authority in Germany (the ‘‘German Tax Authority’’) requesting Etekcity US to provide supplemental information in relation to German value-added tax between 2015 and 2019. As of the Latest Practicable Date, we have engaged tax consultant to handle the enquiry and are preparing the relevant information requested by the German Tax Authority. We have discussed with the tax consultant on actions to be taken and the estimated additional net value-added tax of US$0.1 million for Etekcity US as of June 30, 2020 has been fully reflected in the historical financial information.
Provision
Our provision consists of (i) surcharges; (ii) lawsuit and (iii) warranty. The following table sets forth the breakdown of our provision as of the dates indicated:
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Surcharges...... 508 961 1,818 2,906 Lawsuit...... — 425 106 80 Warranty...... 63 175 262 432
Total...... 571 1,561 2,186 3,418
Our provision (including both current and non-current portions) amounted to US$0.6 million, US$1.6 million, US$2.2 million and US$3.4 million as of December 31, 2017, 2018 and 2019 and June 30, 2020. Our provision increased from approximately US$0.6 million as of December 31, 2017 to approximately US$1.6 million as of December 31, 2018, primary due to (i) an increase in provision for surcharges resulting from adjustments for customs duties and late payment and filing of sales tax; and (ii) provision for a legal proceeding in relation to product liability dispute with a customer which was settled in August 2019; for details, please refer to ‘‘Business—Legal Proceeding and Compliance—Legal Proceedings—Product liability legal proceedings’’.
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Our provision further increased to US$2.2 million as of December 31, 2019, primarily due to an increase in provision for surcharges of approximatelyUS$0.9millionmainlyarisingfrom adjustments on customs duties; and partially offset by the settlement of the abovementioned legal proceeding.
Our provision subsequently increased to US$3.4 million as of June 30, 2020, primarily due to an increase in provision for surcharges of approximatelyUS$1.1millionmainlyarisingfrom adjustments of customs duties and late filing of value-added tax.
Due to/from Directors and related parties
As of December 31, As of June 30, 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
DuefromDirectors...... 465 609 970 970 Due from related parties . . . . . 64 150 4,625 348 Duetoarelatedparty...... — 976 1,032 — DuetoDirectors...... 3,838 4,352 7,868 —
As of December 31, 2017, 2018 and 2019 and June 30, 2020, we had US$0.5 million, US$0.6 million, US$1.0 million and US$1.0 million, respectively, amounts due from Ms. Yang and Mr. Yang Yuzheng. The amounts due from Directors were interest free and with no fixed terms of repayment.
As of December 31, 2017, 2018 and 2019 and June 30, 2020, we had US$64,000, US$0.2 million, US$4.6 million and US$0.3 million, respectively, amounts due from our related parties, namely Karis I LLC, Karis II LLC, Arceus BVI, Caerus BVI, Ms. Jiang Junxiu and HL Y. A significant increase was recorded as of December 31, 2019, primarily due to the subscription money receivables from Karis I LLC, Karis II LLC, Arceus BVI and Caerus BVI, arising from the Reorganization when the Company allotted and issued shares to the aforesaid entities in 2019. Such amounts were subsequently settled in June 2020.
As of December 31, 2017, 2018 and 2019 and June 30, 2020, we had US$3.8 million, US$4.4 million, US$7.9 million and nil, respectively, amount due to Directors, represented a combination of (i) consideration payables in relation to the acquisition of certain of our overseas subsidiaries and acquisition of shareholdings in Shenzhen Chenbei as part of the Reorganization; for details, please refer to the section headed ‘‘History, Reorganization and Corporate Structure—Reorganization’’; and (ii) loans from Mr. Chen which is unsecured, with an effective interest rate of 12% per annum and repayable on demand. The amounts due to Directors were subsequently settled in June 2020.
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As of December 31, 2017, 2018 and 2019 and June 30, 2020, we had nil, US$1.0 million, US$1.0 million and nil, respectively, amount due to Ms. Jiang Junxiu which represented outstanding loans balance borrowed from her. In 2018 and 2019, as the director of Yoowo HK, Ms. Jiang Junxiu borrowed funds from independent invoice factoring companies in the PRC, for which Yoowo HK acted as the guarantor, for the purpose of general working capital of Shenzhen Chenbei. The same amount was lent to Shenzhen Chenbei with an interest rate of 12% per annum, which were on the same terms as the loans to Ms. Jiang Junxiu from the independent invoice factoring companies. The Directors confirmed that the interest rate of such loans was comparable to the market rate of similar loans.
It was arranged by the independent invoice factoring companies that Ms. Jiang Junxiu as the borrower and Yoowo HK as the guarantor. A majority of our Group’s borrowings were bank borrowings. However, our Group uses other sources of financing to satisfy its short term working capital requirements from time to time. The amounts due to related parties were fully settled in June 2020.
Our Directors confirmed that all of our amounts due from Directors and related parties would be settled prior to the Listing.
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Net Current Assets
The following table sets forth our assets and liabilities as of the dates indicated:
As of As of As of December 31, June 30, October 31, 2017 2018 2019 2020 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Current assets Inventories...... 21,969 25,420 33,278 37,924 91,927 Tradereceivables...... 1,574 3,931 17,880 18,621 31,948 Prepayments, other receivables andotherassets...... 4,671 5,585 7,415 10,519 16,514 Taxrecoverable...... 144 210 2,051 258 644 Duefromdirectors...... 465 609 970 970 970 Duefromrelatedparties...... 64 150 4,625 348 395 Pledgeddeposits...... ——588 632 582 Cashandcashequivalents..... 2,843 9,856 9,115 15,045 17,240
Total current assets ...... 31,730 45,761 75,922 84,317 160,220
Current liabilities Tradepayables...... 10,026 8,201 19,418 32,033 57,768 Otherpayablesandaccruals.... 4,298 10,157 14,367 9,013 20,097 Interest-bearing bank and other borrowings...... 4,276 13,999 18,354 4,601 21,763 Leaseliabilities...... 996 1,167 1,500 1,939 2,603 Taxpayable...... 3,590 1,646 729 3,277 12,809 Duetoarelatedparty...... — 976 1,032 —— Duetodirectors...... 3,838 4,352 7,868 —— Provision...... 63 600 368 1,097 1,586
Total current liabilities...... 27,087 41,098 63,636 51,960 116,626
Net current assets ...... 4,643 4,663 12,286 32,357 43,594
As of December 31, 2017, 2018 and 2019, June 30, 2020 and October 31, 2020, we had net current assets of US$4.6 million, US$4.7 million, US$12.3 million, US$32.4 million and US$43.6 million, respectively.
Our net current assets were relatively stable at approximately US$4.6 million and US$4.7 million as of December 31, 2017 and 2018.
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Our net current assets increased significantlyby161.7%orUS$7.6millionfromUS$4.7 millionasofDecember31,2018toUS$12.3million as of December 31, 2019. Such increase was mainly attributable to (i) the increase in trade receivables of US$13.9 million as a result of continuous growth in sales generated from the Amazon Vendor Central program; and (ii) an increase in inventories of US$7.9 million that was partially offset by increase in trade payables of US$11.2 million.
Our net current assets increased by approximately 163.4% or US$20.1 million from approximately US$12.3 million as of December 31, 2019 to approximately US$32.4 million as of June 30, 2020. Such increase was mainly due to (i) a decrease in interest-bearing bank and other borrowings of US$13.8 million; (ii) a decrease in amounts due to Directors of US$7.9 million; (iii) an increase in cash and cash equivalents of US$5.9 million; and (iv) an increase in inventories of US$4.6 million; which was partially offset by (v) an increase in trade payables of US$12.6 million.
Our net current assets increased by approximately 34.6% or US$11.2 million from approximately US$32.4 million as of June 30, 2020 to approximately US$43.6 million as of October 31, 2020. Such increase was primarily due to (i) an increase in inventories of US$54.0 million; which was partially offset by (ii) an increase in trade payables of US$25.7 million and (iii) an increase in interest-bearing bank and other borrowings of approximately US$17.2 million.
LIQUIDITY AND CAPITAL RESOURCES
During the Track Record Period, our operations were generally financed through a combination of internally generated cash flows, bank and other borrowings and capital contribution from our shareholders. Our Directors believe that in the long term, our operations will be funded primarily by cash generated from operations and bank and other borrowings, the net proceeds from the Listing and, if necessary, additional equity financing when the needs come.
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Cash flows
The following table sets forth a summary of our Group’s consolidated statements of cash flows during the Track Record Period:
Year ended December 31, Six months ended June 30, 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000
Operating cash flows before changes in working capital. . . 4,835 8,869 10,795 4,318 30,248 Changes in working capital. . . . (9,773) (2,660) (8,311) (6,993) (1,157) Incometaxpaid...... (466) (3,384) (3,744) (1,792) (318)
Net cash flows from/(used in) operatingactivities...... (5,404) 2,825 (1,260) (4,467) 28,773 Net cash flows used in investing activities...... (1,574) (929) (1,833) (1,070) (6,468) Net cash flows from/(used in) financingactivities...... 8,824 5,162 2,372 (2,793) (16,375)
NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS 1,846 7,058 (721) (8,330) 5,930 Cash and cash equivalents at beginning of year/period . . . . 946 2,843 9,856 9,856 9,115 Effect of foreign exchange rate changes,net...... 51 (45) (20) 71 —
CASH AND CASH EQUIVALENTS AT THE END OF YEAR/PERIOD. . . 2,843 9,856 9,115 1,597 15,045
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Net cash flows from/(used in) operating activities
During the Track Record Period, our cash inflow from operating activities primarily arose from the receipts from customers, and our cash outflow from operating activities represented mainly direct cost incurred for our business operations, which primarily consisted of subcontracting costs, fulfillment fee, raw materials cost freight and insurance cost and customs duties.
We recorded net cash flows used in operating activities of US$5.4 million for the year ended December 31, 2017, which was mainly as a result of (i) the profit before tax of approximately US$3.1 million; adjusted for (ii) an increase in inventories of approximately US$15.8 million primarily due to increased purchases in connection with a new marketing and promotion campaign with Amazon in the fourth quarter of 2017 and; which was partially offset by (iii) an increase in trade payables of approximately US$6.7 million.
We recorded net cash flows from operating activities of US$2.8 million for the year ended December 31, 2018, which was mainly as a result of (i) the profit before tax of approximately US$5.3 million; adjusted for (ii) an increase in inventories of approximately US$3.8 million; and (iii) income tax paid of approximately US$3.4 million; which were partially offset by (iv) an increase in other payables and accruals of approximately US$5.3 million.
We recorded net cash flows used in operating activities of US$1.3 million for the year ended December 31, 2019, which was mainly as a result of (i) the profit before tax of approximately US$6.9 million; adjusted for (ii) an increase in inventories of approximately US$8.5 million as a result of our business growth; and (iii) an increase in trade receivables of approximately US$14.0 million due to increased sales generated under the Vendor Central program and which was partially offset by (iv) an increase in trade payables of approximately US$11.3 million.
We recorded net cash flows from operating activities of US$28.8 million for the six months ended June 30, 2020, which was mainly as a result of (i) the profit before tax of approximately US$27.1 million; adjusted for (ii) an increase in trade payables of approximately US$12.6 million; which was partially offset by (iii) an increase in inventories of approximately US$5.7 million; and (iv) a decrease in other payables and accruals of approximately US$5.2 million.
We recorded negative operating cash flow for the year ended December 31, 2017 and 2019. In view of our business operation and seasonal fluctuations, we generally maintain inventories sufficient for our sales for at least three months, particularly in advance of our sales peak in the secondhalfoftheyear.Wealsograntedacreditperiodof30to60daystoAmazonforsalesunder the Vendor Central program. As such, there are timing differences between paying our suppliers and receiving payment from our customers. In order to better manage our working capital, our Group negotiates with our subcontractors to obtain credit period of up to 90 days to shorten the aforementioned timing difference. We also closely monitor our cash flow position and look for alternative funding sources to sustain and expand our business operation, when necessary. During the Track Record Period, our total borrowings increased from US$8.2 million as of December 31, 2017 to US$14.0 million as of December 31, 2018 and further to US$18.4 million as of December 31, 2019. As of October 31, 2020, being the latest practicable date for determining our indebtedness, we had unutilized banking facility of approximately US$2.4 million. For details, please refer to the paragraph headed ‘‘Indebtedness’’ in this section.
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Net cash used in investing activities
We recorded net cash flows used in investing activities of US$1.6 million for the year ended December 31, 2017, primarily resulted from (i) purchase of items of property, plant and equipment of approximately US$0.9 million; and (ii) acquisition of Shenzhen Zhilun and Shenzhen Dedu of approximately US$0.5 million.
We recorded net cash flows used in investing activities of US$0.9 million for the year ended December 31, 2018, primarily resulted from (i) purchase of items of property, plant and equipment of approximately US$0.6 million; and (ii) loans to directors of approximately US$0.2 million.
We recorded net cash flows used in investing activities of US$1.8 million for the year ended December 31, 2019, primarily resulted from (i) purchase of items of property, plant and equipment of approximately US$1.0 million; and (ii) loan to directors of approximately US$0.7 million.
We recorded net cash flows used in investing activities of US$6.5 million for the six months ended June 30, 2020, which was primarily due to settlement of consideration payment of approximately US$6.4 million to the shareholders in relation to the Reorganization.
Net cash from financing activities
We recorded net cash flows from financing activities of US$8.8 million for the year ended December 31, 2017, primarily attributable to (i) new bank loans of approximately US$16.1 million; which offset by (ii) repayment of bank loans of approximately US$8.9 million.
We recorded net cash flows from financing activities of US$5.2 million for the year ended December 31, 2018, primarily attributable to (i) new bank loans of approximately US$19.2 million, which were partially offset by (ii) repayment of bank loans of approximately US$13.4 million.
We recorded net cash flows from financing activities of US$2.4 million for the year ended December 31, 2019, primarily attributable to (i) new bank loans of approximately US$16.7 million, which were partially offset by (ii) repayment of bank loans of approximately US$12.4 million and (iii) principal portion of lease payment of approximately US$1.4 million.
We recorded net cash flows used in financing activities of US$16.4 million for the six months ended June 30, 2020, which was primarily due to repayment of bank loans and other borrowings of approximately US$15.8 million.
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INDEBTEDNESS
The table below sets forth our bank and other borrowings and lease liabilities balances as of the dates indicated:
As of December 31, As of June 30, As of October 31, 2017 2018 2019 2020 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Interest-bearing bank and other borrowings (current portion) Bankloans...... 163 10,154 15,786 4,601 21,763 Otherborrowings...... 4,113 3,845 2,568 —— Interest-bearing bank and other borrowings (non-current portion) Bankloans...... 95 9 — 1,688 1,083 Otherborrowings...... 3,839 —— — — Lease liabilities (current portion). 996 1,167 1,500 1,939 2,603 Lease liabilities (non-current portion) ...... 1,843 2,047 6,802 9,823 9,446
Total ...... 11,049 17,222 26,656 18,051 34,895
Interest-bearing bank and other borrowings
As of December 31, As of June 30, As of October 31, 2017 2018 2019 2020 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Current portion Secured bank and other borrowings...... 4,168 13,857 18,247 4,509 21,673 Unsecured bank overdraft ...... 108 142 107 92 90
4,276 13,999 18,354 4,601 21,763
Non-current portion Secured bank and other borrowings...... 3,934 9 — 1,688 1,083
Total ...... 8,210 14,008 18,354 6,289 22,846
– 294 – FINANCIAL INFORMATION
Our bank loans represent loans from commercial banks and our other borrowings represent borrowings from (i) institutions such as Amazon, financial service providers in the United States and in Hong Kong. As of December 31, 2017, 2018 and 2019 and June 30, 2020, our interest- bearing bank and other borrowings amounted to US$8.2 million, US$14.0 million, US$18.4 million and US$6.3 million, respectively. Save for unsecured bank overdraft, all our interest-bearing bank and other borrowings during the Track Record Period were secured by shares, assets owned by us, corporate guarantees and personal guarantee provided by Ms. Yang. The balance of bank and other borrowings of approximately US$7.5 million, US$13.9 million, US$18.2 million and US$3.5 million as of December 31, 2017, 2018 and 2019 and June 30, 2020 were secured by guarantees of the Controlling Shareholders. For details, please refer to note 24 to the Accountants’ Report in Appendix I to this prospectus. Our Directors confirmed that the personal guarantee given by Ms. Yang will be released upon to the Listing.
As of October 31, 2020, the latest practicable date for the purpose of the indebtedness statements, we had banking facilities of US$25.1 million, of which US$2.4 million had not been utilized. It is expected that guarantees provided by our Controlling Shareholders for the banking facilities of US$22.4 million as of October 31, 2020 would be replaced by corporate guarantees to be provided by our Group itself upon the Listing.
During the Track Record Period and up to the Latest Practicable Date, we had not been in default of these debt covenants that could cause any material adverse impact on our business operations. We had not experienced any default or withdrawal or request for early repayment of bank borrowings during the Track Record Period. During the Track Record Period and up to October 31, 2020, being the latest practicable date for the purpose of the indebtedness statement, we did not have any material mortgages, charges, debentures, loan capital, debt securities, loans, bank overdrafts or other similar indebtedness, finance lease or hire purchase commitments, liabilities under acceptances (other than normal trade bills), acceptance credits, which are either guaranteed, unguaranteed, secured or unsecured, or guarantees on a consolidated basis.
Lease liabilities
HKFRS 16 introduced a single lessee accounting model, whereby assets and liabilities are recognized for all leases on the statement of financial position, subject to certain exceptions. Our lease liabilities primarily related to the lease of office premises, warehouse and machines and equipment, which generally have a term ranging from two to ten years. We recognize a corresponding lease liability for our right-of-use assets on the lease commencement date, except for short-term lease that have a lease term of 12 month or less and leases of low-value assets. As of October 31, 2020, we, as a lessee, had outstanding lease liabilities for the remaining terms of relevant lease agreements in an aggregate amount of US$12.0 million.
Our Directors confirm that there has been no material adverse change in our indebtedness since October 31, 2020.
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KEY FINANCIAL RATIOS
Year ended/As of December 31, Six months ended/ 2017 2018 2019 As of June 30, 2020
Current ratio(1) ...... 1.2times 1.1times 1.2times 1.6times Quick ratio(2) ...... 0.4times 0.5times 0.7times 0.9times Gearing ratio(3) ...... 214.1% 205.9% 162.6% 52.9% Return on total assets(4) ..... 4.8% 8.3% 7.2% N/A(7) Return on equity(5) ...... 36.2% 52.1% 38.9% N/A(7) Interest coverage(6) ...... 5.9times 6.7times 6.4times N/A(7)
Notes:
(1) Current ratio is calculated as current assets divided by current liabilities as of the end of each year/period.
(2) Quick ratio is calculated by dividing total current assets less inventories by total current liabilities as of the end of each year/period.
(3) Gearing ratio is calculated as total borrowings (bank and other borrowings and lease liabilities) divided by total equity as of the end of each year/period.
(4) Return on total assets is calculated as profit for the year divided by the total assets as of the end of each year. (5) Return on equity is calculated as profit for the year divided by the total equity as of the end of each year.
(6) Interest coverage is calculated by dividing profit before interest and tax by interest expenses for the respective year.
(7) Not applicable as ratios calculated from interim financial figures are not comparable to those calculated from annual financial figures.
Current ratio and quick ratio
Our current ratio was relatively stable at approximately 1.2 times, 1.1 times and 1.2 times as of December 31, 2017, 2018 and 2019. Our current ratio increased from 1.2 times as of December 31, 2019 to 1.6 times as of June 30, 2020, primarily due to (i) a decease in interest-bearing bank and other borrowings; (ii) a decrease in due to Directors; (iii) an increase in cash and cash equivalents and partially offset by increase in trade payables.
Our quick ratio increased slightly from 0.4 times as of December 31, 2017 to 0.5 times as of December 31, 2018, primarily due to increase in current assets excluding inventories outweighed the increase in current liabilities. Our quick ratio increased from approximately 0.5 times as of December 31, 2018 to approximately 0.7 times as of December 31, 2019, primarily driven by increase in (i) trade receivables and (ii) due from related parties, which was partially offset by increase in trade payables. Our quick ratio further increased to 0.9 times as of June 30, 2020, primarily due to (i) a decease in interest-bearing bank and other borrowings; (ii) a decrease in due to directors; (iii) an increase in cash and cash equivalents and partially offset by increase in trade payables.
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Gearing ratio
Our gearing ratio decreased from approximately 214.1% as of December 31, 2017 to approximately 205.9% as of December 31, 2018, primarily due to an increase in other reserves as a result of increased net profit for the year ended December 31, 2018, outweighed the increase in our total borrowings.
Our gearing ratio further decreased to approximately 162.6% as of December 31, 2019, mainly due to increase in total equity as result of (i) increased net profit for the year ended December 31, 2019 and (ii) issuance of shares as part of Reorganization, outweighed the increase in our total borrowings.
Our gearing ratio decreased significantly from 162.6% as of December 31, 2019 to 52.9% as of June 30, 2020, mainly due to a significant increase in net profit for the six months ended June 30, 2020 and decrease in interest-bearing bank and other borrowings.
Return on total assets
Our return on total assets increased from approximately 4.8% for the year ended December 31, 2017 to approximately 8.3% for the year ended December 31, 2018, primarily attributable to increase in our net profit for the year ended December 31, 2018, outweighed the increase in our total assets.
Our return on total assets decreased from approximately 8.3% for the year ended December 31, 2018 to approximately 7.2% for the year ended December 31, 2019, primarily due to increase in our total asset which was mainly driven by an increase in trade receivable of approximately US$13.9 million and increase in inventories of approximately US$7.9 million.
Return on equity
Our return on equity significant increased from approximately 36.2% for the year ended December 31, 2017 to approximately 52.1% for the year ended December 31, 2018, primarily due to increase in net profit for the year ended December 31, 2018 outweighted an increase in total equity for the same year.
Our return on equity decreased from approximately 52.1% for the year ended December 31, 2018 to approximately 38.9%, primarily due to increase in total equity driven by (i) issuance of shares as part of Reorganization and (ii) increase in net profit for the year ended December 31, 2019.
Interest Coverage
Our interest coverage was relatively stable at 5.9 times and 6.7 times for the year ended December 31, 2017 and 2018, respectively, primarily due to increase in profit before tax and interest outweighed increase in finance cost.
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Our interest coverage slight decreased from approximately 6.7 times for the year ended December 31, 2018 to approximately 6.4 times for the year ended December 31, 2019, primarily due to increase in interest on bank borrowings.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements or commitments to guarantee the payment obligations of any third parties. 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 or hedging or research and development services with us.
RELATED PARTY TRANSACTIONS
We entered into certain related party transactions with our related parties during the Track Record Period, details of which are set out in note 33 to the Accountants’ Report in Appendix I to this prospectus. Our related party transactions were mainly non-trade amounts due to/from related parties which will be settled prior to the Listing.
DIVIDEND
In 2017, 2018 and 2019, a subsidiary of our Group declared dividend of nil, approximately US$0.6 million and nil, respectively, to the then shareholders and the amount had been fully settled by cash. In June 2020, our Company declared dividend of US$4.2 million equivalent to approximately RMB29.9 million and such amount has been distributed out of share premium account of our Company and settled in cash.
As we are a holding company, our ability to declare and pay dividends will depend on receipt of sufficient funds from our subsidiaries. Our subsidiaries must comply with their respective constitutional documents and the applicable local laws and regulations in declaring and paying dividends to us.
Any amount of dividends we pay will be at the discretion of our Directors and will depend on our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our Directors consider relevant. Any declaration and payment as well as the amount of dividends will be subject to our constitutional documents and the Cayman Companies Law. Our Shareholders in a general meeting may approve any declaration of dividends, which must not exceed the amount recommended by our Board. No dividend will be declared or payable except out of our profit and reserves lawfully available for distribution. Our future declarations of dividends may or may not reflect our historical declarations of dividends and will be at the absolute discretion of the Board.
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LISTING EXPENSES
Based on the mid-point Offer Price of HK$5.10, the total estimated listing related expenses payable by us in connection with the Global Offering is approximately US$13.3 million (equivalent to HK$103.1 million and assuming the Over-allotment Option is not exercised), representing approximately 7.2% of the total proceeds from the Global Offering, of which approximately US$0.6 million, US$0.9 million and US$2.2 million, respectively, was charged to our consolidated income statement for the year ended December 31, 2018 and 2019 and six months ended June 30, 2020. We estimate that approximately US$2.2 million will be charged to our consolidated income statement for the year ending December 31, 2020, and the remaining balance of approximately US$7.4 million is expected to be capitalized. Our Directors would like to emphasize that the listing expenses stated above are the current estimation for reference purpose only and the actual amount to be recognized may differ from this estimation.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our Group is exposed to certain financial risks including foreign currency risk, credit risk and liquidity risk in the normal course of business. For further details of our financial risk management, please refer to the notes 36 to the Accountants’ Report set out in Appendix I to this prospectus.
DISTRIBUTABLE RESERVES
Our Company was incorporated on January 9, 2019 and is an investment holding company. In accordance with the Articles of Association, dividends may be declared and paid out of the profit of our Company or from any reserve set aside from profit which our Directors determine is no longer needed. The Cayman Companies Law permits, subject to a solvency test and the provisions of the Articles of Association, the payment of dividends and distributions out of the share premium account. As of June 30, 2020, there were no reserves available for distribution to our shareholders.
DISCLOSURE REQUIRED UNDER THE LISTING RULES
Our Directors confirm that as of the Latest Practicable Date, there are no circumstances that would give rise to the disclosure requirement under Rules 13.13 to 13.19 of the Listing Rules.
WORKING CAPITAL CONFIRMATION
During the Track Record Period, we met our working capital and other liquidity requirements principally from cash from operations, bank and other borrowings and capital contribution from our shareholders.
Taking into account the financial resources available to our Group, including the internally generated funds, our available credit facilities and the estimated net proceeds from the Global Offering, our Directors are of the view that our working capital is sufficient for our present requirements, that is for at least the next 12 months from the date of this prospectus.
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UNAUDITED PRO FORMA ADJUSTED NET TANGIBLE ASSETS
Please refer to the section headed ‘‘Unaudited Pro Forma Financial Information’’ in Appendix II to this prospectus for further details.
NO MATERIAL ADVERSE CHANGE
Our Executive Directors further confirm that there has been no event, or any material adverse change in our financial or trading position or prospects since June 30, 2020 and up to the date of this prospectus which would have materially affected the information presented in our consolidated financial statements included in the Accountants’ Report set forth in Appendix I to this prospectus.
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FUTURE PLANS
Please refer to the section headed ‘‘Business—Our Strategies’’ in this prospectus for a detailed description of our future plans.
USE OF PROCEEDS
We estimate that we will receive aggregate net proceeds of approximately HK$1,330.0 million (equivalent to around US$171.6 million) from the Global Offering (after deducting underwriting commissions and estimated expenses payable by us in connection with the Global Offering), assuming that the Over-allotment Option is not exercised and assuming an Offer Price of HK$5.10 per Offer Share (being the mid-point of the indicative Offer Price range). We currently intend to apply such net proceeds in the following manner:
(i) approximately 30.0% of our estimated net proceeds, or HK$399.0 million, will be used for (a) the research and development of new products and (b) the upgrade and iteration of existing products. We plan to recruit approximately 200 to 300 staff, including research and development engineers and product managers, with advanced education degrees and/or relevant industry qualification and experience from 2021 to 2023 and to retain our existing talent with competitive compensation to support our plan to expand and upgrade our product portfolio. As of October 31, 2020, 168 and 55 staff were responsible for (i) the research and development of new products and (ii) the upgrade and iteration of existing products, respectively. Among the planned recruitment of approximately 200 to 300 additional staff, approximately 150 to 225 and approximately 50 to 75 staff will be responsible for (i) the research and development of new products based on market trend and customers’ preference, and (ii) the upgrade and iteration of existing products, including to implement the latest technologies into existing products, respectively. Our research and development staff increased by approximately 82 employees from December 31, 2019 to October 31, 2020. In view of the historical trend, our Directors believe that an additional 200 to 300 staff would be required from 2021 to 2023 to support the continuous growth of our business. The average annual salary for a qualified research and development engineers and product managers is expected to be around HK$250,000. The exact amount of salary will vary according to the experience and qualification of the individual employees. We believe recruiting and retaining research and development engineers and product managers is crucial to enhancing our technical knowhow and game development capabilities. We intend to allocate:
. approximately 15% of our estimated net proceeds, or HK$199.5 million, for the research and development of new products. We aim to develop approximately 80, 95, 120 new products per year covering new product categories and new series of existing products in 2021, 2022 and 2023, respectively. We estimate that we need to hire additional staff for the research and development of new products, primarily because (i) we expect to develop and launch more models along with our business expansion, and we will need additional staff to conduct research and development for various new product concurrently; and (ii) we will be required to enhance our product quality in order to maintain our market position, and we will need devote additional resources in research and development.
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. approximately 5% of our estimated net proceeds, or HK$66.5 million, to upgrade and iterate our existing products, including to upgrade our top selling products, such as air purifiers, air humidifiers and ovens. We aim to offer upgraded products with improved performance, higher reliability and more enjoyable user experience. We therefore need additional staff to conduct research and modify product design. In addition, we will need additional staff to monitor feedback from customers, track market demand for competing products and iterate our products based on the information acquired.
. approximately 5% of our estimated net proceeds, or HK$66.5 million, to upgrade our R&D design facilities and R&D management system. Along with our business expansion, we expect to have an average of approximately 100 new products in our pipeline per year. We plan to purchase facilities and systems, such as Product Life- cycle Management (PLM) system to oversee the development status of various products, improve management efficiency and reliability, and control research and development risks.
. approximately 5% of our estimated net proceeds, or HK$66.5 million, to enhance our testing capability by expanding the capacity of our testing laboratories to better simulate user experiences in different scenarios and further improve our user satisfaction. We currently have two testing laboratories in China. We plan to add testing equipment, such as radio frequency testing, product aging testing, IPX water resistance testing and electrostatic discharge testing.
(ii) approximately 25.0% of our estimated net proceeds, or HK$332.5 million, will be used to expand our sales channels and geographic coverage and enhance our brand awareness. We intend to allocate:
. approximately 8.0% of our estimated net proceeds, or HK$106.4 million, to expand our sales channels and market presence in our existing markets, including North America, Europe and Japan, and increase the size of our local sales teams, sales support teams, and customer services teams.
. We plan to use approximately 4.0% of our estimated net proceeds, or HK$53.2 million, to increase the size of our sales and marketing, after sale support and customer service team for non-Amazon channels. We currently have less than 10 people to facilitate our non-Amazon sales channels. Since 2020, our sales from non-Amazon channels have increased steadily. For the six months ended June 30, 2020, we recorded revenue from non-Amazon channels of US$4.5 million, representing an increase of 650.0%, or US$3.9 million, from US$0.6 million during the same period in 2019. Along with our plan to continue expanding sales through non-Amazon channels, we plan to hire approximate 20–50 staff from 2021 to 2021 to conduct sales and marketing, after sale support and customer service.
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. We plan to use approximately 4.0% of our estimated net proceeds, or HK$53.2 million, for marketing activities and procuring solutions in expanding sales channels. We plan to organize offline promotional events to enhance our brand public awareness. We also plan to procure solutions for customer relationship management, such as Electronic data interchange (‘‘EDI’’) and Customer Relationship Management (‘‘CRM’’)system.
. approximately 8.0% of our estimated net proceeds, or HK$106.4 million, to expand and solidify our market presence in new regions, such as Asia (other than Japan) and Middle East. We also plan to expand our business in these markets by following the development of global e-commerce market places, such as Amazon, to by enlarging the size of our online operation team, building local sales and marketing teams and establishing local support team as needed.
. We plan to use approximately 4.0% of our estimated net proceeds, or HK$53.2 million, to recruit approximately 30 to 60 sales and marketing staff from 2021 to 2023 to support our geographic growth. Among the planned recruitment of approximately 30 to 60 additional staff, we estimate approximately 30%, 40% and 30% of staff will be supporting (i) online sales and marketing, (ii) local sales and marketing, and (iii) local customer services, respectively, for our sales in target regions.
. We also plan to use approximately 4.0% of our estimated net proceeds, or HK$53.2 million, to rent office premises and warehouses for our local support team; create offline sales activities to promote our brand awareness.
. approximately 9.0% of our estimated net proceeds, or HK$119.7 million, to devote more resources in brand promotion, including enhancing our advertising efforts and opening offline experience stores. We primarily relied on Amazon to promote our products.
. We plan to use approximately 4.0% of our estimated net proceeds, or HK$53.2 million, to expand our branding team by recruiting 45 staff from 2021 to 2023. As of October 31, 2020, we had nine and 10 staff, who were responsible for content creation and media management, respectively. As we are expanding our product portfolio, we will need additional staff to create branding campaign, determine product positioning, create branding content and promote our brand awareness. In view of the historical performance, our Directors believe that an additional 45 staff would be required from 2021 to 2023 to support the continuous growth of our business.
. We plan use approximately 5% of our estimated net proceeds, or HK$66.5 million, to (i) conduct performance-based advertising on major search engines, such as Google, and popular social media, such as Youtube and Facebook; (ii) hire branding consulting firm to create innovative branding campaign and
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enhance our brand awareness; and (iii) open offline experience stores in United States, Europe and China, allowing customers to have real-time experiences with our products.
(iii) approximately 25% of our estimated net proceeds, or HK$332.5 million, to upgrade our VeSync app into a home IoT platform. This can be achieved by (i) build and expand our internal talent pool in cloud infrastructure, IoT technology, data technology to maintain and upgrade our VeSync app; and (ii) acquire or partner with outside experienced team to gain advanced technologies and upgrade our VeSync app. We intend to allocate:
. 10% of our estimated net proceeds, or HK$133.0 million, to build and expand our talent pools in cloud infrastructure, IoT technology, data technology (including algorithms, machine learning, data mining and business intelligence). We plan to recruit approximately 100 to 150 staff, including engineers with advanced education degrees and/or relevant industry qualification and experience from 2021 to 2023 to support VeSync app upgrade. Vesync platform is key to our successful smart operation. According to the Frost and Sullivan Report, smart home device market in United States is forecasted to grow rapidly from 2020 to 2024. We expect our smart home devices will contribute to 1/3 of our total revenue in 2023. Along with our increased product sales volume and smart product portfolio, our VeSync users are expected to increase as well. We believe an additional 100 to 150 staff are required to maintain and improve our data processing efficiency of the VeSync app. As of October 31, 2020, we have 63 staff supporting the operation of the VeSync app.
. 15% of our estimated net proceeds, or HK$199.5 million, to acquire or partner with companies in the data technology industry, should suitable opportunities arise. We believe acquiring an experienced IoT team may save research and development time in upgrading the VeSync app into a home IoT system.
(iv) approximately 10% of our estimated net proceeds, or HK$133.0 million, to develop and launch smart solutions, including smart security solutions, for business customers. We intend to allocate:
. 5% of our estimated net proceeds, or HK$66.5 million, for the research and development of smart solutions for business customers. We aim to leverage our know-how in IoT platform and develop smart security solutions for business customers. In 2019, we incurred approximately US$2.0 million research and development costs for developing smart security solutions. From 2021 to 2023, our estimated research and development costs for developing smart security solutions are between US$2.0 million and US$3.0 million. Such costs will be applied to (i) data structure and security testing to ensure user’s access to smart security system; and (ii) development of tailored solutions for various industries.
. 5% of our estimated net proceeds, or HK$66.5 million, to expand North America market of smart solutions for business customers. We aim to (i) expand the size of our product development and sales teams, (ii) devote more resources in the
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promotion of such brand, (iii) establish instalment team to serve customers purchasing our smart solutions, as well as smart solutions developed by third parties, and (iv) cooperate with property developers for the installation of smart solutions into the community during development.
(v) approximately 10.0% of our estimated net proceeds, or HK$133.0 million, will be used for working capital.
The following table sets forth the timeline for our use of net proceeds from the Global Offering:
For the year For the year For the year ending ending ending 31 December 31 December 31 December Percentage to Use of proceeds 2021 2022 2023 Sub-total total proceeds (HK$ in (HK$ in (HK$ in (HK$ in (%) million) million) million) million)
1. Research and development of new products and upgrade and iteration of existing products Research and development of newproducts...... 59.8 59.8 79.9 199.5 15 Upgrade and iterate our existing products...... 19.9 19.9 26.7 66.5 5 Upgrade our R&D design facilities and R&D managementsystem...... 19.9 19.9 26.7 66.5 5 Enhance our testing capability. . 19.9 19.9 26.7 66.5 5 2. Expand our sales channels and geographic coverage and enhance our brand awareness Expand our sales channels and market presence in existing majormarkets...... 37.2 34.6 34.6 106.4 8 Expand and solidify our market presenceinregions...... 35.5 35.5 35.4 106.4 8 Devote more resources in brand promotion...... 39.9 39.9 39.9 119.7 9 3. Upgrade our VeSync app into a home IoT platform Build and expand our talent pools in cloud infrastructure, IoT technology, data technology ...... 44.3 44.3 44.4 133.0 10 Acquire or partner with companies in the data technology industry ...... — 99.8 99.7 199.5 15 4. Develop and launch smart solutions Research and development of smart solutions for business customers...... 19.9 19.9 26.7 66.5 5 Expand North America market of smart solutions for businesscustomer...... 19.9 19.9 26.7 66.5 5 5.Generalworkingcapital...... 66.5 39.9 26.6 133.0 10
Total...... 382.7 453.3 494.0 1,330.0 100
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If the Offer Price is set at the high-end or low-end of the indicative Offer Price range, the net proceeds of the Global Offering (assuming that the Over-allotment Option is not exercised) will increase or decrease by approximately HK$114.5 million (equivalent to around US$14.8 million). In such event, we will increase or decrease the allocation of the net proceeds to the above purposes on a pro-rata basis.
If the Over-allotment Option is exercised in full, we estimate that the additional net proceeds from the offering of these additional Offer Shares to be received by us, after deducting underwriting commissions and estimated expenses in connection with the Global Offering, will be (i) approximately HK$191.3 million, assuming an Offer Price of HK$4.68 per Offer Share, being the low-end of the indicative Offer Price range; (ii) approximately HK$208.5 million, assuming an Offer Price of HK$5.10 per Offer Share, being the mid-point of the indicative Offer Price range; and (iii) approximately HK$225.7 million, assuming an Offer Price of HK$5.52 per Offer Share, being the high-end of the indicative Offer Price range. We intend to apply the additional net proceeds to the above purposes in the proportions stated above.
To the extent that the net proceeds of the Global Offering are not immediately used for the above specified purposes or if we are unable to effect any part of our future strategies as intended, we currently intend to deposit such net proceeds into interest bearing bank accounts with licensed banks and/or authorized financial institutions in Hong Kong, the PRC or the United States.
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HONG KONG UNDERWRITERS
BNP Paribas Securities (Asia) Limited Innovax Securities Limited Haitong International Securities Company Limited China Industrial Securities International Capital Limited UOB Kay Hian (Hong Kong) Limited CMBC Securities Company Limited
UNDERWRITING ARRANGEMENTS AND EXPENSES
Hong Kong Public Offering
Hong Kong Underwriting Agreement
Pursuant to the Hong Kong Underwriting Agreement, our Company is initially offering 28,100,000 Hong Kong Offer Shares for subscription by the public in Hong Kong on and subject to the terms and conditions of this prospectus and the Application Forms.
Subject to (i) the Listing Committee granting approval for the listing of, and permission to deal in, our Shares in issue and to be issued pursuant to the Global Offering as mentioned herein and such approval not having been withdrawn; and (ii) certain other conditions set out in the Hong Kong Underwriting Agreement (including, among others, the Joint Global Coordinators (for themselves and on behalf of the Underwriters) and our Company agreeing on the Offer Price), the Hong Kong Underwriters have agreed, severally but not jointly, to subscribe for, or procure subscribers to subscribe for, their respective applicable proportions of the Hong Kong Offer Shares which are being offered but are not taken up under the Hong Kong Public Offering on the terms and subject to the conditions of this prospectus, the Application Forms and the Hong Kong Underwriting Agreement. The Hong Kong Offer Shares are fully underwritten pursuant to the Hong Kong Underwriting Agreement.
The Hong Kong Underwriting Agreement is conditional upon and subject to the International Underwriting Agreement having been signed and becoming unconditional and not having been terminated.
Grounds for termination of the Hong Kong Underwriting Agreement
If any of the events set out below shall occur at any time prior to 8:00 a.m. (Hong Kong time) on the Listing Date, the Joint Global Coordinators (for themselves and on behalf of the Hong Kong Underwriters) shall be entitled by notice (orallyorinwriting)giventoourCompanytoterminate the Hong Kong Underwriting Agreement with immediate effect:
(a) there shall develop, occur, exist or come into effect:
(i) any local, national, regional or international event or circumstance in the nature of force majeure (including, without limitation, any acts of government, declaration of a national or international emergency or war, calamity, crisis, epidemic, pandemic,
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outbreaks, escalation or adverse mutation of diseases (including, without limitation, COVID-19 and Severe Acute Respiratory Syndrome (SARS)), economic sanctions, strikes, lock-outs, fire, explosion, flooding, earthquake, volcanic eruption, civil commotion, riots, public disorder, acts of war, outbreak or escalation of hostilities (whetherornotwarisdeclared),actsofGodoractsofterrorism)inoraffectingthe Cayman Islands, the British Virgin Islands, Hong Kong, the PRC, the United States, the United Kingdom, the European Union (or any member thereof), Japan, Macau or any other jurisdiction relevant to any member of the Group or the Global Offering (collectively, the ‘‘Relevant Jurisdictions’’ and any one of them, a ‘‘Relevant Jurisdiction’’); or
(ii) any change, or any development involving a prospective change, or any event or circumstance likely to result in any change or development involving a prospective change, in any local, national, regional or international financial, economic, political, military, industrial, fiscal, regulatory, currency, credit or market conditions (including, without limitation, conditions in the stock and bond markets, money and foreign exchange markets, the interbank markets and credit markets) in or affecting any of the Relevant Jurisdictions; or
(iii) any moratorium, suspension or restriction (including, without limitation, any imposition of or requirement for any minimum or maximum price limit or price range) in or on trading in securities generally on the Stock Exchange, the New York Stock Exchange, the NASDAQ Global Market, the London Stock Exchange, the Tokyo Stock Exchange, the Shanghai Stock Exchange or the Shenzhen Stock Exchange; or
(iv) the imposition of any general moratorium on commercial banking activities in any Relevant Jurisdictions, or any disruption in commercial banking or foreign exchange trading or securities settlement or clearance services, procedures or matters in any of the Relevant Jurisdictions; or
(v) the imposition of economic sanctions, in whatever form, directly or indirectly, by, or for, any of the Relevant Jurisdictions; or
(vi) any new law, or any change or any development involving a prospective change or any event or circumstance likely to result in a change or a development involving a prospective change in (or in the interpretation or application by any court or other competent authority of) existing laws, in each case, in or affecting any of the Relevant Jurisdictions; or
(vii) a change or development involving a prospective change in or affecting all forms of taxation or exchange control, currency exchange rates or foreign investment regulations (including, without limitation, a material devaluation of the Hong Kong dollar or the Renminbi against any foreign currencies), or the implementation of any exchange control, in any of the Relevant Jurisdictions; or
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(viii) any litigation or claim of any third party being threatened or instigated against any member of the Group, the executive Directors, the Company, and/or the warranting Shareholders; or
(ix) a Director being charged with an indictable offence or prohibited by operation of law or otherwise disqualified from taking part in the management of a company; or
(x) the chairman or chief executive officer of the Company vacating his or her office; or
(xi) an authority or a political body or organization in any of the Relevant Jurisdictions commencing any investigation or other action, or announcing an intention to investigate or take other action, against any Director; or
(xii) a prohibition on the Company for whatever reason from offering, allotting, issuing or selling any of the Shares (including Shares to be allotted and issued under the Over-allotment Option) pursuant to the terms of the Global Offering; or
(xiii) a contravention by any member of the Group of the Listing Rules or applicable laws; or
(xiv) non-compliance of this prospectus (or any other documents used in connection with the contemplated offer and sale of the Shares) or any aspect of the Global Offering with the Listing Rules or any other applicable laws; or
(xv) the issue or requirement to issue by the Company of any supplement or amendment to this prospectus (or to any other documents used in connection with the contemplated offer and sale of the Shares) pursuant to the Companies (Winding Up and Miscellaneous Provisions) Ordinance or the Listing Rules or any requirement or request of the Stock Exchange and/or the SFC; or
(xvi) an order or petition for the winding up of any members of our Group or any composition or arrangement made by any members of our Group with its creditors or a scheme of arrangement entered into by any members of our Group or any resolution for the winding up of any members of our Group or the appointment of a provisional liquidator, receiver or manager over all or part of the material assets or undertaking of any members of our Group or anything analogous thereto occurring in respect of any members of our Group; which, individually, or in the aggregate, in the sole opinion of the Joint Global Coordinators (for themselves and on behalf of the Hong Kong Underwriters), (i) has or will have or may have a material adverse effect on the assets, liabilities, business, general affairs, management, prospects, shareholders’ equity, profits, losses, results of operations, position or condition, financial or otherwise, or performance of our Group as a whole; or (ii) has or will have or may have a material adverse effect on the success of
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the Global Offering or the level of applications under the Hong Kong Public Offering or the level of interest under the International Offering; or (iii) makes or will make or may make it inadvisable or inexpedient or impracticable for the Global Offering to proceed or to market the Global Offering; or (iv) has or will have or may have the effect of making any part of the Hong Kong Underwriting Agreement (including underwriting) incapable of performance in accordance with its terms or preventing the processing of applications and/or payments pursuant to the Global Offering or pursuant to the underwriting thereof; or
(b) there has come to the notice of the Joint Global Coordinators or the Joint Sponsors:
(i) that any statement contained in any of this prospectus, the Application Forms and/ or in any notices, announcements, advertisements, communications or other documents issued or used by or on behalf of the Company in connection with the Hong Kong Public Offering (including any supplement or amendment thereto) (collectively, the ‘‘Offer Related Documents’’) was, when it was issued, or has become, untrue or incorrect in any material respect or misleading, or that any forecast, estimate, expression of opinion, intention or expectation contained in any of offer Related Documents is not fair and honest and based on reasonable assumptions; or
(ii) that any matter has arisen or has been discovered which would, had it arisen or been discovered immediately before the date of this prospectus, constitute a material omission from any of the Offer Related Documents; or
(iii) any breach of any of the obligations imposed upon any party to the Hong Kong Underwriting Agreement or the International Underwriting Agreement (other than upon any of the Hong Kong Underwriters or the International Underwriters); or
(iv) any material adverse change, or any development involving a prospective material adverse change, in the assets, liabilities, business, general affairs, management, prospects, shareholders’ equity, profits, losses, results of operations, position or condition, financial or otherwise, or performance of any member of the Group; or
(v) any event, act or omission which gives or is likely to give rise to any liability of any of the Company, executive Directors, and the Controlling Shareholders as the indemnifying parties pursuant to the indemnities given by them under the terms of the Hong Kong Underwriting Agreement; or
(vi) any breach of, or any event or circumstance rendering untrue or incorrect or misleading in any respect, any of the representations, warranties, agreements and undertakings of the warrantors under Hong Kong Underwriting Agreement as specified therein; or
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(vii) approval by the Listing Committee of the Stock Exchange of the listing of, and permission to deal in, the Shares to be issued or sold (including any additional Shares that may be issued or sold pursuant to the exercise of the Over-allotment Option) under the Global Offering is refused or not granted, other than subject to customary conditions, on or before the Listing Date, or if granted, the approval is subsequently withdrawn, qualified (other than by customary conditions) or withheld; or
(viii) the Company withdraws this prospectus (and/or any other documents issued or used in connection with the Global Offering) or the Global Offering; or
(ix) any person (other than the Joint Sponsors) has withdrawn or is subject to withdraw its consent to being named in any of this prospectus or the Application Forms or to the issue of any of this prospectus or the Application Forms.
Undertakings to the Stock Exchange
Undertaking by our Company
Pursuant to Rule 10.08 of the Listing Rules, we have undertaken to the Stock Exchange that except pursuant to the Global Offering (including the Over-allotment Option), no further Shares or securities convertible into our equity securities (whether or not of a class already listed) may be issued by us or form the subject of any agreement to such an issue by us within six months from the Listing Date (whether or not such issue of our Shares or our securities will be completed within six months from the Listing Date), except in certain circumstances prescribed by Rule 10.08 of the Listing Rules.
Undertaking by our Controlling Shareholders
Pursuant to Rule 10.07 of the Listing Rules, each of the Controlling Shareholders undertakes to the Stock Exchange and to our Company that except pursuant to the Global Offering (including the Over-allotment Option), they will not at any time:
(a) during the period commencing on the date by reference to which disclosure of his/her/its interestsinourCompanyismadeinthisprospectus and ending on the date falling six months from the Listing Date (the ‘‘First Six-month Period’’), dispose of, or enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of the securities of our Company in respect of which he/ she/it is shown by this prospectus to be the beneficial owners; or
(b) in the six-month period commencing on the expiry of the First Six-month Period set out in paragraph (a) above (the ‘‘Second Six-month Period’’), dispose of, or enter into any agreement to dispose of or otherwise create any options, rights, interests or encumbrances in respect of, any of the securities mentioned in paragraph (a) if, immediately following such disposal or upon the exercise or enforcement of such
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options, rights, interests or encumbrances, he/she/it would cease to be a controlling shareholder or a member of a group of controlling shareholders of our Company for the purposes of the Listing Rules.
Pursuant to Note (3) to Rule 10.07(2) of the Listing Rules, each of our Controlling Shareholders has further undertaken to the Stock Exchange and to our Company that within the period commencing on the date by reference to which disclosure of his/her/its shareholdings is made in this prospectus and to the date which is 12 months from the Listing Date, they will:
(a) when they pledge or charge any securities of our Company or interests therein beneficially owned by them in favor of any authorized institution pursuant to Note (2) to Rule 10.07(2) of the Listing Rules, immediately inform our Company of such pledge or charge together with the number of securities so pledged or charged; and
(b) when they receive indications, either verbal or written, from the pledgee or chargee that any of the securities of our Company pledged or charged will be disposed of, immediately inform our Company of such indications.
Our Company will inform the Stock Exchange as soon as we have been informed of the matters referred to in paragraphs (a) and (b) above by any of the Controlling Shareholders and disclose such matters by way of an announcement in accordance with Rule 2.07C of the Listing Rulesassoonaspossible.
Undertakings pursuant to the Hong Kong Underwriting Agreement
(A) Undertakings by our Company
Pursuant to the Hong Kong Underwriting Agreement, except for the offer and sale of the Offer Shares pursuant to the Global Offering (including pursuant to the Over-Allotment Option), during the period commencing on the date of the Hong Kong Underwriting Agreement and ending on, and including, the date that is six months after the Listing Date (the ‘‘First Six-month Period’’), we have undertaken to each of the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and the Hong Kong Underwriters and the Joint Sponsors, not to, and to procure each other member of the Group not to, without the prior written consent of the Joint Sponsors and the Joint Global Coordinators (for themselves and on behalf of the Hong Kong Underwriters) and unless in compliance with the requirements of the Listing Rules:
(a) allot, issue, sell, accept subscription for, offer to allot, issue or sell, contract or agree to allot, issue or sell, mortgage, charge, pledge, hypothecate, lend, grant or sell any option, warrant, contract or right to subscribe for or purchase, grant or purchase any option, warrant, contract or right to allot, issue or sell, or otherwise transfer or dispose of or create an encumbrance over, or agree to transfer or dispose of or create an encumbrance over, either directly or indirectly, conditionally or unconditionally, any Shares or other securities of our Company or any shares or other securities of such other member of the Group, as applicable, or any interest in any of the foregoing (including, without limitation, any securities convertible into or exchangeable or exercisable for or that
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represent the right to receive, or any warrants or other rights to purchase, any Shares or any shares of such other member of the Group, as applicable), or deposit any Shares or other securities of our Company or any shares or other securities of such other member of the Group, as applicable, with a depositary in connection with the issue of depositary receipts; or
(b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Shares or other securities of our Company or any shares or other securities of such other member of the Group, as applicable, or any interest in any of the foregoing (including, without limitation, any securities convertible into or exchangeable or exercisable for or that represent the right to receive, or any warrants or other rights to purchase, any Shares or any shares of such other member of the Group, as applicable); or
(c) enter into any transaction with the same economic effect as any transaction specified in paragraphs (a) or (b) above; or
(d) offer to or agree to or announce any intention to effect any transaction specified in paragraphs (a), (b) or (c) above,
in each case, whether any of the transactions specified in paragraphs (a), (b) or (c) above is to besettledbydeliveryofSharesorothersecurities of our Company or shares or other securities of such other member of the Group, as applicable, or in cash or otherwise (whether or not the issue of such Shares or other shares or securities will be completed within the First Six-month Period). In the event that, during the period of six months commencing on the date on which the First Six-month Period expires (the ‘‘Second Six-Month Period’’), our Company enters into any of the transactions specified in paragraphs (a), (b) or (c) above or offers to or agrees to or announces any intention to effect anysuchtransaction,ourCompanyshalltake all reasonable steps to ensure that it will not create a disorderly or false market in the securities of our Company. Each of Karis I LLC, Karis II LLC, Caerus Co., Ltd, Arceus Co., Ltd, Yang Lin, Yang Yuzheng and Yang Hai (collectively, the ‘‘Warranting Shareholders’’) and our executive Directors has undertaken to each of the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and the Hong Kong Underwriters to procure our Company to comply with the above undertaking.
The Company has agreed and undertaken that it will not effect any purchase of Shares, or agree to do so, which may reduce the holdings of Shares held by the public (as defined in Rule 8.24 of the Listing Rules) below 25% on or before the date falling six months after the Listing Date without first having obtained the prior written consent of the Joint Sponsors and the Joint Global Coordinators (for themselves and on behalf of the Hong Kong Underwriters).
(B) Undertakings by the Warranting Shareholders
Pursuant to the Hong Kong Underwriting Agreement, each of the Warranting Shareholders has undertaken to each of the Company, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and the Hong Kong Underwriters that, without the prior
– 313 – UNDERWRITING written consent of the Joint Sponsors and the Joint Global Coordinators (for themselves and on behalf of the Hong Kong Underwriters) and unless in compliance with the requirements of the Listing Rules:
(a) it will not, and will procure that none of its associates will, at any time during the First Six-month Period, (i) sell, offer to sell, contract or agree to sell, mortgage, charge, pledge, hypothecate, lend, grant or sell any option, warrant, contract or right to purchase, grant or purchase any option, warrant, contract or right to sell, or otherwise transfer or dispose of or create an encumbrance over, or agree to transfer or dispose of or create an encumbrance over, either directly or indirectly, conditionally or unconditionally, any Shares or other securities of our Company or any interest therein (including, without limitation, any securities convertible into or exchangeable or exercisable for or that represent the right to receive, or any warrants or other rights to purchase, any Shares), or deposit any Shares or other securities of our Company with a depositary in connection with the issue of depositary receipts, or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Shares or other securities of our Company or any interest therein (including, without limitation, any securities convertible into or exchangeable or exercisable for or that represent the right to receive, or any warrants or other rights to purchase, any Shares), or (iii) enter into any transaction with the same economic effect as any transaction specified in sub-paragraphs (i) or (ii) above, or (iv) offer to or agree to or announce any intention to effect any transaction specified in sub-paragraphs (i), (ii) or (iii) above, in each case, whether any of the transactions specified in sub- paragraphs (i), (ii) or (iii) above is to be settled by delivery of Shares or other securities of our Company or in cash or otherwise (whether or not the issue of such Shares or other securities will be completed within the First Six-month Period);
(b) it will not, and will procure that none of its associates will, during the Second Six-Month Period, enter into any of the transactions specified in sub-paragraphs (a)(i), (ii) or (iii) above or offer to or agree to or announce any intention to effect any such transaction if, immediately following any sale, transfer or disposal or upon the exercise or enforcement of any option, right, interest or encumbrance pursuant to such transaction, it together with other Controlling Shareholders will cease to be a controlling shareholder (as the term is defined in the Listing Rules) of our Company; and
(c) until the expiry of the Second Six-Month Period, in the event that it enters into any of the transactions specified in sub-paragraphs (a)(i),(ii)or(iii)aboveoroffertooragrees to or announce any intention to effect any such transaction, it will take all reasonable steps to ensure that it will not create a disorderly or false market in the securities of our Company.
In addition, each of the Warranting Shareholders has agreed and undertaken that it will not, and to procure that our Company will not, effect any purchase of Shares, or agree to do so, which may reduce the holdings of Shares held by the public (as defined in Rule 8.24 of the Listing Rules)
– 314 – UNDERWRITING below 25% on or before the date falling six months after the Listing Date without first having obtained the prior written consent of the Joint Sponsors and the Joint Global Coordinators (for themselves and on behalf of the Hong Kong Underwriters).
The International Offering
The International Underwriting Agreement
In connection with the International Offering, it is expected that our Company and the International Underwriters will enter into the International Underwriting Agreement. Under the International Underwriting Agreement, the International Underwriters will, subject to certain conditions set out therein, severally agree to purchase the International Offer Shares or procure subscribers or purchasers for the International Offer Shares. The International Underwriting Agreement is expected to provide that it may be terminated on similar grounds as the Hong Kong Underwriting Agreement. Potential investors will be reminded that in the event the International Underwriting Agreement is not entered into, the Global Offering will not proceed. It is expected that pursuant to the International Underwriting Agreement, we will give undertakings similar to those given pursuant to the Hong Kong Underwriting Agreement in the paragraph headed ‘‘Undertakings pursuant to the Hong Kong Underwriting Agreement’’ under this section.
Over-allotment Option
Our Company is expected to grant to the International Underwriters the Over-allotment Option exercisable by the Joint Global Coordinators, on behalf of the International Underwriters, at any time until the 30th day after the last day for the lodging of applications under the Hong Kong Public Offering, to require our Company to allot and issue up to an aggregate of 42,150,000 additional Shares, representing 15% of the Offer Shares, at the Offer Price per Offer Share under the International Offering, solely to cover over-allocations, if any, under the International Offering. For further details of the Over-allotment Option, please refer to the section headed ‘‘Structure of the Global Offering’’ in this prospectus.
Commission and Expenses
The Underwriters will receive an underwriting commission of 3% of the aggregate Offer Price of all the Offer Shares (including any Shares which may be issued pursuant to the exercise of the Over-allotment Option), out of which they will pay sub-underwriting commissions and other fees.
The Joint Global Coordinators may receive a discretionary incentive fee of up to 1.0% of the aggregate Offer Price of all the Offer Shares to be issued by our Company under the Global Offering (including any Shares which may be issued pursuant to the exercise of the Over-allotment Option).
For any unsubscribed Hong Kong Offer Shares reallocated to the International Offering, the underwriting commission will not be paid to the Hong Kong Underwriters but will instead be paid, at the rate applicable to the International Offering, to the relevant International Underwriters.
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The aggregate underwriting commissions payable to the Underwriters in relation to the Global Offering (assuming an Offer Price of HK$5.10 per Offer Share (which is the mid-point of the Offer Price Range), the full payment of the discretionary incentive fee and the exercise of the Over- allotment Option in full) will be approximately HK$65.9 million.
In consideration of the Joint Sponsors’ services in sponsoring the Global Offering, the Joint Sponsors will receive a sponsorship fee. Such underwriting commission and sponsorship fee, together with the Stock Exchange listing fee, the Stock Exchange trading fee, the SFC transaction levy, legal and other professional fees, printing and other expenses relating to the Global Offering which are currently estimated to be approximately HK$103.1 million in aggregate (assuming an Offer Price of HK$5.10 per Offer Share (being the midpoint of the indicative Offer Price of HK$4.68 to HK$5.52 per Offer Share)), are to be borne by us, without taking into account the commissions and expenses relating to the exercise of Over-allotment Option.
JOINT GLOBAL COORDINATORS’ AND UNDERWRITERS’ INTEREST IN OUR COMPANY
Save for the interests and obligations under the Underwriting Agreements, none of the Joint Global Coordinators and the Hong Kong Underwriters is interested legally or beneficially in the shares of any of our Group’s members or has any right or option (whether legally enforceable or not) to subscribe for or purchase or to nominate persons to subscribe for or purchase securities in any members of our Group.
INDEPENDENCE OF THE JOINT SPONSORS
The Joint Sponsors satisfy the independence criteria applicable to sponsors set out in Rule 3A.07 of the Listing Rules.
ACTIVITIES BY SYNDICATE MEMBERS
The underwriters of the Hong Kong Public Offering and the International Offering (together, the ‘‘Syndicate Members’’) and their affiliates may each individually undertake a variety of activities (as further described below) which do not form part of the underwriting or stabilizing process.
The Syndicate Members and their affiliates are diversified financial institutions with relationships in countries around the world. These entities engage in a wide range of commercial and investment banking, brokerage, funds management, trading, hedging, investing and other activities for their own account and for the account of others. In relation to the Shares, those activities could include acting as agent for buyers and sellers of the Shares, entering into transactions with those buyers and sellers in a principal capacity, proprietary trading in the Shares, and entering into over the counter or listed derivative transactions or listed and unlisted securities transactions (including issuing securities such as derivative warrants listed on a stock exchange) which have as their underlying assets, assets including the Shares. Those activities may require hedging activity by those entities involving, directly or indirectly, the buying and selling of the Shares.AllsuchactivitycouldoccurinHongKongandelsewhereintheworldandmayresultin
– 316 – UNDERWRITING the Syndicate Members and their affiliates holding long and/or short positions in the Shares, in baskets of securities or indices including the Shares, in units of funds that may purchase the Shares, or in derivatives related to any of the foregoing.
In relation to issues by Syndicate Members or their affiliates of any listed securities having the Shares as their underlying securities, whether on the Stock Exchange or on any other stock exchange, the rules of the exchange may require the issuer of those securities (or one of its affiliates or agents) to act as a market maker or liquidity provider in the security, and this will also result in hedging activity in the Shares in most cases.
All such activities may occur both during and after the end of the stabilizing period described in the section headed ‘‘Structure of the Global Offering’’. Such activities may affect the market price or value of the Shares, the liquidity or trading volume in the Shares and the volatility of the price of the Shares, and the extent to which this occurs from day to day cannot be estimated.
It should be noted that when engaging in any of these activities, the Syndicate Members will be subject to certain restrictions, including the following:
(a) the Syndicate Members (other than the Stabilizing Manager, its affiliates or any person acting for it) must not, in connection with the distribution of the Offer Shares, effect any transactions (including issuing or entering into any option or other derivative transactions relating to the Offer Shares), whether in the open market or otherwise, with a view to stabilizing or maintaining the market price of any of the Offer Shares at levels other than those which might otherwise prevail in the open market; and
(b) the Syndicate Members must comply with all applicable laws and regulations, including the market misconduct provisions of the SFO, including the provisions prohibiting insider dealing, false trading, price rigging and stock market manipulation.
Certain of the Syndicate Members or their respective affiliates have provided from time to time, and expect to provide in the future, investment banking and other services to our Company and its affiliates for which such Syndicate Members or their respective affiliates have received or will receive customary fees and commissions.
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THE GLOBAL OFFERING
This prospectus is published in connection with the Hong Kong Public Offering as part of the Global Offering. A total of initially 281,000,000 Offer Shares will be made available under the Global Offering. The Global Offering comprises:
. the Hong Kong Public Offering of initially 28,100,000 Shares (subject to reallocation) for subscription by the public in Hong Kong as described in ‘‘Hong Kong Public Offering’’ in this section below; and
. the International Offering of an aggregate of initially 252,900,000 International Offer Shares (subject to reallocation and the Over-allotment Option) outside the United States (including to professional and institutional investors within Hong Kong) in offshore transactions in reliance on Regulation S and in the United States to Qualified Institutional Buyers, or QIBs, in reliance on Rule 144A pursuant to an exemption from the registration requirements of the U.S. Securities Act, as described in ‘‘International Offering’’ below.
Up to 42,150,000 additional Shares may be offered pursuant to the exercise of the Over- allotment Option as set forth in the paragraph headed ‘‘International Offering—Over-allotment Option’’ in this section below.
Investors may apply for the Offers Shares under theHongKongPublicOfferingorindicatean interest, if qualified to do so, in the International Offering, but may not do both.
The Hong Kong Public Offering is open to all members of the public in Hong Kong as well as to institutional and professional investors. The Hong Kong Underwriters have severally agreed to underwrite the Hong Kong Offer Shares under the terms of the Hong Kong Underwriting Agreement. The International Underwriters will underwrite the International Offer Shares pursuant to the terms of the International Underwriting Agreement. Further details of the underwriting are set out in the section headed ‘‘Underwriting’’ in this prospectus.
CONDITIONS OF THE HONG KONG PUBLIC OFFERING
Acceptance of the application for the Offer Shares pursuant to the Hong Kong Public Offering is conditional upon, among others:
1. Listing
the Listing Committee granting the listing of, and permission to deal in, the Shares in issue and to be issued pursuant to the Global Offering (including any Shares which may be issued pursuant to the exercise of the Over-allotment Option and the options to be granted under the Share Option Scheme) on the Stock Exchange and such approval not subsequently having been revoked prior to the commencement of dealings in the Shares;
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2. Underwriting Agreements
(i) the obligations of the Underwriters under the Underwriting Agreements becoming and remaining unconditional, and not being terminated in accordance with the terms of the respective agreements; and
(ii) the execution and delivery of the International Underwriting Agreement prior to or on the Price Determination Date;
3. Price determination
the Offer Price having been determined and the execution of the Price Determination AgreementonoraroundthePrice Determination Date, in each case on or before the dates and times specified in such Underwriting Agreements (unless and to the extent such conditions are waived on or before such dates and times) and in any event not beyond the 30th day after the date of this prospectus.
If any of the above conditions is not fulfilled or waived on or before the times and dates specified, the Global Offering will lapse and the Stock Exchange will be notified immediately. We will cause a notice of the lapse of the Hong Kong Public Offering to be published on the website of the Hong Kong Stock Exchange at www.hkexnews.hk and our Company’s website at www.vesync.com on the next business day following such lapse. In such eventuality, all application monies will be returned, without interest, on the terms set out in the section headed ‘‘How to Apply for Hong Kong Offer Shares’’ in this prospectus. In the meantime, the application money will be held in one or more separate bank accounts with the receiving banker or other bank(s) in Hong Kong, licensed under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong).
Share certificates for the Offer Shares are expected to be issued on Thursday, December 17, 2020 but will only become valid certificates of title at 8:00 a.m. on Friday, December 18, 2020 provided that (i) the Global Offering has become unconditional in all respects; and (ii) neither of the Underwriting Agreements has been terminated in accordance with its terms. Investors who trade Shares prior to the receipt of the share certificates or prior to the share certificates bearing valid certificates of title do so entirely as their own risk.
HONG KONG PUBLIC OFFERING
Number of Offer Shares initially offered
Our Company is initially offering 28,100,000 Offer Shares for subscription by the public in Hong Kong at the Offer Price, representing 10% of the total number of Offer Shares initially available under the Global Offering (assuming that the Over-allotment Option is not exercised). Subject to the reallocation of Shares between (i) the International Offering; and (ii) the Hong Kong Public Offering as mentioned below, the number of the Hong Kong Offer Shares will represent approximately 2.5% of our Company’s issued share capital immediately after completion of the
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Global Offering and the Capitalization Issue without taking into account any Shares which may be issued and allotted upon any exercise of Over-allotment Option and the options which have been or may be granted under the Share Option Scheme.
Completion of the Hong Kong Public Offering is subject to the conditions as set out in the paragraph headed ‘‘Conditions of the Hong Kong Public Offering’’ in this section.
Allocation
Allocation of the Hong Kong Offer Shares to investors under the Hong Kong Public Offering will be based solely on the level of valid applications received under the Hong Kong Public Offering. The basis of allocation may vary, depending on the number of Hong Kong Offer Shares validly applied for by applicants. Such allocation could, where appropriate, consist of balloting, which would mean that some applicants may receive a higher allocation than others who have applied for the same number of Hong Kong Offer Shares, and those applicants who are not successful in the ballot may not receive any Hong Kong Offer Shares.
The total available Shares under the Hong Kong Public Offering (after taking into account of any reallocation of Offer Shares between the Hong Kong Public Offering and the International Offering) is to be divided into two pools (subject to adjustment of odd lot size) for allocation purposes: pool A and pool B with any odd board lots being allocated to pool A. Accordingly, the maximum number of Hong Kong Offer Shares initially in pool A and pool B will be 14,050,000 and 14,050,000 respectively. The Hong Kong Offer Shares in pool A will be allocated on an equitable basis to applicants who have applied for Hong Kong Offer Shares with an aggregate price of HK$5 million (excluding the brokerage of 1.0%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005% payable) or less. The Hong Kong Offer Shares in pool B will be allocated on an equitable basis to applicants who have applied for Hong Kong Offer Shares with an aggregate price of more than HK$5 million (excluding the brokerage of 1.0%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005% payable). Investors should be aware that applications in pool A and applications in pool B may receive different allocation ratios. If the Hong Kong Offer Shares in one (but not both) of the pools are undersubscribed, the surplus Hong Kong Offer Shares will be transferred to the other pool to satisfy demand in that other pool and be allocated accordingly. For the purpose of this section only, the ‘‘price’’ for Offer Shares means the price payable on application therefor (without regard to the Offer Price as finally determined). Applicants can only receive an allocation of Hong Kong Offer Shares from either pool A or pool B but not from both pools and can only apply for Hong Kong Offer Shares in either pool A or pool B.
Multiple or suspected multiple applications within either pool or between pools and any application for more than 14,050,000 Hong Kong Offer Shares are liable to be rejected.
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Reallocation
The allocation of the Offers Shares between the Hong Kong Public Offering and the International Offering is subject to reallocation. Paragraph 4.2 of Practice Note 18 of the Listing Rules requires a clawback mechanism to be put in place which would have the effect of increasing thenumberofOfferSharesundertheHongKongPublic Offering to a certain percentage of the total number of Offer Shares offered under the Global Offering if certain prescribed total demand levels are reached. In the event of over-subscription under the Hong Kong Public Offering to certain prescribed total demand levels and that the International Offer Shares are fully subscribed or oversubscribed, the Joint Global Coordinators (for themselves and on behalf of the Underwriters) shall apply a clawback mechanism according to paragraph 4.2 of Practice Note 18 of the Listing Rules following the closing of the application lists as follows (the ‘‘Mandatory Reallocation’’):
(i) if the number of Offer Shares validly applied for under the Hong Kong Public Offering represents 15 times or more but less than 50 times the number of the Offer Shares initially available for subscription under the Hong Kong Public Offering, then 56,200,000 Offer Shares will be reallocated to the Hong Kong Public Offering from the International Offering, so that the total number of the Offer Shares available under the Hong Kong Public Offering will be increased to 84,300,000 Offer Shares, representing 30% of the number of the Offer Shares initially available under the Global Offering (before any exercise of the Over-allotment Option);
(ii) if the number of Offer Shares validly applied for under the Hong Kong Public Offering represents 50 times or more but less than 100 times the number of the Offer Shares initially available for subscription under the Hong Kong Public Offering, then 84,300,000 Offer Shares will be reallocated to the Hong Kong Public Offering from the International Offering, so that the number of the Offer Shares available under the Hong Kong Public Offering will be increased to 112,400,000 Offer Shares, representing 40% of the number of the Offer Shares initially available under the Global Offering (before any exercise of the Over-allotment Option); and
(iii) if the number of Offer Shares validly applied for under the Hong Kong Public Offering represents 100 times or more the number of the Offer Shares initially available for subscription under the Hong Kong Public Offering, then 112,400,000 Offer Shares will be reallocated to the Hong Kong Public Offering from the International Offering, so that the number of the Offer Shares available under the Hong Kong Public Offering will be increased to 140,500,000 Offer Shares, representing 50% of the number of the Offer Shares initially available under the Global Offering (before any exercise of the Over- allotment Option).
The Offer Shares to be offered in the Hong Kong Public Offering and the International Offering may, in certain circumstances, be reallocated as between these offerings at the discretion of the Joint Global Coordinators (for themselves and on behalf of the Underwriters). Subject to the foregoing paragraph, the Joint Global Coordinators may in their discretion reallocate Offer Shares from the International Offering to the Hong Kong Public Offering to satisfy valid applications
– 321 – STRUCTURE OF THE GLOBAL OFFERING under the Hong Kong Public Offering. In addition, if the Hong Kong Public Offering is not fully subscribed for, the Joint Global Coordinators (for themselves and on behalf of the Underwriters) have the authority to reallocate all or any unsubscribed Hong Kong Offer Shares to the International Offering, in such proportions as the Joint Global Coordinators deem appropriate.
In addition to any Mandatory Reallocation which may be required, the Joint Global Coordinators (for themselves and on behalf of the Underwriters) may, at their discretion, reallocate Offer Shares initially allocated for the International Offering to the Hong Kong Public Offering to satisfy valid applications in pool A and pool B under the Hong Kong Public Offering in accordance with Guidance Letter HKEX-GL-91-18. In the event that (i) the International Offer Shares are undersubscribed and the Hong Kong Offer Shares are fully subscribed or oversubscribed irrespective of the number of times; or (ii) the International Offer Shares are fully subscribed or oversubscribed and the Hong Kong Offer Shares are fully subscribed or oversubscribed as to less than 15 times of the number of Hong Kong Offer Shares initially available under the Hong Kong Public Offering provided that the Offer Price wouldbesetatHK$4.68(low-endoftheindicative Office Price range), up to 28,100,000 Offer Shares may be reallocated to the Hong Kong Public Offering from the International Offering, so that the total number of the Offer Shares available under the Hong Kong Public Offer will be increased to 56,200,000 Offer Shares, representing twice of the number of the Offer Shares initially available under the Hong Kong Public Offering (before any exercise of the Over-allotment Option).
Applications
Each applicant under the Hong Kong Public Offering will also be required to give an undertaking and confirmation in the Application Form submitted by him that he and any person(s) for whose benefit he is making the application have not applied for or taken up, or indicated an interest for, and will not apply for or take up, or indicate an interest for, any Offer Shares under the International Offering, and such applicant’s application is liable to be rejected if the said undertaking and/or confirmation is breached and/or untrue (as the case may be) or it has been or will be placed or allocated (including conditionally and/or provisionally) Offer Shares under the International Offering.
The listing of the Offer Shares on the Stock Exchange is sponsored by the Joint Sponsors. Applicants under the Hong Kong Public Offering are required to pay, on application, the maximum price of HK$5.52 per Offer Share in addition to any brokerage of 1.0%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005% payable on each Offer Share. If the Offer Price, as finally determined in the manner described in the paragraph headed ‘‘Price Determination of the Global Offering’’ below in this section, is less than the maximum price of HK$5.52 per Share, appropriate refund payments (including the brokerage of 1.0%, SFC transaction levy of 0.0027% and Stock Exchange trading fee of 0.005% attributable to the surplus application monies) will be made to successful applicants, without interest. Further details are set out in section headed ‘‘How to Apply for Hong Kong Offer Shares’’ in this prospectus.
References in this prospectus to applications, Application Forms, application monies or the procedure for application relate solely to the Hong Kong Public Offering.
– 322 – STRUCTURE OF THE GLOBAL OFFERING
INTERNATIONAL OFFERING
Number of Offer Shares offered
The number of Offer Shares to be initially offered for subscription under the International Offering will be 252,900,000 Shares (subject to reallocation and the Over-allotment Option). Subject to any reallocation of Offer Shares between the International Offering and the Hong Kong Public Offering, the International Offer Shares represent90%ofthetotalnumberofOfferShares initially available under the Global Offering and approximately 22.5% of our enlarged issued share capital immediately after completion of the Global Offering without taking into account any Shares which may be issued and allotted upon any exercise of the Over-allotment Option and the options which have been or may be granted under the Share Option Scheme.
The International Offering is subject to the same conditions as stated in the paragraph headed ‘‘Conditions of the Hong Kong Public Offering’’ above in this section.
Allocation
Allocation of Offer Shares pursuant to the International Offering will be effected in accordance with the book-building process and based on a number of factors, including the level and timing of demand, the total size of the relevant investor’s invested assets or equity assets in the relevant sector and whether or not it is expected that the relevant investor is likely to buy further Offer Shares, and/or hold or sell its Offer Shares, after the listing of the Offer Shares on the Stock Exchange. Such allocation is intended to result in a distribution of the Shares on a basis which wouldleadtotheestablishmentofasolidprofessional and institutional shareholder base to the benefit of our Company and our Shareholders as a whole.
The Joint Global Coordinators (for themselves and on behalf of the Underwriters) may require any investor who has been offered Shares under the International Offering, and who has made an application under the Hong Kong Public Offering, to provide sufficient information to the Joint Global Coordinators so as to allow them to identify the relevant applications under the Hong Kong Public Offering and to ensure that it is excluded from any application for Shares under the Hong Kong Public Offering.
Over-allotment Option
In connection with the Global Offering, our Company is expected to grant an Over-allotment Option to the Joint Global Coordinators (for themselves and on behalf of the International Underwriters) that is exercisable at the sole discretion of the Joint Global Coordinators (for themselves and on behalf of the International Underwriters).
Pursuant to the Over-allotment Option, the Joint Global Coordinators have the right, exercisable at any time from the date of the International Underwriting Agreement until 30 days from the date of the last day of lodging application under the Hong Kong Public Offering, to require our Company to allot and issue up to 42,150,000 additional Shares, representing 15% of the number of the Offer Shares initially available under the Global Offering, at the Offer Price, to cover over-allocation in the International Offering, if any. If the Over-allotment Option is exercised in
– 323 – STRUCTURE OF THE GLOBAL OFFERING full, the additional Offer Shares will represent approximately 3.6% of our enlarged share capital immediately following the completion of the Global Offering and the exercise of the Over-allotment Option but without taking into account any Shares which may fall to be issued upon the exercise of any options to be granted under the Share Option Scheme. In the event that the Over-allotment Option is exercised, an announcement will be made in accordance with the Listing Rules.
PRICE DETERMINATION OF THE GLOBAL OFFERING
The Offer Price is expected to be fixed on the Price Determination Date, which is expected to be on or around Friday, December 11, 2020, and in any event not later than Thursday, December 17, 2020, by agreement between the Joint Global Coordinators (for themselves and on behalf of the Underwriters) and our Company.
The Offer Price will be not more than HK$5.52 per Share and is expected to be not less than HK$4.68 per Share unless otherwise announced, as further explained below, not later than the morning of the last day for lodging applications under the Hong Kong Public Offering.
Prospective investors should be aware that the Offer Price to be determined on the Price Determination Date may be, but is not expected to be, lower than the indicative Offer Price range stated in this prospectus.
The Joint Global Coordinators, for themselves and on behalf of the Underwriters, may, where considered appropriate, based on the level of interest expressed by prospective professional, institutional and other investors during the book-building process, and with the consent of our Company, reduce the indicative Offer Price range and/or the number of Hong Kong Offer Shares below that stated in this prospectus at any time on or prior to the morning of the last day for lodging applications under the Hong Kong Public Offering. In such a case, we will, as soon as practicable following the decision to make such reduction, and in any event not later than the morning of the day which is the last day for lodging applications under the Hong Kong Public Offering, cause to be published on the website of the Stock Exchange at www.hkexnews.hk and our website at www.vesync.com notices of the reduction in the indicative Offer Price range and/or number of Offer Shares. Upon issue of such a notice, the revised Offer Price range will be final and conclusive and the Offer Price, if agreed upon by the Joint Global Coordinators (for themselves and on behalf of the Underwriters) and our Company, willbefixedwithinsuchrevisedOfferPrice range. Applicants should have regard to the possibility that any announcement of a reduction in the indicative Offer Price range and/or the number of Offer Shares may not be made until the day which is the last day for lodging applications under the Hong Kong Public Offering.
Such notice will also include confirmation or revision, as appropriate, of the working capital statement and the Global Offering statistics as currently set out in this prospectus, and any other financial information which may change as a result of such reduction. In the absence of any such notice so published, the Offer Price, if agreed upon by our Company with the Joint Global Coordinators (for themselves and on behalf of the Underwriters), will under no circumstances be set outside the Offer Price range as stated in this prospectus.
– 324 – STRUCTURE OF THE GLOBAL OFFERING
The final Offer Price, the levels of indication of interest in the Global Offering, the results of applications and the basis of allotment of Offer Shares under the Hong Kong Public Offering, are expected to be announced on Thursday, December 17, 2020 in the manner set out in the section headed ‘‘How to Apply for Hong Kong Offer Shares—11. Publication of Results’’ in this prospectus.
RESTRICTIONS ON THE OFFER SHARES
No action has been taken to permit a public offering of the Offer Shares other than in Hong Kong, or the distribution of this prospectus in any jurisdiction other than Hong Kong. Accordingly, this prospectus may not be used for the purpose of, and does not constitute, an offer or invitation in any jurisdiction or in any circumstances in which such offer or invitation is not authorized or to any person to whom it is unlawful to make such an offer or invitation.
STABILIZATION
Stabilization is a practice used by underwriters in some markets to facilitate the distribution of securities. To stabilize, the underwriters may bid for, or purchase, the newly issued securities in the secondary market, during a specified period of time, to retard and, if possible, prevent a decline in the market price of the securities below the offer price. In Hong Kong and certain other jurisdictions, the price at which stabilization is effected is not permitted to exceed the offer price.
The Stabilizing Manager has been appointed by us as the stabilizing manager for the purposes of the Global Offering in accordance with the Securities and Futures (Price Stabilising) Rules made under the SFO. In connection with the Global Offering, the Stabilizing Manager, as stabilizing manager, or its affiliates or any person acting for it, on behalf of the Underwriters, may over- allocate or effect transactions with a view to stabilizing or maintaining the market price of the Shares at a level higher than that which might otherwise prevail for a limited period after the Listing Date.
Any such stabilizing activity will be made in compliance with all applicable laws, rules and regulations on stabilization including the Securities and Futures (Price Stabilising) Rules made under the SFO. However, there is no obligation on the Stabilizing Manager, its affiliates or any person acting for it to do this. Such stabilization, if commenced, will be conducted at the absolute discretion of the Stabilizing Manager, its affiliates or any person acting for it and may be discontinued at any time, and must be brought to an end after a limited period. Any such stabilization activity is required to be brought to an end within 30 days from the last date for lodging application under the Hong Kong Public Offering. The number of Shares that may be over- allocated will not be greater than the number of Shares which may be made available upon exercise of the Over-allotment Option, being 42,150,000 Shares, which is 15% of the Offer Shares initially available under the Global Offering.
– 325 – STRUCTURE OF THE GLOBAL OFFERING
Subject to and under the Securities and Futures (Price Stabilising) Rules of the SFO, the Stabilizing Manager, as stabilizing manager, its affiliates or any person acting for it, may take all or any of the following stabilizing action in Hong Kong during the stabilization period:
(1) purchase, or agree to purchase, any of the Shares or offer or attempt to do so for the sole purpose of preventing or minimizing any reduction in the market price of the Shares;
(2) in connection with any action described in paragraph (1) above:
(a) (i) over-allocate our Shares; or
(ii) sell or agree to sell the Shares so as to establish a short position in them, for the sole purpose of preventing or minimizing any reduction in the market price of our Shares;
(b) exercise the Over-allotment Option and subscribe for or purchase, or agree to subscribe for or purchase, the Shares pursuant to the Over-allotment Option in order to close out any position established under subparagraph (a) above;
(c) sell or agree to sell any Shares acquired by it in the course of the stabilizing action referred to in paragraph (1) above in order to liquidate any position that has been established by such action; and
(d) offer or attempt to do anything described in subparagraphs (a)(ii), (b) or (c) above.
Specifically, prospective applicants for and investors in Offer Shares should note that:
. the Stabilizing Manager, its affiliates or any person acting for it may, in connection with the stabilizing action, maintain a long position in the Shares;
. there is no certainty regarding the extent to which and the time period for which the Stabilizing Manager, its affiliates or any person acting for it, will maintain such a position;
. liquidation of any such long position by the Stabilizing Manager, its affiliates or any person acting for it, may have an adverse impact on the market price of the Shares;
. no stabilizing action can be taken to support the price of the Shares for longer than the stabilizingperiodwhichwillbeginontheListingDate,andisexpectedtoexpireon Sunday, January 10, 2021, being the 30th day after the last date for lodging applications under the Hong Kong Public Offering. After this date, when no further action may be taken to support the price of the Shares, demand for the Shares, and therefore the price of the Shares, could fall;
. the price of any security (including the Shares) cannot be assured to stay at or above its Offer Price by the taking of any stabilizing action; and
– 326 – STRUCTURE OF THE GLOBAL OFFERING
. stabilizing bids may be made or transactions effected in the course of the stabilizing action at any price at or below the Offer Price, which means that stabilizing bids may be made or transactions effected at a price below the price paid by applicants for, or investors in, the Shares.
A public announcement in compliance with the Securities and Futures (Price Stabilizing) Rules of the SFO will be made within seven days of the expiration of the stabilization period.
STOCK BORROWING ARRANGEMENT
In order to facilitate the settlement of over-allocations, if any, in connection with the Global Offering, the Stabilizing Manager may choose to borrow, whether on its own or through its affiliates, up to 42,150,000 Shares, representing 15% of the Offer Shares initially available under the Global Offering, from Caerus BVI to cover over-allocation under the stock borrowing arrangement (being the maximum number of Offer Shares which may be issued upon exercise of the Over-allotment Option), or acquire Shares from other sources, including exercising the Over- allotment Option. If such stock borrowing arrangement with Caerus BVI is entered into, it will only be effected by the Stabilizing Manager or its agent for settlement of over-allocation in the International Offering and such arrangement is not subject to the restrictions of Rule 10.07(1) of the Listing Rules provided that the requirements set forth in Rule 10.07(3) of the Listing Rules, being that the Stock Borrowing Agreement will be for the sole purpose of covering any short position prior to the exercise of the Over-allotment Option in connection with the International Offering, are complied with.
The same number of Shares so borrowed must be returned to Caerus BVI or its nominees, as the case may be, within three business days after the last day for exercising the Over-allotment Option or, if earlier, the day on which the Over-allotment Option is exercised in full.
The Shares borrowing arrangement described above will be effected in compliance with all applicable laws, rules and regulatory requirements. No payment will be made to Caerus BVI by the Stabilizing Manager (or any person acting for it) in relation to such Shares borrowing arrangement.
COMMENCEMENT OF DEALINGS
Assuming the Hong Kong Public Offering becomes unconditional at or before 8:00 a.m. in Hong Kong on Friday, December 18, 2020, it is expected that dealings in the Shares on the Stock Exchange will commence at 9:00 a.m. on Friday, December 18, 2020.
The Shares will be traded in board lots of 1,000 Shares each. The stock code of the Company is 2148.
– 327 – HOW TO APPLY FOR HONG KONG OFFER SHARES
1. HOW TO APPLY
If you apply for Hong Kong Offer Shares, then you may not apply for or indicate an interest for International Offer Shares.
To apply for Hong Kong Offer Shares, you may:
. use a WHITE or YELLOW Application Form;
. apply online via the eWhite Form Service at www.ewhiteform.com.hk;or
. electronically cause HKSCC Nominees to apply on your behalf.
None of you or your joint applicant(s) may make more than one application, except where you are a nominee and provide the required information in your application.
Our Company, the Joint Global Coordinators, the eWhite Form Service Provider and their respective agents may reject or accept any application in full or in part for any reason at their discretion.
2. WHO CAN APPLY
You can apply for Hong Kong Offer Shares on a WHITE or YELLOW Application Form if you or the person(s) for whose benefit you are applying:
. are 18 years of age or older;
. have a Hong Kong address;
. are outside the United States, and are not a United States Person (as defined in Regulation S under the U.S. Securities Act); and
. are not a legal or natural person of the PRC.
If you apply online through the eWhite Form Service, in addition to the above, you must also: (i) have a valid Hong Kong identity card number and (ii) provide a valid e-mail address and a contact telephone number.
If you are a firm, the application must be in the individual members’ names. If you are a body corporate, the application form must be signed by a duly authorized officer, who must state his representative capacity, and stamped with your corporation’s chop.
– 328 – HOW TO APPLY FOR HONG KONG OFFER SHARES
If an application is made by a person under a power of attorney, the Joint Global Coordinators may accept it at their discretion and on any conditions they think fit, including evidence of the attorney’sauthority.
The number of joint applicants may not exceed four and they may not apply by means of eWhite Form Service for the Hong Kong Offer Shares.
Unless permitted by the Listing Rules, you cannot apply for any Hong Kong Offer Shares if you are:
. an existing beneficial owner of Shares in our Company and/or any its subsidiaries;
. a director or chief executive officer of our Company and/or any of its subsidiaries;
. a close associate (as defined in the Listing Rules) of any of the above;
. have been allocated or have applied for any International Offer Shares or otherwise participate in the International Offering.
3. APPLYING FOR HONG KONG OFFER SHARES
Which Application Channel to Use
For Hong Kong Offer Shares to be issued in your own name, use a WHITE Application Form or apply online through www.ewhiteform.com.hk.
For Hong Kong Offer Shares to be issued in the name of HKSCC Nominees and deposited directly into CCASS to be credited to your or a designated CCASS Participant’s stock account, use a YELLOW Application Form or electronically instruct HKSCC via CCASS to cause HKSCC Nominees to apply for you.
– 329 – HOW TO APPLY FOR HONG KONG OFFER SHARES
Where to Collect the Application Forms
You can collect a WHITE Application Form and a prospectus during normal business hours from 9:00 a.m. on Tuesday, December 8, 2020 until 12:00 noon on Friday, December 11, 2020 from:
(i) the following address of the Hong Kong Underwriters:
BNP Paribas Securities (Asia) Limited. . 63/F, Two International Finance Centre 8 Finance Street, Central Hong Kong
Innovax Securities Limited ...... UnitA–C, 20/F, Neich Tower 128 Gloucester Road, Wanchai Hong Kong
Haitong International Securities 22/F, Li Po Chun Chambers, Company Limited ...... 189 Des Voeux Road Central, Hong Kong
China Industrial Securities 7/F, Three Exchange Square, International Capital Limited ...... 8 Connaught Place, Central, Hong Kong
UOB Kay Hian (Hong Kong) Limited . . 6/F, Harcourt House, 39 Gloucester Road, Hong Kong
CMBC Securities Company Limited . . . 45/F., One Exchange Square, 8 Connaught Place, Central, Hong Kong
– 330 – HOW TO APPLY FOR HONG KONG OFFER SHARES
(ii) any of the following branches of DBS Bank (Hong Kong) Limited:
Branch Name Address
Hong Kong Island . . Head Office G/F, The Center, 99 Queen’s Road Central, Central
North Point Branch G/F, 391 King’s Road, North Point
Kowloon ...... MeiFooBranch ShopsN26A,N26B&N26D, Stage V, Mei Foo Sun Chuen, 10&12NassauStreet,Kowloon
New Territories .... TuenMunTown Shop 23, G/F, Plaza — SME Tuen Mun Town Plaza (II), Banking Centre 3TuenLungStreet,TuenMun
You can collect a YELLOW Application Form and a prospectus during normal business hours from 9:00 a.m. on Tuesday, December 8, 2020 until 12:00 noon on Friday, December 11, 2020 from:
. the Depository Counter of HKSCC at 1/F, One & Two Exchange Square, 8 Connaught Place, Central, Hong Kong; or
. from your stockbroker.
Time for Lodging Application Forms
Your completed WHITE or YELLOW Application Form, together with a cheque or a banker’s cashier order attached and marked payable to ‘‘TING HONG NOMINEES LIMITED — VESYNC PUBLIC OFFER’’ for the payment, should be deposited in the special collection boxes provided at any of the branches of the receiving bank listed above, at the following times:
. Tuesday, December 8, 2020 — 9:00 a.m. to 4:00 p.m.
. Wednesday, December 9, 2020 — 9:00 a.m. to 4:00 p.m.
. Thursday, December 10, 2020 — 9:00 a.m. to 4:00 p.m.
. Friday, December 11, 2020 — 9:00 a.m. to 12:00 noon
– 331 – HOW TO APPLY FOR HONG KONG OFFER SHARES
To safeguard the health and safety of its employees and customers in light of the rapidly changing novel coronavirus situation in Hong Kong, the receiving bank referred to above may adjust its branch services (including branch operation hours) from time to time. For the latest arrangement on branch services, please refer to the website of the receiving bank at https://www.dbs.com.hk/personal/default.page
The application lists will be open from 11:45 a.m. to 12:00 noon on Friday, December 11, 2020, the last application day, or such later time as described in ‘‘10. Effect of Bad Weather on the Opening of the Applications Lists’’ in this section.
4. TERMS AND CONDITIONS OF AN APPLICATION
Follow the detailed instructions in the Application Form carefully; otherwise, your application may be rejected.
By submitting an Application Form or applying through the eWhite Form Service, among other things, you:
(i) undertake to execute all relevant documents and instruct and authorize our Company and/ or the Joint Global Coordinators (or their agents or nominees), as agents of our Company, to execute any documents for you and to do on your behalf all things necessary to register any Hong Kong Offer Shares allocated to you in your name or in the name of HKSCC Nominees as required by the Articles of Association;
(ii) agree to comply with the Companies Ordinance, the Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Articles of Association;
(iii) confirm that you have read the terms and conditions and application procedures set out in this prospectus and in the Application Form and agree to be bound by them;
(iv) confirm that you have received and read this prospectus and have only relied on the information and representations contained in this prospectus in making your application and will not rely on any other information or representations except those in any supplement to this prospectus;
(v) confirm that you are aware of the restrictions on the Global Offering in this prospectus;
(vi) agree that none of our Company, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Underwriters, their respective directors, officers, employees, partners, agents, advisers and any other parties involved in the Global Offering is or will be liable for any information and representations not in this prospectus (and any supplement to it);
– 332 – HOW TO APPLY FOR HONG KONG OFFER SHARES
(vii) undertake and confirm that you or the person(s) for whose benefit you have made the application have not applied for or taken up, or indicated an interest for, and will not apply for or take up, or indicate an interest for, any Offer Shares under the International Offering nor participated in the International Offering;
(viii) agree to disclose to our Company, our Hong Kong Share Registrar, receiving bank(s), the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Underwriters and/or their respective advisers and agents any personal data which they may require about you and the person(s) for whose benefit you have made the application;
(ix) if the laws of any place outside Hong Kong apply to your application, agree and warrant that you have complied with all such laws and none of our Company, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and the Underwriters nor any of their respective officers or advisers will breach any law outside Hong Kong as a result of the acceptance of your offer to purchase, or any action arising from your rights and obligations under the terms and conditions contained in this prospectus and the Application Form;
(x) agree that once your application has been accepted, you may not rescind it because of an innocent misrepresentation;
(xi) agree that your application will be governed by the laws of Hong Kong;
(xii) represent, warrant and undertake that (i) you understand that the Hong Kong Offer Shares have not been and will not be registered under the U.S. Securities Act; and (ii) you and any person for whose benefit you are applying for the Hong Kong Offer Shares are outside the United States (as defined in Regulation S) or are a person described in paragraph (h)(3) of Rule 902 of Regulation S;
(xiii) warrant that the information you have provided is true and accurate;
(xiv) agree to accept the Hong Kong Offer Shares applied for, or any lesser number allocated to you under the application;
(xv) authorize our Company to place your name(s) or the name of the HKSCC Nominees, on our Company’s register of members as the holder(s) of any Hong Kong Offer Shares allocated to you, and our Company and/or its agents to send any share certificate(s) and/ or any eAuto Refund payment instructions and/or any refund cheque(s) to you or the first-named applicant for joint applicationbyordinarypostatyourownrisktothe address stated on the application, unless you are eligible to collect the share certificate(s) and/or refund cheque(s) in person;
– 333 – HOW TO APPLY FOR HONG KONG OFFER SHARES
(xvi) declare and represent that this is the only application made and the only application intended by you to be made to benefit you or the person for whose benefit you are applying;
(xvii) understand that our Company, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers will rely on your declarations and representations in deciding whether or not to make any allotment of any of the Hong Kong Offer Shares to you and that you may be prosecuted for making a false declaration;
(xviii) (if the application is made for your own benefit) warrant that no other application has been or will be made for your benefit on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC or to the eWhite Form Service by you or by any one as your agent or by any other person; and
(xix) (if you are making the application as an agent for the benefit of another person) warrant that (i) no other application has been or will be made by you as agent for or for the benefit of that person or by that person or by any other person as agent for that person on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC; and (ii) you have due authority to sign the Application Form or give electronic application instructions on behalf of that other person as their agent.
Additional Instructions for Yellow Application Form
You may refer to the Yellow Application Form for details.
5. APPLYING THROUGH eWHITE FORM SERVICE
General
Individuals who meet the criteria in ‘‘Who can apply’’ section, may apply through the eWhite Form Service for the Offer Shares to be allotted and registered in their own names through the designated website at www.ewhiteform.com.hk.
Detailed instructions for application through the eWhite Form Service are on the designated website. If you do not follow the instructions, your application may be rejected and may not be submitted to our Company. If you apply through the designated website, you authorize the eWhite Form Service Provider to apply on the terms and conditions in this prospectus, as supplemented and amended by the terms and conditions of the eWhite Form Service.
Time for Submitting Applications under the eWhite Form
You may submit your application to the eWhite Form Service Provider at www.ewhiteform.com.hk. (24 hours daily, except on the last application day) from 9:00 a.m. on Tuesday, December 8, 2020 until 11:30 a.m. on Friday, December 11, 2020 and the latest
– 334 – HOW TO APPLY FOR HONG KONG OFFER SHARES
time for completing full payment of application monies in respect of such applications will be 12:00 noon on Friday, December 11, 2020 or such later time under the ‘‘Effects of Bad Weather on the Opening of the Applications Lists’’ in this section.
No Multiple Applications
IfyouapplybymeansofeWhite Form, once you complete payment in respect of any electronic application instruction given by you or for your benefit through the eWhite Form Service to make an application for Hong Kong Offer Shares, an actual application shall be deemed to have been made. For the avoidance of doubt, giving an electronic application instruction under eWhite Form more than once and obtaining different application reference numbers without effecting full payment in respect of a particular reference number will not constitute an actual application.
If you are suspected of submitting more than one application through the eWhite Form Service or by any other means, all of your applications are liable to be rejected.
Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance
For the avoidance of doubt, our Company and all other parties involved in the preparation of this prospectus acknowledge that each applicant who gives or causes to give electronic application instructions is a person who may be entitled to compensation under Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (as applied by Section 342E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance).
6. APPLYING BY GIVING ELECTRONIC APPLICATION INSTRUCTIONS TO HKSCC VIA CCASS
General
CCASS Participants may give electronic application instructions to apply for the Hong Kong Offer Shares and to arrange payment of the money due on application and payment of refunds under their participant agreements with HKSCC and the General Rules of CCASS and the CCASS Operational Procedures.
If you are a CCASS Investor Participant, you may give these electronic application instructions through the CCASS Phone System by calling 2979 7888 or through the CCASS Internet System (http://ip/ccass/com) (using the procedures in HKSCC’s ‘‘An Operating Guide for Investor Participants’’ in effect from time to time).
– 335 – HOW TO APPLY FOR HONG KONG OFFER SHARES
HKSCC can also input electronic application instructions for you if you go to:
Hong Kong Securities Clearing Company Limited Customer Service Center 1/F, One & Two Exchange Square 8 Connaught Place, Central Hong Kong and complete an input request form.
You can also collect a prospectus from this address.
If you are not a CCASS Investor Participant, you may instruct your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give electronic application instructions via CCASS terminals to apply for the Hong Kong Offer Shares on your behalf.
You will be deemed to have authorized HKSCC and/or HKSCC Nominees to transfer the details of your application to our Company, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and our Hong Kong Share Registrar.
Giving Electronic Application Instructions to HKSCC via CCASS
Where you have given electronic application instructions to apply for the Hong Kong Offer Shares and a WHITE Application Form is signed by HKSCC Nominees on your behalf:
(i) HKSCC Nominees will only be acting as a nominee for you and is not liable for any breach of the terms and conditions of the WHITE Application Form or this prospectus;
(ii) HKSCC Nominees will do the following things on your behalf:
. agree that the Hong Kong Offer Shares to be allotted shall be issued in the name of HKSCC Nominees and deposited directly into CCASS for the credit of the CCASS Participant’s stock account on your behalf or your CCASS Investor Participant’s stock account;
. agree to accept the Hong Kong Offer Shares applied for or any lesser number allocated;
. undertake and confirm that you have not applied for or taken up, will not apply for or take up, or indicate an interest for, any Offer Shares under the International Offering;
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. (if the electronic application instructions are given for your benefit) declare declare that only one set of electronic application instructions has been given for your benefit;
. (if you are an agent for another person) declare that you have only given one set of electronic application instructions for the other person’s benefit and are duly authorized to give those instructions as their agent;
. confirm that you understand that our Company, our Directors, the Joint Global Coordinators, the Joint Bookrunners and the Joint Lead Managers will rely on your declarations and representations in deciding whether or not to make any allotment of any of the Hong Kong Offer Shares to you and that you may be prosecuted if you make a false declaration;
. authorize our Company to place HKSCC Nominees’ name on our Company’s register of members as the holder of the Hong Kong Offer Shares allocated to you and to send share certificate(s) and/or refund monies under the arrangements separately agreed between us and HKSCC;
. confirm that you have read the terms and conditions and application procedures set out in this prospectus and agree to be bound by them;
. confirm that you have received and/or read a copy of this prospectus and have relied only on the information and representations in this prospectus in causing the application to be made, save as set out in any supplement to this prospectus;
. agree that none of our Company, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Underwriters, their respective directors, officers, employees, partners, agents, advisers and any other parties involved in the Global Offering, is or will be liable for any information and representations not contained in this prospectus (and any supplement to it);
. agree to disclose your personal data to our Company, our Hong Kong Share Registrar, receiving bank(s), the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Underwriters and/or their respective advisers and agents;
. agree (without prejudice to any other rights which you may have) that once HKSCC Nominees’ application has been accepted, it cannot be rescinded for innocent misrepresentation;
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. agree that any application made by HKSCC Nominees on your behalf is irrevocable before the fifth day after the time of the opening of the application lists (excluding any day which is Saturday, Sunday or public holiday in Hong Kong), such agreement to take effect as a collateral contract with us and to become binding when you give the instructions and such collateral contract to be in consideration of our Company agreeing that it will not offer any Hong Kong Offer Shares to any person before the fifth day after the time of the opening of the application lists (excluding any day which is Saturday, Sunday or public holiday in Hong Kong), except by means of one of the procedures referred to in this prospectus. However, HKSCC Nominees may revoke the application before the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is a Saturday, Sunday or public holiday in Hong Kong) if a person responsible for this prospectus under Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance gives a public notice under that section which excludes or limits that person’s responsibility for this prospectus;
. agree that once HKSCC Nominees’ application is accepted, neither that application nor your electronic application instructions can be revoked, and that acceptance of that application will be evidenced by the Company’s announcement of the Hong Kong Public Offering results;
. agree to the arrangements, undertakings and warranties under the participant agreement between you and HKSCC, read with the General Rules of CCASS and the CCASS Operational Procedures, for the giving electronic application instructions to apply for Hong Kong Offer Shares;
. agree with our Company, for itself and for the benefit of each Shareholder (and so that our Company will be deemed by its acceptance in whole or in part of the application by HKSCC Nominees to have agreed, for itself and on behalf of each of the Shareholders, with each CCASS Participant giving electronic application instructions)toobserveandcomplywiththe Companies (Winding Up and Miscellaneous Provisions) Ordinance and the Articles of Association; and
. agree that your application, any acceptance of it and the resulting contract will be governed by the Laws of Hong Kong.
Effect of Giving Electronic Application Instructions to HKSCC via CCASS
By giving electronic application instructions to HKSCC or instructing your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give such instructions to HKSCC, you (and, if you are joint applicants, each of you jointly and
– 338 – HOW TO APPLY FOR HONG KONG OFFER SHARES severally) are deemed to have done the following things. Neither HKSCC nor HKSCC Nominees shall be liable to our Company or any other person in respect of the things mentioned below:
. instructed and authorized HKSCC to cause HKSCC Nominees (acting as nominee for the relevant CCASS Participants) to apply for the Hong Kong Offer Shares on your behalf;
. instructed and authorized HKSCC to arrange payment of the maximum Offer Price, brokerage, SFC transaction levy and the Stock Exchange trading fee by debiting your designated bank account and, in the case of a wholly or partially unsuccessful application and/or if the Offer Price is less than the maximum Offer Price per Offer Share initially paid on application, refund of the application monies (including brokerage, SFC transaction levy and the Stock Exchange trading fee) by crediting your designated bank account; and
. instructed and authorized HKSCC to cause HKSCC Nominees to do on your behalf all the things stated in the WHITE Application Form and in this prospectus.
Minimum Purchase Amount and Permitted Numbers
You may give or cause your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give electronic application instructions for a minimum of 1,000 Hong Kong Offer Shares. Instructions for more than 1,000 Hong Kong Offer Shares must be in one of the numbers set out in the table in the Application Forms. No application for any other number of Hong Kong Offer Shares will be considered and any such application is liable to be rejected.
Time for Inputting Electronic Application Instructions(1)
CCASS Clearing/Custodian Participants can input electronic application instructions at the following times on the following dates:
. Tuesday, December 8, 2020 — 9:00 a.m. to 8:30 p.m.
. Wednesday, December 9, 2020 — 8:00 a.m. to 8:30 p.m.
. Thursday, December 10, 2020 — 8:00 a.m. to 8:30 p.m.
. Friday, December 11, 2020 — 8:00 a.m. to 12:00 noon
CCASS Investor Participants can input electronic application instructions from 9:00 a.m. on Tuesday, December 8, 2020 until 12:00 noon on Friday, December 11, 2020 (24 hours daily, except on the last application day).
– 339 – HOW TO APPLY FOR HONG KONG OFFER SHARES
The latest time for inputting your electronic application instructions will be 12:00 noon on Friday, December 11, 2020, the last application day or such later time as described in ‘‘Effect of Bad Weather on the Opening of the Application Lists’’ in this section.
(1) The times in this sub-section are subject to change as HKSCC may determine from time to time with prior notification to CCASS Clearing/Custodian Participants and/or CCASS Investor Participants.
No Multiple Applications
If you are suspected of having made multiple applications or if more than one application is made for your benefit, the number of Hong Kong Offer Shares applied for by HKSCC Nominees will be automatically reduced by the number of Hong Kong Offer Shares for which you have given such instructions and/or for which such instructions have been given for your benefit. Any electronic application instructions to make an application for the Hong Kong Offer Shares given by you or for your benefit to HKSCC shall be deemed to be an actual application for the purposes of considering whether multiple applications have been made.
Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance
For the avoidance of doubt, our Company and all other parties involved in the preparation of this prospectus acknowledge that each CCASS Participant who gives or causes to give electronic application instructions is a person who may be entitled to compensation under Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (as applied by Section 342E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance).
Personal Data
The section of the Application Form headed ‘‘Personal Data’’ applies to any personal data held by our Company, the Hong Kong Share Registrar, the receiving bank(s), the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers, the Underwriters and any of their respective advisers and agents about you in the same way as it applies to personal data about applicants other than HKSCC Nominees.
7. WARNING FOR ELECTRONIC APPLICATIONS
The subscription of the Hong Kong Offer Shares by giving electronic application instructions to HKSCC is only a facility provided to CCASS Participants. Similarly, the application for Hong Kong Offer Shares through the eWhite Form Service is also only a facility provided by the eWhite Form Service Provider to public investors. Such facilities are subject to capacity limitations and potential service interruptions and you are advised not to wait until the last application day in making your electronic applications. Our Company, our Directors, the Joint Sponsors, the Joint Global Coordinators, the Joint Bookrunners, the Joint Lead Managers and the Underwriters take no responsibility for such applications and provide no assurance that any CCASS Participant or person applying through the eWhite Form Service will be allotted any Hong Kong Offer Shares.
– 340 – HOW TO APPLY FOR HONG KONG OFFER SHARES
To ensure that CCASS Investor Participants can give their electronic application instructions, they are advised not to wait until the last minute to input their instructions to the systems. In the event that CCASS Investor Participants have problems in the connection to CCASS Phone System/CCASS Internet System for submission of electronic application instructions,they should either (i) submit a WHITE or YELLOW Application Form, or (ii) go to HKSCC’s Customer Service Centre to complete an input request form for electronic application instructions before 12:00 noon on Friday, December 11, 2020.
8. HOW MANY APPLICATIONS CAN YOU MAKE
Multiple applications for the Hong Kong Offer Shares are not allowed except by nominees. If you are a nominee, in the box on the Application Form marked ‘‘For nominees’’ you must include:
. an account number; or
. some other identification code, for each beneficial owner or, in the case of joint beneficial owners, for each joint beneficial owner. If you do not include this information, the application will be treated as being made for your benefit.
All of your applications will be rejected if more than one application on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC or through eWhite Form Service, is made for your benefit (including the part of the application made by HKSCC Nominees acting on electronic application instructions). If an application is made by an unlisted company and:
. the principal business of that company is dealing in securities; and
. you exercise statutory control over that company, then the application will be treated as being for your benefit.
‘‘Unlisted company’’ means a company with no equity securities listed on the Stock Exchange.
‘‘Statutory control’’ means you:
. control the composition of the board of directors of our Company;
. control more than half of the voting power of our Company; or
. hold more than half of the issued share capital of our Company (not counting any part of it which carries no right to participate beyond a specified amount in a distribution of either profit or capital).
– 341 – HOW TO APPLY FOR HONG KONG OFFER SHARES
9. HOW MUCH ARE THE HONG KONG OFFER SHARES
The WHITE and YELLOW Application Forms have tables showing the exact amount payable for Shares.
You must pay the maximum Offer Price, brokerage, SFC transaction levy and the Stock Exchange trading fee in full upon application for Shares under the terms set out in the Application Forms.
You may submit an application using a WHITE or YELLOW Application Form or through the eWhite Form Service in respect of a minimum of 1,000 Hong Kong Offer Shares. Each application or electronic application instruction in respect of more than 1,000 Hong Kong Offer Shares must be in one of the numbers set out in the table in the Application Form, or as otherwise specified on the designated website at www.ewhiteform.com.hk.
If your application is successful, brokerage will be paid to the Exchange Participants, and the SFC transaction levy and the Stock Exchange trading fee are paid to the Stock Exchange (in the case of the SFC transaction levy, collected by the Stock Exchange on behalf of the SFC).
For further details on the Offer Price, see the section headed ‘‘Structure of the Global Offering—Price Determination of the Global Offering’’ in this prospectus.
10. EFFECT OF BAD WEATHER ON THE OPENING OF THE APPLICATION LISTS
The application lists will not open if there is:
. a tropical cyclone warning signal number 8 or above;
. a ‘‘black’’ rainstorm warning, and/or
. Extreme Conditions in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Friday, December 11, 2020. Instead they will open between 11:45 a.m. and 12:00 noon on the next business day which does not have either of those warnings in Hong Kong in force at any time between 9:00 a.m. and 12:00 noon.
If the application lists do not open and close on Friday, December 11, 2020 or if there is a tropical cyclone warning signal number 8 or above, a ‘‘black’’ rainstorm warning signal and/or Extreme Conditions in force in Hong Kong that may affect the dates mentioned in the section headed ‘‘Expected Timetable’’ in this prospectus, an announcement will be made in such event.
– 342 – HOW TO APPLY FOR HONG KONG OFFER SHARES
11. PUBLICATION OF RESULTS
Our Company expects to announce the final Offer Price, the level of indication of interest in the International Offering, the level of applications in the Hong Kong Public Offering and the basis of allocation of the Hong Kong Offer Shares on Thursday, December 17, 2020 on the Company’s website at www.vesync.com and the website of the Stock Exchange at www.hkexnews.hk.
The results of allocations and the Hong Kong identity card/passport/Hong Kong business registration numbers of successful applicants under the Hong Kong Public Offering will be available at the times and date and in the manner specified below:
. in the announcement to be posted on our Company’s website at www.vesync.com and the Stock Exchange’s website at www.hkexnews.hk by no later than 9:00 a.m. on Thursday, December 17, 2020;
. from the designated results of allocations website at www.ewhiteform.com.hk/results with a ‘‘search by ID’’ function on a 24-hour basis from 9:00 a.m. on Thursday, December 17, 2020 to 12:00 midnight on Monday, December 21, 2020;
. by telephone enquiry line by calling (852) 2153 1688 between 9:00 a.m. and 6:00 p.m. from Thursday, December 17, 2020 to Monday, December 21, 2020 (excluding Saturday and Sunday or public holiday in Hong Kong);
. in the special allocation results booklets which will be available for inspection during opening hours from Thursday, December 17, 2020 to Monday, December 21, 2020 at all the receiving bank’s designated branches and sub-branches.
If our Company accepts your offer to purchase (in whole or in part), which it may do by announcing the basis of allocations and/or making available the results of allocations publicly, there will be a binding contract under which you will be required to purchase the Hong Kong Offer Shares if the conditions of the Global Offering are satisfied and the Global Offering is not otherwise terminated. Further details are contained in the section headed ‘‘Structure of the Global Offering’’ in this prospectus.
You will not be entitled to exercise any remedy of rescission for innocent misrepresentation at any time after acceptance of your application. This does not affect any other right you may have.
– 343 – HOW TO APPLY FOR HONG KONG OFFER SHARES
12. CIRCUMSTANCES IN WHICH YOU WILL NOT BE ALLOTTED OFFER SHARES
You should note the following situations in which the Hong Kong Offer Shares will not be allotted to you:
(i) If your application is revoked:
By completing and submitting an Application Form or giving electronic application instructions to HKSCC or to eWhite Form Service Provider, you agree that your application or the application made by HKSCC Nominees on your behalf cannot be revoked on or before the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is Saturday, Sunday or public holiday in Hong Kong). This agreement will take effect as a collateral contract with our Company.
Your application or the application made by HKSCC Nominees on your behalf may only be revoked on or before such fifth day if a person responsible for this prospectus under Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (as applied by Section 342E of the Companies (Winding Up and Miscellaneous Provisions) Ordinance) gives a public notice under that section which excludes or limits that person’s responsibility for this prospectus.
If any supplement to this prospectus is issued, applicants who have already submitted an application will be notified that they are required to confirm their applications. If applicants have been so notified but have not confirmed their applications in accordance with the procedure to be notified, all unconfirmed applications will be deemed revoked.
If your application or the application made by HKSCC Nominees on your behalf has been accepted, it cannot be revoked. For this purpose, acceptance of applications which are not rejected will be constituted by notification in the press of the results of allocation, and where such basis of allocation is subject to certain conditions or provides for allocation by ballot, such acceptance will be subject to the satisfaction of such conditions or results of the ballot respectively.
(ii) If our Company or its agents exercise their discretion to reject your application:
Our Company, the Joint Global Coordinators, the eWhite Form Service Provider and their respective agents and nominees have full discretion to reject or accept any application, or to accept only part of any application, without giving any reasons.
(iii) If the allotment of Hong Kong Offer Shares is void:
The allotment of Hong Kong Offer Shares will be void if the Listing Committee of the Stock Exchange does not grant permission to list the Shares either:
. within three weeks from the closing date of the application lists; or
– 344 – HOW TO APPLY FOR HONG KONG OFFER SHARES
. within a longer period of up to six weeks if the Listing Committee notifies our Company of that longer period within three weeks of the closing date of the application lists.
(iv) If:
. you make multiple applications or suspected multiple applications;
. you or the person for whose benefit you are applying have applied for or taken up, or indicated an interest for, or have been or will be placed or allocated (including conditionally and/or provisionally) Hong Kong Offer Shares and International Offer Shares;
. your Application Form is not completed in accordance with the stated instructions;
. your electronic application instructions through the eWhite Form service are not completed in accordance with the instructions, terms and conditions on the designated website;
. your payment is not made correctly or the cheque or banker’s cashier order paid by you is dishonored upon its first presentation;
. the Underwriting Agreements do not become unconditional or are terminated;
. our Company or the Joint Global Coordinators believe that by accepting your application, it would violate applicable securities or other laws, rules or regulations; or
. your application is for more than 50% of the Hong Kong Offer Shares initially offered under the Hong Kong Public Offering.
13. REFUND OF APPLICATION MONIES
If an application is rejected, not accepted or accepted in part only, or if the Offer Price as finally determined is less than the maximum offer price of HK$5.52 per Offer Share (excluding brokerage, SFC transaction levy and the Stock Exchange trading fee thereon), or if the conditions of the Hong Kong Public Offering are not fulfilled in accordance with the section headed ‘‘Structure of the Global Offering—Conditions of the Hong Kong Public Offering’’ in this prospectus or if any application is revoked, the application monies, or the appropriate portion thereof, together with the related brokerage, SFC transaction levy and the Stock Exchange trading fee, will be refunded, without interest or the cheque or banker’s cashier order will not be cleared.
Any refund of your application monies will be made on Thursday, December 17, 2020.
– 345 – HOW TO APPLY FOR HONG KONG OFFER SHARES
14. DESPATCH/COLLECTION OF SHARE CERTIFICATES AND REFUND MONIES
You will receive one share certificate for all Hong Kong Offer Shares allotted to you under the Hong Kong Public Offering (except pursuant to applications made on YELLOW Application Forms or by electronic application instructions to HKSCC via CCASS where the share certificates will be deposited into CCASS as described below).
No temporary document of title will be issued in respect of the Shares. No receipt will be issued for sums paid on application. If you apply by WHITE or YELLOW Application Form, subject to personal collection as mentioned below, the following will be sent to you (or, in the case of joint applicants, to the first-named applicant) by ordinary post, at your own risk, to the address specified on the Application Form:
. share certificate(s) for all the Hong Kong Offer Shares allotted to you (for YELLOW Application Forms, share certificates will be deposited into CCASS as described below); and
. refund cheque(s) crossed ‘‘Account Payee Only’’ in favor of the applicant (or, in the case of joint applicants, the first-named applicant) for (i) all or the surplus application monies for the Hong Kong Offer Shares, wholly or partially unsuccessfully applied for; and/or (ii) the difference between the Offer Price and the maximum Offer Price per Offer Share paid on application in the event that the Offer Price is less than the maximum Offer Price (including brokerage, SFC transaction levy and the Stock Exchange trading fee but without interest). Part of the Hong Kong identity card number/passport number, provided by you or the first-named applicant (if you are joint applicants), may be printed on your refund cheque, if any. Your banker may require verification of your Hong Kong identity card number/passport number before encashment of your refund cheque(s). Inaccurate completion of your Hong Kong identity card number/passport number may invalidate or delay encashment of your refund cheque(s).
Subject to arrangement on despatch/collection of share certificates and refund monies as mentioned below, any refund cheques and share certificates are expected to be posted on or around Thursday, December 17, 2020. The right is reserved to retain any share certificate(s) and any surplus application monies pending clearance of cheque(s) or banker’scashier’s order(s).
Share certificates will only become valid at 8:00 a.m. on Friday, December 18, 2020 provided that the Global Offering has become unconditional and the right of termination described in the section headed ‘‘Underwriting’’ in this prospectus has not been exercised. Investors who trade shares prior to the receipt of Share certificates or the Share certificates becoming valid do so at their own risk.
– 346 – HOW TO APPLY FOR HONG KONG OFFER SHARES
Personal Collection
(i) If you apply using a WHITE Application Form
If you apply for 1,000,000 or more Hong Kong Offer Shares and have provided all information required by your Application Form, you may collect your refund cheque(s) and/or share certificate(s) from the Hong Kong Share Registrar, Boardroom Share Registrars (HK) Limited at 2103B, 21/F, 148 Electric Road, North Point, Hong Kong, from 9:00 a.m. to 1:00 p.m. on Thursday, December 17, 2020, or such other date as notified by us in the newspapers.
If you are an individual who is eligible for personal collection, you must not authorize any other person to collect for you. If you are a corporate applicant which is eligible for personal collection, your authorized representative must bear a letter of authorization from your corporation stamped with your corporation’s chop. Both individuals and authorized representatives must produce, at the time of collection, evidence of identity acceptable to the Hong Kong Share Registrar.
If you do not collect your refund cheque(s) and/or share certificate(s) personally within the time specified for collection, they will be despatched promptly to the address specified in your Application Form by ordinary post at your own risk.
If you apply for less than 1,000,000 Hong Kong Offer Shares, your refund cheque(s) and/or share certificate(s) will be sent to the address on the relevant Application Form on Thursday, December 17, 2020 by ordinary post and at your own risk.
(ii) If you apply using a YELLOW Application Form
If you apply for 1,000,000 Hong Kong Offer Shares or more, please follow the same instructions as described above. If you have applied for less than 1,000,000 Hong Kong Offer Shares, your refund cheque(s) will be sent to the address on the relevant Application Form on Thursday, December 17, 2020, by ordinary post and at your own risk.
If you apply by using a YELLOW Application Form and your application is wholly or partially successful, your share certificate(s) will be issued in the name of HKSCC Nominees and deposited into CCASS for credit to your or the designated CCASS Participant’sstock account as stated in your Application Form on Thursday, December 17, 2020, or upon contingency, on any other date determined by HKSCC or HKSCC Nominees.
. If you apply through a designated CCASS participant (other than a CCASS investor participant)
For Hong Kong Offer Shares credited to your designated CCASS participant’sstock account (other than CCASS Investor Participant), you can check the number of Hong Kong Offer Shares allotted to you with that CCASS participant.
– 347 – HOW TO APPLY FOR HONG KONG OFFER SHARES
. If you are applying as a CCASS investor participant
Our Company will publish the results of CCASS Investor Participants’ applications together with the results of the Hong Kong Public Offering in the manner described in ‘‘11. Publication of Results’’ in this section. You should check the announcement published by our Company and report any discrepancies to HKSCC before 5:00 p.m. on Thursday, December 17, 2020 or any other date as determined by HKSCC or HKSCC Nominees. Immediately after the credit of the Hong Kong Offer Shares to your stock account, you can check your new account balance via the CCASS Phone System and CCASS Internet System.
(iii) If you apply through the eWhite Form Service
If you apply for 1,000,000 Hong Kong Offer Shares or more and your application is wholly or partially successful, you may collect your Share certificate(s) from our Hong Kong Share Registrar, Boardroom Share Registrars (HK) Limited at 2103B, 21/F, 148 Electric Road, North Point, Hong Kong from 9:00 a.m. to 1:00 p.m. on Thursday, December 17, 2020 or such other date as notified by our Company as the date of despatch/collection of Share certificates/e-Refund payment instructions/refund cheques.
If you do not collect your Share certificate(s) personally within the time specified for collection, they will be sent to the address specified in your application instructions by ordinary post at your own risk.
If you apply for less than 1,000,000 Hong Kong Offer Shares, your Share certificate(s) (where applicable) will be sent to the address specified in your application instructions on Thursday, December 17, 2020 by ordinary post at your own risk.
If you apply and pay the application monies from a single bank account, any refund monies will be despatched to that bank account in the form of e-Refund payment instructions. If you apply and pay the application monies from multiple bank accounts, any refund monies will be despatched to the address as specified in your application instructions in the form of refund cheque(s) by ordinary post at your own risk.
(iv) If you apply via Electronic Application Instructions to HKSCC
Allocation of Hong Kong Offer Shares
For the purposes of allocating Hong Kong Offer Shares, HKSCC Nominees will not be treated as an applicant. Instead, each CCASS Participant who gives electronic application instructions or each person for whose benefit instructions are given will be treated as an applicant.
– 348 – HOW TO APPLY FOR HONG KONG OFFER SHARES
Deposit of Share Certificates into CCASS and Refund of Application Monies
. If your application is wholly or partially successful, your share certificate(s) will be issued in the name of HKSCC Nominees and deposited into CCASS for the credit of your designated CCASS Participant’s stock account or your CCASS Investor Participant stock account on Thursday, December 17, 2020, or, on any other date determined by HKSCC or HKSCC Nominees.
. Our Company expects to publish the application results of CCASS Participants (and where the CCASS Participant is a broker or custodian, our Company will include information relating to the relevant beneficial owner), your Hong Kong identity card number/passport number or other identification code (Hong Kong business registration number for corporations) and the basis of allotment of the Hong Kong Public Offering in the manner specified in ‘‘11. Publication of Results’’ in this section on Thursday, December 17, 2020. You should check the announcement published by our Company and report any discrepancies to HKSCC before 5:00 p.m. on Thursday, December 17, 2020 or such other date as determined by HKSCC or HKSCC Nominees.
. If you have instructed your broker or custodian to give electronic application instructions on your behalf, you can also check the number of Hong Kong Offer Shares allotted to you and the amount of refund monies (if any) payable to you with that broker or custodian.
. If you have applied as a CCASS Investor Participant, you can also check the number of Hong Kong Offer Shares allotted to you and the amount of refund monies (if any) payable to you via the CCASS Phone System and the CCASS Internet System (under the procedures contained in HKSCC’s ‘‘An Operating Guide for Investor Participants’’ in effect from time to time) on Thursday, December 17, 2020. Immediately following the credit of the Hong Kong Offer Shares to your stock account and the credit of refund monies to your bank account, HKSCC will also make available to you an activity statement showing the number of Hong Kong Offer Shares credited to your CCASS Investor Participant stock account and the amount of refund monies (if any) credited to your designated bank account.
. Refund of your application monies (if any) in respect of wholly and partially unsuccessful applications and/or difference between the Offer Price and the maximum Offer Price per Offer Share initially paid on application (including brokerage, SFC transaction levy and the Stock Exchange trading fee but without interest) will be credited to your designated bank account or the designated bank account of your broker or custodian on Thursday, December 17, 2020.
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15. ADMISSION OF THE SHARES INTO CCASS
If the Stock Exchange grants the listing of, and permission to deal in, the Shares and we comply with the stock admission requirements of HKSCC, the Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the Shares or any other date HKSCC chooses. Settlement of transactions between Exchange Participants (as defined in the Listing Rules) is required to take place in CCASS on the second business day after any trading day.
All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time.
Investors should seek the advice of their stockbroker or other professional adviser for details of the settlement arrangement as such arrangements may affect their rights and interests.
All necessary arrangements have been made enabling the Shares to be admitted into CCASS.
– 350 – APPENDIX I ACCOUNTANTS’ REPORT
The following is the text of a report received from our Company’s reporting accountant, Ernst & Young, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this prospectus.
The Directors Vesync Co., Ltd BNP Paribas Securities (Asia) Limited Innovax Capital Limited
Dear Sirs,
We report on the historical financial information of Vesync Co., Ltd (the ‘‘Company’’)andits subsidiaries (together, the ‘‘Group’’) set out on pages I-4 to I-80, which comprises the consolidated statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows of the Group for each of the years ended 31 December 2017, 2018 and 2019, and the six months ended 30 June 2020 (the ‘‘Relevant Periods’’), and the consolidated statements of financial position of the Group as at 31 December 2017, 2018 and 2019 and 30 June 2020 and the statement of financial position of the Company as at 31 December 2019 and 30 June 2020 and a summary of significant accounting policies and other explanatory information (together, the ‘‘Historical Financial Information’’). The Historical Financial Information set out on pages I-4 to I-80 forms an integral part of this report, which has been prepared for inclusion in the prospectus of the Company dated 8 December 2020 (the ‘‘Prospectus’’) in connection with the initial listing of the shares of the Company on the Main Board of The Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange’’).
DIRECTORS’ RESPONSIBILITY FOR THE HISTORICAL FINANCIAL INFORMATION
The directors of the Company are responsible for the preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of presentation and the basis of preparation set out in notes 2.1 and 2.2 to the Historical Financial Information, respectively, and for such internal control as the directors determine is necessary to enable the preparation of the Historical Financial Information that is free from material misstatement, whether due to fraud or error.
– I-1 – APPENDIX I ACCOUNTANTS’ REPORT
REPORTING ACCOUNTANTS’ RESPONSIBILITY
Our responsibility is to express an opinion on the Historical Financial Information and to report our opinion to you. We conducted our work in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 200 Accountants’ Reports on Historical Financial Information in Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’). This standard requires that we comply with ethical standards and plan and perform our work to obtain reasonable assurance about whether the Historical Financial Information is free from material misstatement.
Our work involved performing procedures to obtain evidence about the amounts and disclosures in the Historical Financial Information. The procedures selected depend on the reporting accountants’ judgement, including the assessment of risks of material misstatement of the Historical Financial Information, whether due to fraud or error. In making those risk assessments, the reporting accountants consider internal control relevant to the entity’s preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of presentation and the basis of preparation set out in notes 2.1 and 2.2 to the Historical Financial Information, respectively, in order to design procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Our work also included evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the Historical Financial Information.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
OPINION
In our opinion, the Historical Financial Information gives, for the purposes of the accountants’ report, a true and fair view of the financial position of the Group as at 31 December 2017, 2018 and 2019 and 30 June 2020 and of the financial position of the Company as at 31 December 2019 and 30 June 2020 and of the financial performance and cash flows of the Group for each of the Relevant Periods in accordance with the basis of presentation and the basis of preparation set out in notes 2.1 and 2.2 to the Historical Financial Information, respectively.
Review of interim comparative financial information
We have reviewed the interim comparative financial information of the Group which comprises the consolidated statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the six months ended 30 June 2019 and other explanatory information (the ‘‘Interim Comparative Financial Information’’). The directors of the Company are responsible for the preparation and presentation of the Interim Comparative Financial Information in accordance with the basis of presentation and the basis of preparation set out in notes 2.1 and 2.2 to the Historical Financial Information. Our responsibility is to express a conclusion on the Interim Comparative Financial Information based on our review. We conducted
– I-2 – APPENDIX I ACCOUNTANTS’ REPORT our review in accordance with Hong Kong Standard on Review Engagements 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the HKICPA. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Based on our review, nothing has come to our attention that causes us to believe that the Interim Comparative Financial Information, for the purposes of the accountants’ report, is not prepared, in all material respects, in accordance with the basis of presentation and the basis of preparation set out in notes 2.1 and 2.2 to the Historical Financial Information, respectively.
REPORT ON MATTERS UNDER THE RULES GOVERNING THE LISTING OF SECURITIES ON THE STOCK EXCHANGE AND THE COMPANIES (WINDING UP AND MISCELLANEOUS PROVISIONS) ORDINANCE
Adjustments
In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements as defined on page I-4 have been made.
Dividends
We refer to note 11 to the Historical Financial Information which contains information about the dividends paid by the Company in respect of the Relevant Periods.
No historical financial statements for the Company
As at the date of this report, no statutory financial statements have been prepared for the Company since its date of incorporation.
Yours faithfully,
Ernst & Young Certified Public Accountants Hong Kong
8 December 2020
– I-3 – APPENDIX I ACCOUNTANTS’ REPORT
I HISTORICAL FINANCIAL INFORMATION
Preparation of Historical Financial Information
Set out below is the Historical Financial Information which forms an integral part of this accountants’ report.
The financial statements of the Group for the Relevant Periods, on which the Historical Financial Information is based, were audited by Ernst & Young in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’)(the‘‘Underlying Financial Statements’’).
The Historical Financial Information is presented in United States dollars (‘‘US$’’)and all values are rounded to the nearest thousand (US$’000) except when otherwise indicated.
– I-4 – APPENDIX I ACCOUNTANTS’ REPORT
CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Six months ended Year ended 31 December 30 June 2017 2018 2019 2019 2020 Notes US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
REVENUE...... 5 85,210 144,758 171,919 75,250 129,254 Costofsales...... (50,512) (88,980)(104,685) (46,021) (67,486)
Grossprofit...... 34,698 55,778 67,234 29,229 61,768
Otherincomeandgains...... 5 150 353 1,182 504 185 Sellinganddistributionexpenses..... (21,852) (34,101) (37,779) (16,556) (19,525) Administrativeexpenses...... (8,443) (13,538) (21,253) (9,792) (13,139) Impairment losses on financial assets, net...... (4) (65) (36) (18) (227) Otherexpenses...... (767) (2,135) (1,131) (363) (1,291) Financecosts...... 7 (646) (946) (1,283) (629) (643)
PROFITBEFORETAX...... 6 3,136 5,346 6,934 2,375 27,128 Incometaxexpense...... 10 (1,269) (985) (562) (395) (4,647)
PROFIT FOR THE YEAR/PERIOD ATTRIBUTABLE TO OWNERS OF THEPARENT...... 1,867 4,361 6,372 1,980 22,481
OTHER COMPREHENSIVE LOSS Other comprehensive loss that may be reclassified to profit or loss in subsequent periods: Exchange differences on translation of foreignoperations...... (46) (526) (23) (30) (536)
OTHER COMPREHENSIVE LOSS FOR THE YEAR/PERIOD, NETOFTAX...... (46) (526) (23) (30) (536)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR/PERIOD ATTRIBUTABLE TO OWNERS OF THEPARENT...... 1,821 3,835 6,349 1,950 21,945
EARNINGS PER SHARE Basicanddiluted...... 12 N/A N/A N/A N/A N/A
– I-5 – APPENDIX I ACCOUNTANTS’ REPORT
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at 31 December As at 30 June 2017 2018 2019 2020 Notes US$’000 US$’000 US$’000 US$’000
NON-CURRENT ASSETS Property, plant and equipment . 13 1,078 1,235 1,594 1,304 Right-of-useassets...... 14(a) 2,642 3,042 8,067 11,287 Goodwill...... 15 274 ——— Otherintangibleassets...... 16 913 107 207 151 Deferredtaxassets...... 26 2,094 2,312 2,837 2,858 Othernon-currentassets..... 12 22 23 4
Totalnon-currentassets..... 7,013 6,718 12,728 15,604
CURRENT ASSETS Inventories...... 17 21,969 25,420 33,278 37,924 Trade receivables ...... 18 1,574 3,931 17,880 18,621 Prepayments, other receivables andotherassets...... 19 4,671 5,585 7,415 10,519 Taxrecoverable...... 144 210 2,051 258 Duefromdirectors...... 33(c) 465 609 970 970 Duefromrelatedparties..... 33(c) 64 150 4,625 348 Pledgeddeposits...... 21 ——588 632 Cash and cash equivalents . . . 21 2,843 9,856 9,115 15,045
Totalcurrentassets...... 31,730 45,761 75,922 84,317
CURRENT LIABILITIES Tradepayables...... 22 10,026 8,201 19,418 32,033 Other payables and accruals . . 23 4,298 10,157 14,367 9,013 Interest-bearing bank and other borrowings...... 24 4,276 13,999 18,354 4,601 Leaseliabilities...... 14(b) 996 1,167 1,500 1,939 Taxpayable...... 3,590 1,646 729 3,277 Duetodirectors...... 33(c) 3,838 4,352 7,868 — Duetoarelatedparty...... 33(c) — 976 1,032 — Provision...... 25 63 600 368 1,097
Totalcurrentliabilities...... 27,087 41,098 63,636 51,960
NETCURRENTASSETS.... 4,643 4,663 12,286 32,357
TOTAL ASSETS LESS CURRENT LIABILITIES . . 11,656 11,381 25,014 47,961
– I-6 – APPENDIX I ACCOUNTANTS’ REPORT
As at 31 December As at 30 June 2017 2018 2019 2020 Notes US$’000 US$’000 US$’000 US$’000
NON-CURRENT LIABILITIES Interest-bearing bank and other borrowings...... 24 3,934 9 — 1,688 Leaseliabilities...... 14(b) 1,843 2,047 6,802 9,823 Provision...... 25 508 961 1,818 2,321 Deferredtaxliabilities...... 26 210 ———
Total non-current liabilities. . . 6,495 3,017 8,620 13,832
Netassets...... 5,161 8,364 16,394 34,129
EQUITY Equity attributable to owners of the parent Sharecapital...... 27 —— 11 Sharepremium...... ——4,210 — Otherreserves...... 28 5,161 8,364 12,183 34,128
Totalequity...... 5,161 8,364 16,394 34,129
– I-7 – APPENDIX I ACCOUNTANTS’ REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Attributable to owners of the parent Exchange Statutory Capital Other fluctuation surplus Retained Total reserve* reserve* reserve* reserve* profits* equity US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Year ended 31 December 2017
At 1 January 2017 ...... 830 (3,753) 131 170 2,611 (11)
Profitfortheyear...... ————1,867 1,867 Other comprehensive loss for the year: Exchange differences on translation of foreignoperations...... ——(46) ——(46)
Total comprehensive income for the year . . ——(46) — 1,867 1,821 Transfertostatutorysurplusreserve...... ———293 (293) — Capitalinjectiontoasubsidiary...... 3,351 ————3,351
At 31 December 2017 ...... 4,181 (3,753) 85 463 4,185 5,161
Year ended 31 December 2018
At 1 January 2018 ...... 4,181 (3,753) 85 463 4,185 5,161
Profitfortheyear...... ————4,361 4,361 Other comprehensive loss for the year: Exchange differences on translation of foreignoperations...... ——(526) ——(526)
Total comprehensive income for the year . . ——(526) — 4,361 3,835 Transfertostatutorysurplusreserve...... ———516 (516) — Dividend declared to the then shareholders (note 11) ...... ————(632) (632)
At 31 December 2018 ...... 4,181 (3,753) (441) 979 7,398 8,364
– I-8 – APPENDIX I ACCOUNTANTS’ REPORT
Attributable to owners of the parent Exchange Statutory Share Share Capital Other fluctuation Surplus Retained Total capital premium reserve* reserve* reserve* reserve* profits* equity US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Year ended 31 December 2019
At 1 January 2019...... ——4,181 (3,753) (441) 979 7,398 8,364
Profit for the year ...... ——————6,372 6,372 Other comprehensive loss for the year: Exchange differences on translation of foreign operations...... ————(23) ——(23)
Total comprehensive income for the year ...... ————(23) — 6,372 6,349 Disposal of a subsidiary (note 30).. ———1,651 ———1,651 Transfer to statutory surplus reserve —————470 (470) — Issueofshares...... 1 4,210 —————4,211 Acquisition of equity interests from the then shareholders of a subsidiary as part of the Reorganisation ...... ——(4,181) ————(4,181)
At 31 December 2019 ...... 1 4,210 — (2,102) (464) 1,449 13,300 16,394
Six months ended 30 June 2020
At 1 January 2020...... 1 4,210 — (2,102) (464) 1,449 13,300 16,394 Profitfortheperiod...... ——————22,481 22,481 Other comprehensive loss for the period: Exchange differences on translation of foreign operations...... ————(536) ——(536)
Total comprehensive income for theperiod...... ————(536) — 22,481 21,945 Dividends paid to shareholders (note 11) ...... — (4,210) —————(4,210)
At 30 June 2020 ...... 1 ——(2,102) (1,000) 1,449 35,781 34,129
* These reserve accounts comprise the consolidated reserves of US$5,161,000, US$8,364,000, US$12,183,000 and US$34,128,000 in the consolidated statements of financial position as at 31 December 2017, 2018 and 2019 and 30 June 2020, respectively.
– I-9 – APPENDIX I ACCOUNTANTS’ REPORT
Attributable to owners of the parent Exchange Statutory Share Share Capital Other fluctuation Surplus Retained Total capital premium reserve reserve reserve reserve profits equity US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Six months ended 30 June 2019
At 1 January 2019...... ——4,181 (3,753) (441) 979 7,398 8,364 Profit for the period (unaudited) . . . ——————1,980 1,980 Other comprehensive loss for the period: (unaudited) Exchange differences on translation of foreign operations (unaudited) . . . . . ————(30) ——(30)
Total comprehensive income for the period (unaudited) ...... ————(30) — 1,980 1,950 Disposal of a subsidiary (note 30) (unaudited) ...... ———1,651 ———1,651 Issue of shares (unaudited) ...... 1 4,210 —————4,211 Acquisition of equity interests from the then shareholders of a subsidiary as part of the Reorganisation (unaudited) . . ——(4,181) ————(4,181)
At 30 June 2019 (unaudited) . . . . . 1 4,210 — (2,102) (471) 979 9,378 11,995
– I-10 – APPENDIX I ACCOUNTANTS’ REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended Year ended 31 December 30 June 2017 2018 2019 2019 2020 Notes US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES Profitbeforetax...... 3,136 5,346 6,934 2,375 27,128 Adjustments for: Financecosts...... 7 646 946 1,283 629 643 Foreign exchange differences, net . . . (148) (419) (234) (160) (516) Gain on disposal of items of property, plantandequipment...... (4) ———— Depreciation of property, plant and equipment...... 13 269 383 592 274 364 Depreciation of right-of-use assets . . . 14 873 1,102 1,514 706 1,247 Amortisation of other intangible assets 16 55 117 79 22 107 Impairment of other intangible assets . 16 — 715 ——— Impairmentofgoodwill...... 15 — 261 ——— Impairmentofinventories...... 6 4 353 591 454 1,048 Impairment of trade receivables, net. . 18 4653618227
4,835 8,869 10,795 4,318 30,248
Increaseininventories...... (15,773) (3,804) (8,464) (3,462) (5,694) Increase in trade receivables ...... (1,110) (2,422) (13,985) (11,580) (968) Decrease/(increase) in prepayments, depositsandotherreceivables..... (1,696) (914) (1,793) 1,971 (3,104) Decrease/(increase) in other non-currentassets...... (12) (10) (1) 5 19 Increase/(decrease) in trade payables . . 6,735 (1,825) 11,270 3,525 12,615 Increaseinprovision...... 532 990 625 331 1,232 Increase/(decrease) in other payables and accruals...... 1,551 5,325 4,625 2,217 (5,213) Increaseinpledgeddeposits...... ——(588) — (44)
Cash generated from/(used in) operations...... (4,938) 6,209 2,484 (2,675) 29,091 Incometaxpaid...... (466) (3,384) (3,744) (1,792) (318)
Net cash flows from/(used in) operatingactivities...... (5,404) 2,825 (1,260) (4,467) 28,773
– I-11 – APPENDIX I ACCOUNTANTS’ REPORT
Six months ended Year ended 31 December 30 June 2017 2018 2019 2019 2020 Notes US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant andequipment...... 13 (883) (588) (972) (517) (90) Proceeds from disposal of items of property,plantandequipment..... 7 — 312 Prepaymentsofright-of-useassets.... (35) (43) (80) (30) — Purchases of other intangible assets . . . 16 (77) (68) (182) (16) (53) Netcashflowfromdisposalofa subsidiary...... 30 ——(22) (22) — Acquisitionofsubsidiaries...... 29 (494) ———— Loanstodirectors...... 33(a) (92) (240) (731) (554) — Repaymentsofloanstodirectors..... — 96 370 —— Loanstorelatedparties...... 33(a) — (195) (310) — (14) Acquisition of equity interests in subsidiaries from the then shareholders...... ————(6,422) Repayments of loans to related parties . — 109 91 68 109
Net cash flows used in investing activities...... (1,574) (929) (1,833) (1,070) (6,468)
CASH FLOWS FROM FINANCING ACTIVITIES Capital contribution by the then shareholders...... 3,351 ———4,224 Repayment of bank loans and other borrowings...... (8,917) (13,367) (12,400) (7,395) (15,847) Interestpaid...... (646) (834) (1,242) (628) (783) Newbankloans...... 16,137 19,165 16,746 5,328 3,769 Principal portion of lease payments . . . (804) (1,082) (1,370) (691) (1,005) Loansfromemployees...... — 502292912 Repayment of loans from employees . . (297) (80) (422) —— Loansfromadirector...... 33(a) — 540 1,290 —— Repaymentofloansfromdirectors.... — (26) (315) (59) (1,489) Loansfromarelatedparty...... 33(a) — 976 4,330 2,327 947 Repayment of loans from a related party ——(4,274) (1,704) (1,979) Dividendpaidtoshareholders...... ————(4,224) Dividend paid to the then shareholders . — (632) ———
Net cash flows from/(used in) financing activities...... 8,824 5,162 2,372 (2,793) (16,375)
– I-12 – APPENDIX I ACCOUNTANTS’ REPORT
Six months ended Year ended 31 December 30 June 2017 2018 2019 2019 2020 Notes US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS. 1,846 7,058 (721) (8,330) 5,930 Cash and cash equivalents at beginning ofyear...... 946 2,843 9,856 9,856 9,115 Effect of foreign exchange rate changes, net...... 51 (45) (20) 71 —
CASH AND CASH EQUIVALENTS ATENDOFYEAR/PERIOD...... 2,843 9,856 9,115 1,597 15,045
ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS
Cashandbankbalances...... 21 2,843 9,856 9,115 1,597 15,045 Cash and cash equivalents as stated in the consolidated statements of financial position and the consolidated statementsofcashflows...... 2,843 9,856 9,115 1,597 15,045
– I-13 – APPENDIX I ACCOUNTANTS’ REPORT
STATEMENTS OF FINANCIAL POSITION OF THE COMPANY
As at As at 31 December 2019 30 June 2020 Notes US$’000 US$’000
CURRENT ASSETS Otherreceivables...... 19 97 — Duefromrelatedparties...... 33(c) 4,182 —
Totalcurrentassets...... 4,279 —
CURRENT LIABILITY
Duetoarelatedparty...... 33(c) 12 19
Totalcurrentliability...... 12 19
NETCURRENTASSETS...... 4,267 (19)
TOTAL ASSETS LESS CURRENT LIABILITIES...... 4,267 (19)
Netassets...... 4,267 (19)
EQUITY Sharecapital...... 27 11 Sharepremium...... 27 4,210 — Otherreserves...... 56 (20)
Totalequity...... 4,267 (19)
– I-14 – APPENDIX I ACCOUNTANTS’ REPORT
II NOTES TO THE HISTORICAL FINANCIAL INFORMATION
1. CORPORATE INFORMATION
The Company is a limited liability company incorporated in the Cayman Islands. The registered office of the Company is located at the offices of Conyers Trust Company (Cayman) Limited, with the address of Cricket Square, Hutchins Drive, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands.
The Company is an investment holding company. During the Relevant Periods, the Company and its subsidiaries were principally engaged in research and development, manufacture and sale of smart household appliances and smart home devices. The Company’s products are manufactured in the People’s Republic of China (the ‘‘PRC’’) and sold to customers in locations including the United States (‘‘USA’’), Canada, the United Kingdom, France, Germany, Spain, Italy and Japan. In the opinion of the directors of the Company, the ultimate controlling shareholders of the Group are Ms. Yang Lin, Mr. Yang Yuzheng and Mr. Yang Hai.
The Company and its subsidiaries now comprising the Group underwent the Reorganisation as set out in the paragraph headed ‘‘Reorganisation’’ in the section headed ‘‘History, Reorganisation and Corporate Structure’’ in the Prospectus. Apart from the Reorganisation, the Company has not commenced any business or operation since its incorporation.
As at the date of this report, the Company had direct and indirect interests in its subsidiaries, the particulars of which are set out below:
Place and date of Nominal value of Percentage of equity incorporation/ issued ordinary/ attributable to registration and registered share the Company Principal Name place of operations capital Direct Indirect activities
Vitasync Co., Ltd The British Virgin — 100% — Investment (‘‘Vitasync BVI’’) (note (a)) .. Islands (‘‘BVI’’) holding 27 February 2019
Arcsync Co., Ltd BVI — 100% — Investment (‘‘Arcsync BVI’’) (note (a)) .. 27 February 2019 holding
Ecomine Co., Ltd PRC/Hong Kong HK$10,000 — 100% Investment (‘‘Ecomine HK’’) (note (a)) .. 25 March 2019 holding
L&H Y Trading Inc. USA/California US$50 — 100% Sale of products (‘‘L&H Y US’’) (note (a)) ... 3 October 2006
Vesync Corporation USA/California ——100% Sale of products (‘‘Vesync US’’) (note (a)).... 1 April 2015
Etekcity Company Limited PRC/Macau MOP25,000 — 100% Import and export (‘‘Etekcity Macau’’) 21 February 2019 trade (note (a)) ......
Shenzhen City Chenbei PRC/Mainland China RMB30,000,000 — 100% Investment Management Consulting 26 April 2019 holding Company Limited (‘‘WFOE’’) (note (a)) ......
– I-15 – APPENDIX I ACCOUNTANTS’ REPORT
Place and date of Nominal value of Percentage of equity incorporation/ issued ordinary/ attributable to registration and registered share the Company Principal Name place of operations capital Direct Indirect activities
Etekcity Corporation USA/California US$50 — 100% Sale of products (‘‘Etekcity US’’) (note (a)) . 5 December 2011
Atekcity Corporation USA/California ——100% Customs clearance (‘‘Atekcity US’’) (note (a)) ... 3 July 2012 and declaration
Arovast Corporation USA/California ——100% Sale of products (‘‘Arovast US’’) (note (a)) ... 20 October 2016
Cosori Corporation USA/California ——100% Sale of products (‘‘Cosori US’’) (note (a)) .... 8 September 2015
Shenzhen City Chenbei PRC/Mainland China RMB28,500,000 — 100% Research, Technology Company Limited* 27 February 2013 development (’’Shenzhen Chenbei’’) and sale of (note (c)) ...... products
Rongyi (Shanghai) PRC/Mainland China RMB1,000,000 — 100% Technical support Information Technology 17 March 2015 Company Limited* (‘‘Rongyi Shanghai’’) (note (a)) ......
Dongguan City Zhilun Electronic PRC/Mainland China RMB5,000,000 — 100% Manufacture and Technology Company Limited* 14 February 2017 sale of (‘‘Dongguan Zhilun’’) products (note (a)) ......
Chongqing Xiaodao PRC/Mainland China RMB1,000,000 — 100% Technical support Information Technology 8 April 2015 Company Limited* (‘‘Chongqing Xiaodao’’) (note (a)) ......
Yoowo Co., Ltd PRC/Hong Kong HK$1,000,000 — 100% Import and export (‘‘Yoowo HK’’) (note (b)) ... 23 September 2015 trade
Etekcity Company Limited Japan JPY2,000,000 — 100% Sale of products (‘‘Etekcity Japan’’) (note (a)) . 28 January 2019
Etekcity GmbH Germany EUR150 — 100% Customs clearance (‘‘Etekcity Germany’’) 16 November 2017 and declaration (note (a)) ......
– I-16 – APPENDIX I ACCOUNTANTS’ REPORT
Place and date of Nominal value of Percentage of equity incorporation/ issued ordinary/ attributable to registration and registered share the Company Principal Name place of operations capital Direct Indirect activities
Adiman B.V. Netherlands/ EUR1,000 — 100% Sale of products (‘‘Adiman Netherlands’’) Amsterdam (note (d)) ...... 4 January 2016
Notes:
(a) No audited financial statements have been prepared for these entities since their dates of incorporation/ registration, as these entities were not subject to any statutory audit requirements under the relevant rules and regulations in their jurisdictions of incorporation/registration.
(b) The statutory financial statements of Yoowo HK for the years ended 31 March 2018 and 2019 prepared under Hong Kong Financial Reporting Standards (‘‘HKFRSs’’) were audited by SBC CPA Limited and Talent Partners CPA Limited, certified public accountants registered in Hong Kong, respectively.
(c) The statutory financial statements of Shenzhen Chenbei for the years ended 31 December 2017 and 2018 prepared under PRC Generally Accepted Accounting Principles (‘‘PRC GAAP’’) were audited by Shenzhen GuoTai Certified Public Accountants Limited (深圳國泰會計師事務所), certified public accountants registered in the PRC.
(d) The statutory financial statements of Adiman Netherlands for the years ended 31 December 2017 and 2018 prepared under Title 9 Book 2 of the Netherlands Civil Code were audited by Dutch Accounting House, certified public accountants registered in the Netherlands.
* The English names of these entities registered in the PRC represent the best efforts made by management of the Company to directly translate their Chinese names as they did not register any official English name.
** On 15 July 2020, a subsidiary of the Group, Chengdu City Xiaodu Information Technology Company Limited (‘‘Chengdu Xiaodu’’) was deregistered.
2.1 BASIS OF PRESENTATION
Pursuant to the Reorganisation as more fully explained in the paragraph headed ‘‘Reorganisation’’ in the section headed ‘‘History, Reorganisation and Corporate Structure’’ in the Prospectus, the Company became the holding company of the companies now comprising the Group on 12 September 2019.
As the Reorganisation only involved inserting a new holding company at the top of an existing group and has not resulted in any change of economic substances, the Historical Financial Information has been presented as a continuation of the existing group using the pooling of interests method as if the Reorganisation had been completed at the beginning of the Relevant Periods.
Accordingly, the consolidated statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows of the Group are prepared as if the current group structure had been in existence throughout the Relevant Periods. The consolidated statements of financial position of the Group as at 31 December 2017, 2018 and 2019 and 30 June 2020 have been prepared to present the assets and liabilities of the companies now comprising the Group, as if the current group structure had been in existence at those dates.
– I-17 – APPENDIX I ACCOUNTANTS’ REPORT
All intra-group transactions and balances have been eliminated on consolidation.
2.2 BASIS OF PREPARATION
The Historical Financial Information has been prepared in accordance with HKFRSs (which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (‘‘HKASs’’) and Interpretations) issued by the HKICPA and accounting principles generally accepted in Hong Kong. All HKFRSs effective for the accounting period commencing from 1 January 2020 together with the relevant transitional provisions, have been early adopted on a consistent basis by the Group in the preparation of the Historical Financial Information throughout the Relevant Periods and in the period covered by the Interim Comparative Financial Information. The Group early adopted the Amendment to HKFRS 16 Covid-19- Related Rent Concessions for rent concessions occurring as a direct consequence of the covid-19 pandemic after 1 January 2020 and the amendment did not have any significant impact on the financial position and performance of the Group.
The Historical Financial Information has been prepared under the historical cost convention.
2.3 ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS
The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in the Historical Financial Information.
AmendmentstoHKFRS3 ...... Reference to the Conceptual Framework3 Amendments to HKFRS 10 Sale or Contribution of Assets between an Investor and HKAS 28 (2011) ...... and its Associate or Joint Venture2 HKFRS17...... Insurance Contracts1 AmendmentstoHKAS1 ...... Classification of Liabilities as Current or Non-current4 AmendmentstoHKAS16...... Property, Plant and Equipment: Proceeds before Intended Use3 AmendmentstoHKAS37...... Onerous Contracts — Cost of Fulfilling a Contract3 Annual Improvements to Amendments to HKFRS 1, HKFRS 9, HKAS 41 and Illustrative HKFRSs 2018–2020...... Examples accompanying HKFRS 163
1 Effective for annual periods beginning on or after 1 January 2021 2 No mandatory effective date yet determined but available for adoption 3 Effective for annual periods beginning on or after 1 January 2022 4 Effective for annual periods beginning on or after 1 January 2023
The Group is in the process of making an assessment of the impact of these new and revised HKFRSs upon initial application. So far, the Group consider that these new and revised HKFRSs may result in changes in accounting policies but are unlikely to have a significant impact on the Group’s financial performance and financial position.
– I-18 – APPENDIX I ACCOUNTANTS’ REPORT
2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Subsidiaries
A subsidiary is an entity (including a structured entity), directly or indirectly, controlled by the Company. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (i.e., existing rights that give the Group the current ability to direct the relevant activities of the investee).
When the Company has, directly or indirectly, less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
(a) the contractual arrangement with the other vote holders of the investee;
(b) rights arising from other contractual arrangements; and
(c) the Group’s voting rights and potential voting rights.
The results of subsidiaries are included in the Company’s profit or loss to the extent of dividends received and receivable.
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control described above. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
If the Group loses control over a subsidiary, it derecognises (i) the assets (including goodwill) and liabilities of the subsidiary, (ii) the carrying amount of any non-controlling interest and (iii) the cumulative translation differences recorded in equity; and recognises (i) the fair value of the consideration received, (ii) the fair value of any investments retained and (iii) any resulting surplus or deficit in profit or loss. The Group’s share of components previously recognised in other comprehensive income is reclassified to profit or loss or retained profits, as appropriate, on the same basis as would be required if the Group had directly disposed of the related assets or liabilities.
Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The consideration transferred is measured at the acquisition date fair value which is the sum of the acquisition date fair values of assets transferred by the Group, liabilities assumed by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of net assets in the event of liquidation at fair value or at the proportionate share of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at fair value. Acquisition-related costs are expensed as incurred.
– I-19 – APPENDIX I ACCOUNTANTS’ REPORT
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts of the acquiree.
If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in profit or loss.
Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability is measured at fair value with changes in fair value recognised in profit or loss. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity.
Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognised for non-controlling interests and any fair value of the Group’s previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognised in profit or loss as a gain on bargain purchase.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash- generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. An impairment loss recognised for goodwill is not reversed in a subsequent period.
Where goodwill has been allocated to a cash-generating unit (or group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on the disposal. Goodwill disposed of in these circumstances is measured based on the relative value of the operation disposed of and the portion of the cash- generating unit retained.
Impairment of non-financial assets
Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets and financial assets), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs of disposal, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.
An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to profit or loss in the period in which it arises in those expense categories consistent with the function of the impaired asset.
– I-20 – APPENDIX I ACCOUNTANTS’ REPORT
An assessment is made at the end of each of the Relevant Periods as to whether there is an indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss of an asset is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation) had no impairment loss been recognised for the asset in prior years. A reversal of such an impairment loss is credited to profit or loss in the period in which it arises.
Related parties
A party is considered to be related to the Group if:
(a) the party is a person or a close member of that person’s family and that person
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or of a parent of the Group;
or
(b) the party is an entity where any of the following conditions applies:
(i) the entity and the Group are members of the same group;
(ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow subsidiary of the other entity);
(iii) the entity and the Group are joint ventures of the same third party;
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) the entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group;
(vi) the entity is controlled or jointly controlled by a person identified in (a);
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity); and
(viii) the entity, or any member of a group of which it is a part, provides key management personnel services to the Group or to the parent of the Group.
Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.
Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to profit or loss in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for a major inspection is capitalised in the carrying
– I-21 – APPENDIX I ACCOUNTANTS’ REPORT
amount of the asset as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly.
Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:
Leasehold improvements 20%–100% Machinery and equipment 9.5%–33.33% Office equipment 10%–50% Electronic equipment 31.67%–33.33%
Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation methods are reviewed, and adjusted if appropriate, at least at each financial year end.
An item of property, plant and equipment including any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in profit or loss in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.
Intangible assets (other than goodwill)
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value at the date of acquisition. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are subsequently amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end.
Trademarks and software
Trademarks and software are stated at cost less any impairment losses and are amortised on the straight-line basis over their estimated useful lives as follows:
Trademarks 10 years Software 3–10 years
The estimated useful lives of trademarks are determined by the shorter of legal registered period and the period over which the trademarks are expected to generate net cash inflows from the commercialization of product.
The estimated useful lives of the purchased software are determined by the shorter of contract period or expected usage period after considering technical obsolescence and estimates of useful lives of similar assets.
Research and development costs
All research costs are charged to profit or loss as incurred.
Leases
The Group assesses at contract inception whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
– I-22 – APPENDIX I ACCOUNTANTS’ REPORT
Group as a lessee
The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
(a) Right-of-use assets
Right-of-use assets are recognised at the commencement date of the lease (that is the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and any impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease terms and the estimated useful lives of the assets as follows:
Offices and warehouses 16–78 months Machinery and equipment 5–10 years
If ownership of the leased asset transfers to the Group by the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.
(b) Lease liabilities
Lease liabilities are recognised at the commencement date of the lease at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for termination of a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as an expense in the period in which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Group uses its incremental borrowing rate (‘‘IBR’’)at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in lease payments (e.g., a change to future lease payments resulting from a change in an index or rate) or a change in assessment of an option to purchase the underlying asset.
(c) Short-term leases and leases of low-value assets
The Group applies the short-term lease recognition exemption to its short-term leases of office premises and staff dormitory (that is those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the recognition exemption for leases of low-value assets to leases of office equipment that are considered to be of low value.
Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term.
– I-23 – APPENDIX I ACCOUNTANTS’ REPORT
Investments and other financial assets
Initial recognition and measurement
The Group’s financial assets are classified, at initial recognition, as subsequently measured at amortised cost.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient of not adjusting the effect of a significant financing component, the Group initially measures a financial asset at its fair value plus in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under HKFRS 15 in accordance with the policies set out for ‘‘Revenue recognition’’ below.
In order for a financial asset to be classified and measured at amortised cost, it needs to give rise to cash flows that are solely payments of principal and interest (‘‘SPPI’’) on the principal amount outstanding. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of the business model.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at amortised cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows, while financial assets classified and measured at fair value through other comprehensive income are held within a business model with the objective of both holding to collect contractual cash flows and selling. Financial assets which are not held within the aforementioned business models are classified and measured at fair value through profit or loss.
All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.
Subsequent measurement
The subsequent measurement of financial assets depends on their classification as follows:
Financial assets at amortised cost (debt instruments)
Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
– I-24 – APPENDIX I ACCOUNTANTS’ REPORT
Derecognition of financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s consolidated statement of financial position) when:
. the rights to receive cash flows from the asset have expired; or
. the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘‘pass-through’’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass- through arrangement, it evaluates if, and to what extent, it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of the Group’s continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Impairment of financial assets
The Group recognises an allowance for expected credit losses (‘‘ECLs’’) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
General approach
ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12 months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).
At each reporting date, the Group assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable information that is available without undue cost or effort, including historical and forward-looking information.
The Group considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
– I-25 – APPENDIX I ACCOUNTANTS’ REPORT
Financial assets at amortised cost are subject to impairment under the general approach and they are classified within the following stages for measurement of ECLs except for trade receivables and contract assets which apply the simplified approach as detailed below.
Stage 1 — Financial instruments for which credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at an amount equal to 12-month ECLs
Stage 2 — Financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and for which the loss allowance is measured at an amount equal to lifetime ECLs
Stage 3 — Financial assets that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss allowance is measured at an amount equal to lifetime ECLs
Simplified approach
For trade receivables that do not contain a significant financing component or when the Group applies the practical expedient of not adjusting the effect of a significant financing component, the Group applies the simplified approach in calculating ECLs. Under the simplified approach, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
Financial liabilities
Initial recognition and measurement
The Group’s financial liabilities are classified, at initial recognition, as loans and borrowings and payables.
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Group’s financial liabilities include trade and other payables, amounts due to directors and a related party and interest-bearing bank and other borrowings.
Subsequent measurement
The subsequent measurement of financial liabilities depends on their classification as follows:
Financial liabilities at amortised cost (loans and borrowings)
After initial recognition, payables are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the effective interest rate amortisation process.
Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in finance costs in profit or loss.
– I-26 – APPENDIX I ACCOUNTANTS’ REPORT
Derecognition of financial liabilities
Financial liabilities are derecognised when they are extinguished, i.e., when the obligation is discharged or cancelled, or expires.
Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out basis and, in the case of work in progress and finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.
Cash and cash equivalents
For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, and form an integral part of the Group’s cash management.
For the purpose of the consolidated statement of financial position, cash and cash equivalents comprise cash on hand and at banks, including term deposits, which are not restricted as to use.
Provisions
A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.
When the effect of discounting is material, the amount recognised for a provision is the present value at the end of each of the Relevant Periods of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in profit or loss.
The Group provides for warranties in relation to the sale of certain products for general replacement of defects occurring during the warranty period. Provisions for these assurance-type warranties granted by the Group are recognised based on sales volume and past experience of the level of replacements, discounted to their present values as appropriate.
Income tax
Income tax comprises current and deferred tax. Income tax relating to items recognised outside profit or loss is recognised outside profit or loss, either in other comprehensive income or directly in equity.
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of each of the Relevant Periods, taking into consideration interpretations and practices prevailing in the countries in which the Group operates.
– I-27 – APPENDIX I ACCOUNTANTS’ REPORT
Deferred tax is provided, using the liability method, on all temporary differences at the end of each of the Relevant Periods between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognised for all taxable temporary differences, except:
. when the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, and the carryforward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised, except:
. when the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
. in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at the end of each of the Relevant Periods and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at the end of each of the Relevant Periods and are recognised to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of each of the Relevant Periods.
Deferred tax assets and deferred tax liabilities are offset if and only if the Group has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
Government grants
Government grants are recognised at their fair value wherethereisreasonableassurancethatthegrantwillbe received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods in which the costs, for which it is intended to compensate, are expensed.
– I-28 – APPENDIX I ACCOUNTANTS’ REPORT
Revenue recognition
Revenue from contracts with customers
Revenue from contracts with customers is recognised when control of goods or services is transferred to the customers at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services.
When the consideration in a contract includes a variable amount, the amount of consideration is estimated to which the Group will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved.
When the contract contains a financing component which provides the customer with a significant benefit of financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction between the Group and the customer at contract inception. When the contract contains a financing component which provides the Group a significant financial benefit for more than one year, revenue recognised under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in HKFRS 15.
(a) Sale of products
The Group sells its products to customers via retailers of the Group (‘‘Vendor Central program’’)orover third-party online retail platforms such as Amazon (‘‘Seller Central program’’). Revenue from contracts with customers is recognised when control of the goods is transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods.
Revenue from the sale of products is recognised at the point in time when control of the asset is transferred to the customer, generally on the receipt of products by customers for Seller Central program and on delivery of products for Vendor Central program.
Some contracts for the sale of goods provide customers with rights of return or promotion rebates. The rights of return and promotion rebates give rise to variable consideration.
(i) Rights of return
For contracts which provide a customer with a right to return the goods within a specified period, the expected value method is used to estimate the goods that will not be returned because this method best predicts the amount of variable consideration to which the Group will be entitled. The requirements in HKFRS 15 on constraining estimates of variable consideration are applied in order to determine the amount of variable consideration that can be included in the transaction price. For goods that are expected to be returned, instead of revenue, a refund liability is recognised. A right-of-return asset (and the corresponding adjustment to cost of sales) is also recognised for the right to recover products from a customer.
(ii) Promotion rebates
For Vendor Central program, the Group can provide the retailer promotion rebates to encourage the retailer to do promotion for the Group’s products. The Group provides the type of promotion, the desired start and end dates of the promotion, the products subject to the promotion, and the funding amount. The retailer may at any time and in their discretion reject any promotion. Promotion rebates are offset against amounts payable by the customer. To estimate the variable consideration for the expected future discounts, the expected value method is used for contracts
– I-29 – APPENDIX I ACCOUNTANTS’ REPORT
with more than one product orders. The selected method that best predicts the amount of variable consideration is primarily driven by the promotion plan and historical promotion rebates. The requirements on constraining estimates of variable consideration are applied and a refund liability for the expected future promotion rebates is recognised.
Other income
Interest income is recognised on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.
Contract balances
(i) Contract assets
A contract asset is the right to consideration in exchange for goods transferred to the customer. If the Group performs by transferring goods to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration that is conditional (other than the passage of time). Contract assets are subject to impairment assessment, details of which are included in the accounting policies for impairment of financial assets.
(ii) Contract liabilities
A contract liability is recognised when a payment is received or a payment is due (whichever is earlier) from a customer before the Group transfers the related goods or services. Contract liabilities are recognised as revenue when the Group performs under the contract (i.e., transfers control of the related goods or services to the customer).
Refund liabilities
A refund liability is recognised for the obligation to refund some or all of the consideration received (or receivable) from a customer and is measured at the amount the Group ultimately expects it will have to return to the customer. The Group updates its estimates of refund liabilities (and the corresponding change in the transaction price) at the end of each Relevant Periods.
Employee benefits
Pension scheme
The employees of the Group’s subsidiaries which operate in Mainland China are required to participate in a central pension scheme operated by the local municipal government. These subsidiaries are required to contribute a certain percentage of payroll costs to the central pension scheme. The contributions are charged to profit or loss as they become payable in accordance with the rules of the central pension scheme.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as a part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.
– I-30 – APPENDIX I ACCOUNTANTS’ REPORT
Dividends
Final dividends are recognised as a liability when they are approved by the shareholders in a general meeting.
Foreign currency
The Historical Financial Information is presented in the US$, which is the Company’s functional currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions recorded by the entities in the Group are initially recorded using their respective functional currency rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rates of exchange ruling at the end of each of the Relevant Periods. Differences arising on settlement or translation of monetary items are recognised in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured. The gain or loss arising on translation of a non-monetary item measured at fair value is treated in line with the recognition of the gain or loss on change in fair value of the item (i.e., translation difference on the item whose fair value gain or loss is recognised in other comprehensive income or profit or loss is also recognised in other comprehensive income or profit or loss, respectively).
In determining the exchange rate on initial recognition of the related asset, expense or income on the derecognition of a non-monetary asset or non-monetary liability relating to an advance consideration, the date of initial transaction is the date on which the Group initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, the Group determines the transaction date for each payment or receipt of the advance consideration.
The functional currencies of certain subsidiaries are currencies other than the US$. As at the end of each of the Relevant Periods, the assets and liabilities of these entities are translated into US$ at the exchange rates prevailing at the end of each of the Relevant Periods and their statements of profit or loss and other comprehensive income are translated into US$ at the weighted average exchange rates for the year.
The resulting exchange differences are recognised in other comprehensive income and accumulated in the exchange fluctuation reserve. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss.
For the purpose of the consolidated statement of cash flows, the cash flows of overseas subsidiaries are translated into US$ at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of overseas subsidiaries which arise throughout the year are translated into US$ at the weighted average exchange rates for the year.
– I-31 – APPENDIX I ACCOUNTANTS’ REPORT
3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES
The preparation of the Group’s Historical Financial Information requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.
Judgements
In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the Historical Financial Information:
Revenue from contracts with customers
The Group applied the following judgements that significantly affect the determination of the amount and timing of revenue from contracts with customers:
(i) Determining the method to estimate variable consideration and assessing the constraint for the sale of products
Certain contracts for the sale of products include a right of return and promotion rebates that give rise to variable consideration. In estimating the variable consideration, the Group is required to use either the expected value method or the most likely amount method based on which method better predicts the amount of consideration to which it will be entitled.
The Group determined that the expected value method is the appropriate method to use in estimating the variable consideration for the sale of products with rights of return and promotion rebates, given the large number of customer contracts that have similar characteristics. The selected method that better predicts the amount of variable consideration related to promotion rebates is primarily driven by promotion plan for more than one product orders.
Before including any amount of variable consideration in the transaction price, the Group considers whether the amount of variable consideration is constrained. The Group determined that the estimates of variable consideration are not constrained based on its historical experience, business forecast and the current economic conditions. In addition, the uncertainty on the variable consideration will be resolved within a short time frame.
Estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the end of each of the Relevant Periods, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below.
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating units and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Further details are given in note 15.
– I-32 – APPENDIX I ACCOUNTANTS’ REPORT
Impairment of non-financial assets (other than goodwill)
The Group assesses whether there are any indicators of impairment for all non-financial assets (including the right-of-use assets) at the end of each of the Relevant Periods. Non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. An impairment exists when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The calculation of the fair value less costs of disposal is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.
Provision for expected credit losses of trade receivables
The Group uses a provision matrix to calculate ECLs for trade receivables from customers other than the largest retailer. The provision rates are based on days past due of these customers. For the largest retailer, the provision rate is based on the Moody’s credit rating.
The provision matrix is initially based on the Group’s historical observed default rates. The Group will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. For instance, if forecast economic conditions (i.e., gross domestic product) are expected to deteriorate over the next year which can lead to an increased number of defaults, the historical default rates are adjusted. At the end of each of the Relevant Periods, the historical observed default rates are updated and changes in the forward-looking estimates are analysed.
The assessment of the correlation among historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of a customer’s actual default in the future. The information about the ECLs on the Group’strade receivables is disclosed in note 18 to the Historical Financial Information.
Leases — Estimating the incremental borrowing rate
The Group cannot readily determine the interest rate implicit in a lease, and therefore, it uses an IBR to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘‘wouldhavetopay’’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions). The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating).
– I-33 – APPENDIX I ACCOUNTANTS’ REPORT
4. OPERATING SEGMENT INFORMATION
For management purposes, the Group is not organised into business units based on their products and only has one reportable operating segment. Management monitors the operating results of the Group’s operating segment as a whole for the purpose of making decisions about resource allocation and performance assessment.
Geographical information
(a) Revenue from external customers
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
NorthAmerica...... 73,343 120,986 148,634 63,979 109,661 Europe...... 11,733 22,391 21,976 10,607 17,125 Asia...... 134 1,381 1,309 664 2,468
Total...... 85,210 144,758 171,919 75,250 129,254
The revenue information above is based on the combination of the locations of our accounts with the sales channels and the locations of the customers.
(b) Non-current assets
As at As at 31 December 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
MainlandChina...... 3,715 2,629 4,165 3,443 HongKong...... 157 282 492 338 NorthAmerica...... 1,044 1,490 5,139 8,718 Europe...... 3 5 5 180 Other...... ——90 67
Total...... 4,919 4,406 9,891 12,746
The non-current asset information above is based on the locations of the assets and excludes deferred tax assets.
Information about a major customer
Revenue of approximately US$7,173,000, US$41,455,000, US$87,284,000, US$30,870,000 and US$79,125,000 for the years ended 31 December 2017, 2018 and 2019 and the six months ended 30 June 2019 and 2020, respectively, was derived from sales to a single retailer, including sales to a group of entities which are known to be under common control with that customer.
– I-34 – APPENDIX I ACCOUNTANTS’ REPORT
5. REVENUE, OTHER INCOME AND GAINS
An analysis of revenue is as follows:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Revenue from contracts with customers 85,210 144,758 171,919 75,250 129,254
Revenue from contracts with customers
(a) Disaggregated revenue information:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Type of goods or services Saleofproducts...... 85,210 144,758 171,919 75,250 129,254
Timing of revenue recognition Goods transferred at a point intime...... 85,210 144,758 171,919 75,250 129,254
The following table shows the amounts of revenue recognised in the Relevant Periods that were included in the contract liabilities at the beginning of the Relevant Periods:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Revenue recognised that was included in contract liabilities at the beginning of the year: Saleofproducts...... 103 116 167 167 180
(b) Performance obligations
Information about the Group’s performance obligations is summarised below:
Sale of products
The performance obligation of Vendor Central program is satisfied upon delivery of goods and payment is generally due within 30 to 90 days from delivery. The performance obligation of Seller Central program is satisfied upon receipt of products by customers and payment is generally received when customers place orders on the platform. Seller Central program provides customers with a right of return within 30 days, sometimes extending up to 60 days.
At the end of each of the Relevant Periods, the remaining performance obligations (unsatisfied or partially unsatisfied) are expected to be recognised within one year. As permitted under HKFRS 15, the transaction price allocated to these unsatisfied contracts is not disclosed.
– I-35 – APPENDIX I ACCOUNTANTS’ REPORT
An analysis of other income and gains is as follows:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Other income Bankinterestincome...... 12226 Governmentgrants*...... 2 85 187 144 85 Otherincomefromsuppliers.... 126 204 522 —— Others...... 17 4 107 83 94
146 295 818 229 185
Gains Gain on disposal of property, plantandequipments...... 4 ———— Foreignexchangegains,net.... — 58 364 275 —
4 58 364 275 —
150 353 1,182 504 185
* The amount represents grants received from the government authorities of Mainland China by the Group’s subsidiaries in connection with certain financial support to local business enterprises for the purpose of encouraging business development. There are no unfulfilled conditions or contingencies relating to these grants.
– I-36 – APPENDIX I ACCOUNTANTS’ REPORT
6. PROFIT BEFORE TAX
The Group’s profit before tax is arrived at after charging/(crediting):
Six months ended Year ended 31 December 30 June 2017 2018 2019 2019 2020 Notes US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Costofinventoriessold...... 29,231 56,416 75,163 31,309 51,438 Amazonfulfilmentfee...... 16,748 22,123 18,712 9,992 8,393 Commissiontoplatform...... 11,565 15,549 12,809 6,717 7,283 Research and development costs* ...... 1,821 3,954 8,178 3,762 4,580 Depreciation of property, plant and equipment...... 13 269 383 592 274 364 Amortisation of other intangible assets** . 16 55 117 79 22 107 Depreciation of right-of-use assets ...... 14 873 1,102 1,514 706 1,247 Impairment of goodwill***...... — 261 ——— Auditor’sremuneration...... 60 18 111 60 98 Lease payments not included in the measurement of lease liabilities ...... 14 77 239 191 88 310 Listingexpenses...... — 607 879 395 2,247 Employee benefit expense (excluding directors’ and chief executive’s remuneration (note 8)): Wagesandsalaries...... 5,326 8,369 13,363 6,306 8,318 Pensionschemecontributions...... 672 1,087 1,439 644 348 Staffwelfareexpenses...... 585 850 1,355 620 828
6,583 10,306 16,157 7,570 9,494
Foreign exchange differences, net ...... 60 (58) (364) (275) 63 Impairment of trade receivables, net. . . . . 18 4653618227 Impairmentofinventories,net^...... 4 353 591 454 1,048 Impairment of other intangible assets . . . . 16 — 715 ——— Bankinterestincome...... (1) (2) (2) (2) (6)
Product warranty provision: Addition provision...... 102 241 469 206 564 Gain on disposal of items of property, plant andequipment...... (4) ————
* Research and development costs include part of employee benefit expense, depreciation of property, plant and equipment and amortisation of other intangible assets.
** The amortisation and impairment of other intangible assets are included in ‘‘Administrative expenses’’ in the consolidated statements of profit or loss and other comprehensive income.
*** The impairment of goodwill is included in ‘‘Other expenses’’ in the consolidated statements of profit or loss and other comprehensive income.
^ The impairment of inventories is included in ‘‘Cost of sales’’ in the consolidated statements of profit or loss and other comprehensive income.
– I-37 – APPENDIX I ACCOUNTANTS’ REPORT
7. FINANCE COSTS
An analysis of finance costs is as follows:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Interest on bank loans and otherborrowings...... 495 737 862 454 248 Interest on loans from related parties . . — 46 196 68 85 Interestonloansfromemployees..... — 21 17 19 — Interest on lease liabilities ...... 151 142 208 88 310
646 946 1,283 629 643
8. DIRECTORS’ AND CHIEF EXECUTIVE’S REMUNERATION
The Company was incorporated in the Cayman Islands on 9 January 2019. Ms. Yang Lin was appointed as an executive director and chief executive of the Company on 9 January 2019.
Mr. Yang Hai and Mr. Chen Zhaojun were appointed as executive directors of the Company on 27 May 2020. Mr. Yang Yuzheng was appointed as a non-executive director of the Company on 27 May 2020. Mr. Fong Wo, Felix, Mr. Gu Jiong and Mr. Tan Wen were appointed as independent non-executive directors of the Company on 1 December 2020.
Certain of the directors received remuneration from the subsidiaries now comprising the Group for their appointments as directors of these subsidiaries. The remuneration of each of these directors is set out below:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Other emoluments: Salaries, bonuses, allowances and benefitsinkind...... 401 619 830 424 438 Pensionschemecontributions...... 30 21 27 15 11
431 640 857 439 449
(a) Independent non-executive directors
No independent non-executive director was appointed and there were no fees and other emoluments payable to any independent non-executive director during the Relevant Periods.
– I-38 – APPENDIX I ACCOUNTANTS’ REPORT
(b) Executive directors
Salaries, bonuses, allowances and Pension scheme Total benefits in kind contributions remuneration US$’000 US$’000 US$’000
Year ended 31 December 2017
Executive directors: Ms.YangLin...... 287 15 302 Mr.YangHai...... 114 15 129
401 30 431
Year ended 31 December 2018
Executive directors: Ms.YangLin...... 305 9 314 Mr.YangHai...... 209 9 218 Mr.ChenZhaojun...... 105 3 108
619 21 640
Year ended 31 December 2019
Executive directors: Ms.YangLin...... 305 11 316 Mr.YangHai...... 285 11 296 Mr.ChenZhaojun...... 240 5 245
830 27 857
Six months ended 30 June 2019 (unaudited)
Executive directors: Ms.YangLin...... 150 6 156 Mr.YangHai...... 142 6 148 Mr.ChenZhaojun...... 132 3 135
424 15 439
Six months ended 30 June 2020
Executive directors: Ms.YangLin...... 165 5 170 Mr.YangHai...... 137 5 142 Mr.ChenZhaojun...... 136 1 137
438 11 449
There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Periods.
During the Relevant Periods, no remuneration was paid the Group to the director as an inducement to join or upon joining the Group or as compensation of loss of office.
– I-39 – APPENDIX I ACCOUNTANTS’ REPORT
9. FIVE HIGHEST PAID EMPLOYEES
The five highest paid employees during the Relevant Periods and the six months ended 30 June 2019 included two, three, three, three and three directors, respectively, details of whose remunerations are set out in note 8 above. Details of the remuneration for the remaining three, two, two, two and two highest paid employees who are not a director of the Company during the Relevant Periods and the six months ended 30 June 2019 are as follows:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Salaries, bonuses, allowances and benefitsinkind...... 333 291 268 153 232 Pensionschemecontributions...... 25 15 16 12 15
358 306 284 165 247
The number of non-director and non-chief executive highest paid employees whose remuneration fell within the following bands is as follows:
Number of employees Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 (unaudited)
NiltoHK$1,000,000...... 2 1 — 21 HK$1,000,001 to HK$1,500,000 ..... 1 1 2 — 1
32222
10. INCOME TAX
The Group is subject to income tax on an entity basis on profit arising in or derived from the jurisdictions in which members of the Group are domiciled and operate.
The Cayman Islands and the BVI
Pursuant to the rules and regulations of the Cayman Islands and the BVI, the Company and its subsidiary are not subject to any income tax in the Cayman Islands and the BVI.
Hong Kong
Pursuant to the relevant tax law of the Hong Kong Special Administrative Region, Hong Kong profits tax was levied at the rate of 16.5% on the estimated assessable profits arising in Hong Kong during the Relevant Periods.
Mainland China
The provision for current income tax in Mainland China is based on the statutory rate of 25% of the assessable profits of certain PRC subsidiaries of the Group as determined in accordance with the PRC Corporate Income Tax Law, which was approved and became effective on 1 January 2008, except for certain subsidiaries of the Group in Mainland China which are granted tax concession and are taxed at preferential tax rates.
Shenzhen Chenbei is qualified as a High and New Technology Enterprise and was subject to tax at a preferential income tax rate of 15% during the Relevant Periods.
– I-40 – APPENDIX I ACCOUNTANTS’ REPORT
Chongqing Xiaodao is entitled to a preferential income tax rate of 5% for the taxable income less than or equal to RMB1,000,000 and a preferential income tax rate of 10% for the taxable income between RMB1,000,000 and RMB3,000,000.
United States
Pursuant to the relevant tax laws of the United States, federal corporation income tax was levied at the rate of up to 34% on the taxable income arising in the United States during the year ended 31 December 2017, and was levied at the rate of 21% on the taxable income arising in the United States since the year 2018.
Netherlands and Germany
Pursuant to the relevant tax laws of the Netherlands and Germany, the subsidiaries which operate in the Netherlands and Germany are subject to corporate income tax at a rate of 20% and 15%, respectively, on the taxable income arising in the Netherlands and Germany.
The income tax expense of the Group during the Relevant Periods is analysed as follows:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Current — MainlandChina...... 618 636 130 73 231 — HongKong...... 1,058 ———3,785 — UnitedStates...... 577 666 895 471 620 — Netherlands and Germany . . 10 107 96 24 33
Deferred (note 26) ...... (994) (424) (559) (173) (22)
Total tax charge for theyear/period...... 1,269 985 562 395 4,647
– I-41 – APPENDIX I ACCOUNTANTS’ REPORT
A reconciliation of the tax expense applicable to profit before tax at the statutory rates for the countries in which the Company and the subsidiaries are domiciled to the tax expense at the effective tax rates is as follows:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Profitbeforetax...... 3,136 5,346 6,934 2,375 27,128
Taxatthestatutorytaxrates.... 616 1,607 1,382 589 4,937 Preferential income tax rates applicabletosubsidiaries.... (7) (568) (459) (92) (335) Effect on opening deferred tax of decreaseinrate...... 78 18 ——— Expenses not deductible for tax . . 271 180 342 97 467 Additional deduction allowance for research and development costs...... (208) (316) (731) (278) (328) Tax losses utilised from previous periods...... ——(65) — (99) Tax losses not recognised ...... 32 64 93 79 5 Transfer pricing adjustments not deductiblefortax...... 487 ————
Tax charge at the Group’s effectivetaxrate...... 1,269 985 562 395 4,647
11. DIVIDENDS
On 31 January 2018, a subsidiary of the Company declared dividend of US$632,000 to its then shareholders. The dividend has been fully paid in 2018.
On 15 June 2020, the Company declared a cash dividend of US$4,210,000 (equivalent to RMB29,853,000) to the shareholders of the Company, which has been fully paid in June 2020.
12. EARNINGS PER SHARE
Earnings per share information is not presented as its inclusion, for the purpose of this report, is not considered meaningful due to the Reorganisation and the basis of presentation of the Group for the Relevant Periods as disclosed in note 2.1 of the Historical Financial Information.
– I-42 – APPENDIX I ACCOUNTANTS’ REPORT
13. PROPERTY, PLANT AND EQUIPMENT
Machinery Leasehold and Office Electronic improvements equipment equipment equipment Total US$’000 US$’000 US$’000 US$’000 US$’000
31 December 2017
At 1 January 2017: Cost...... 131 72 219 75 497 Accumulateddepreciation..... (19) (9) (74) (25) (127) Exchangerealignment...... (5) — (5) (4) (14)
Netcarryingamount...... 107 63 140 46 356
At 1 January 2017, net of accumulated depreciation . . . 107 63 140 46 356 Additions...... 340 337 32 174 883 Disposal...... (3) ——— (3) Acquisition of subsidiaries (note 29) ...... 35 15 12 8 70 Depreciation provided during the year (note 6) ...... (101) (43) (81) (44) (269) Exchangerealignment...... 16 10 6 9 41
At 31 December 2017, net of accumulated depreciation . . . 394 382 109 193 1,078
At 31 December 2017: Cost...... 471 426 265 258 1,420 Accumulateddepreciation..... (88) (54) (157) (70) (369) Exchangerealignment...... 11 10 1 5 27
Netcarryingamount...... 394 382 109 193 1,078
– I-43 – APPENDIX I ACCOUNTANTS’ REPORT
Machinery Leasehold and Office Electronic improvement equipment equipment equipment Total US$’000 US$’000 US$’000 US$’000 US$’000
31 December 2018
At 31 December 2017 and 1 January 2018: Cost...... 471 426 265 258 1,420 Accumulateddepreciation..... (88) (54) (157) (70) (369) Exchangerealignment...... 11 10 1 5 27
Netcarryingamount...... 394 382 109 193 1,078
At 1 January 2018, net of accumulated depreciation . . . 394 382 109 193 1,078 Additions...... 14 291 162 121 588 Depreciation provided during the year (note 6) ...... (119) (108) (67) (89) (383) Exchangerealignment...... (15) (15) (8) (10) (48)
At 31 December 2018, net of accumulated depreciation . . . 274 550 196 215 1,235
At 31 December 2018: Cost...... 485 717 427 379 2,008 Accumulateddepreciation..... (207) (162) (224) (159) (752) Exchangerealignment...... (4) (5) (7) (5) (21)
Netcarryingamount...... 274 550 196 215 1,235
– I-44 – APPENDIX I ACCOUNTANTS’ REPORT
Machinery Leasehold and Office Electronic improvement equipment equipment equipment Total US$’000 US$’000 US$’000 US$’000 US$’000
31 December 2019
At 31 December 2018 and 1 January 2019 Cost...... 485 717 427 379 2,008 Accumulateddepreciation..... (207) (162) (224) (159) (752) Exchangerealignment...... (4) (5) (7) (5) (21)
Netcarryingamount...... 274 550 196 215 1,235
At 1 January 2019, net of accumulated depreciation . . . 274 550 196 215 1,235 Additions...... 68 638 24 242 972 Disposals...... — (1) — (2) (3) Depreciation provided during the year (note 6) ...... (122) (265) (69) (136) (592) Exchangerealignment...... (3) (8) (3) (4) (18)
At 31 December 2019, net of accumulated depreciation . . . 217 914 148 315 1,594
At 31 December 2019: Cost...... 552 1,353 451 605 2,961 Accumulateddepreciation..... (328) (426) (293) (281) (1,328) Exchangerealignment...... (7) (13) (10) (9) (39)
Netcarryingamount...... 217 914 148 315 1,594
– I-45 – APPENDIX I ACCOUNTANTS’ REPORT
Machinery Leasehold and Office Electronic improvement equipment equipment equipment Total US$’000 US$’000 US$’000 US$’000 US$’000
30 June 2020
At 31 December 2019 and 1 January 2020 Cost...... 552 1,353 451 605 2,961 Accumulateddepreciation..... (328) (426) (293) (281) (1,328) Exchangerealignment...... (7) (13) (10) (9) (39)
Netcarryingamount...... 217 914 148 315 1,594
At 1 January 2020, net of accumulated depreciation . . . 217 914 148 315 1,594 Additions...... 10 32 3 45 90 Disposals...... ——— (2) (2) Depreciation provided during the period (note 6) ...... (49) (206) (25) (84) (364) Exchangerealignment...... (3) (6) (2) (3) (14)
At 30 June 2020, net of accumulated depreciation . . . 175 734 124 271 1,304
At 30 June 2020 Cost...... 562 1,385 454 646 3,047 Accumulateddepreciation..... (377) (632) (318) (363) (1,690) Exchangerealignment...... (10) (19) (12) (12) (53)
Netcarryingamount...... 175 734 124 271 1,304
The shelving and forklifts owned by Etekcity US, with aggregate carrying amounts of US$46,000, US$39,000, US$32,000 and US$29,000 as at 31 December 2017, 2018 and 2019 and 30 June 2020, respectively, were pledged as security for the Group’s bank loans, as further detailed in note 24(a).
The property, plant and equipment owned by Etekcity US, Arovast US, Atekcity US and L&H Y US, with aggregate carrying amounts of US$62,000, US$52,000, US$54,000 and US$47,000 as at 31 December 2017, 2018 and 2019 and 30 June 2020, respectively, were pledged as security for the Group’s bank loans, as further detailed in note 24(d) and note 24(i).
– I-46 – APPENDIX I ACCOUNTANTS’ REPORT
14. LEASES
The Group as a lessee
The Group has lease contracts for offices, warehouses, machinery and equipment such as forklifts and packing used for its operations. Leases of office premises generally have lease terms between 2 and 10 years, while machinery and equipment generally have lease terms between 5 and 10 years. Other office equipment generally has lease terms of 12 months or less and/or is individually of low value. Generally, the Group is restricted from assigning and subleasing the leased assets outside the Group. There are no lease contracts that include extension and termination options and variable lease payments.
(a) Right-of-use assets
The carrying amounts of the Group’s right-of-use assets and the movements during the Relevant Periods are as follows:
Offices and Machinery and warehouses equipment Total US$’000 US$’000 US$’000
Asat1January2017...... 2,192 — 2,192 Additions...... 1,249 — 1,249 Depreciation charge (note 6) ...... (873) — (873) Exchangerealignment...... 74 — 74
As at 31 December 2017 and 1 January 2018 .... 2,642 — 2,642 Additions...... 1,509 72 1,581 Depreciation charge (note 6) ...... (1,094) (8) (1,102) Exchangerealignment...... (79) — (79)
As at 31 December 2018 and 1 January 2019 .... 2,978 64 3,042 Additions...... 6,246 335 6,581 Depreciation charge (note 6) ...... (1,481) (33) (1,514) Exchangerealignment...... (42) — (42)
As at 31 December 2019 and 1 January 2020 .... 7,701 366 8,067 Additions...... 4,502 — 4,502 Depreciation charge (note 6) ...... (1,215) (32) (1,247) Exchangerealignment...... (35) — (35)
As at 30 June 2020 ...... 10,953 334 11,287
– I-47 – APPENDIX I ACCOUNTANTS’ REPORT
(b) Lease liabilities
The carrying amounts of lease liabilities and the movements during the Relevant Periods are as follows:
2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Carryingamountat1January...... 2,351 2,839 3,214 8,302 Newleases...... 1,214 1,538 6,501 4,502 Accretion of interest recognised duringtheyear/period...... 151 142 208 310 Payments...... (955) (1,224) (1,578) (1,315) Exchangerealignment...... 78 (81) (43) (37)
Carrying amount at 31 December 2017, 2018 and 2019 and 30 June 2020 ...... 2,839 3,214 8,302 11,762
Analysed into: Currentportion...... 996 1,167 1,500 1,939 Non-currentportion...... 1,843 2,047 6,802 9,823
The maturity analysis of lease liabilities is disclosed in note 36 to the Historical Financial Information.
(c) The amounts recognised in profit or loss in relation to leases are as follows:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Interest on lease liabilities ..... 151 142 208 88 310 Depreciation charge of right-of- useassets...... 873 1,102 1,514 706 1,247 Expense relating to short-term leases and other leases with remaining lease terms ended on or before the year/period end (included in selling and distribution expenses and administrativeexpenses)..... 77 239 191 88 310
Total amounts recognised in profit orloss...... 1,101 1,483 1,913 882 1,867
(d) The total cash outflow for leases is disclosed in note 32(c) to the Historical Financial Information.
– I-48 – APPENDIX I ACCOUNTANTS’ REPORT
15. GOODWILL
US$’000
Cost at 1 January 2017, net of accumulated impairment ...... — Acquisition of subsidiaries (note 29) ...... 258 Exchangerealignment...... 16
As at 31 December 2017 ...... 274
Cost at 1 January 2018, net of accumulated impairment ...... 274 Impairmentduringtheyear...... (261) Exchangerealignment...... (13)
As at 31 December 2018, 1 January 2019 and 31 December 2019 ...... —
Cost at 1 January 2020, net of accumulated impairment ...... — Impairmentduringtheperiod...... — Exchangerealignment...... —
Asat30June2020...... —
Impairment testing of goodwill
Goodwill acquired through business combinations is allocated to products processing cash-generating unit for impairment testing.
The recoverable amount of the products processing cash-generating unit was determined based on a value in use calculation using cash flow projections based on financial budgets covering a five-year period approved by management. The pre-tax discount rate applied to the cash flow projections was 14% and cash flows beyond the five-year period were extrapolated using a long term growth rate of 3% in 2017. At the end of 2018, revenue of the products such as lighting products processed by the cash-generated unit started to decrease and management expected a decrease in revenue of 40% in 2019 and 45% in 2020 and remain stable in the following years, which cause the recoverable amount of the cash-generating unit lower than its carrying amount by approximately US$812,000. In the opinion of the directors, an impairment of goodwill of US$261,000 was recognised in 2018. The related trademarks with carrying amount of US$715,000 (note 16) was fully impaired since they are no longer be used.
Assumptions were used in the value in use calculation of the products processing cash-generating unit for the Relevant Periods. The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill:
Long term growth rate — The long term growth rate is based on the historical data and management’s expectation on the future market.
Pre-tax discount rate — The pre-tax discount rate reflects specific risks relating to the cash-generating unit, which is determined using the capital asset pricing model with reference to the beta coefficient and company specific risk premium.
The values assigned to the key assumptions on market development of the products processing cash- generating unit and discount rate are consistent with external information sources.
– I-49 – APPENDIX I ACCOUNTANTS’ REPORT
As at 31 December 2017, the recoverable amount of the cash-generating unit exceeds its carrying amount by US$536,000 and the directors did not identify an impairment for this cash-generating unit.
Decrease in the long term growth rate of 6% or rise in the pre-tax discount rate of 4% (with other assumptions remaining unchanged) would result in decrease in the cash-generating unit’s recoverable amount to equal to its carrying amount.
In the opinion of the directors, except for the above, any reasonably possible change in the other key assumptions on which the recoverable amount is based would not cause the cash-generating unit’s carrying amount to exceed its recoverable amount as at 31 December 2017.
16. OTHER INTANGIBLE ASSETS
Software Trademarks Total US$’000 US$’000 US$’000
31 December 2017
At 1 January 2017: Cost...... 2 — 2 Accumulatedamortisationandimpairmentloss..... ———
Net carrying amount ...... 2 — 2
Cost at 1 January 2017, net of accumulated amortisationandimpairmentloss...... 2 — 2 Acquisition of subsidiaries (note 29) ...... 1 835 836 Additions...... 77 — 77 Exchangerealignment...... 2 51 53 Amortisation during the year (note 6)...... (8) (47) (55)
At 31 December 2017 ...... 74 839 913
At 31 December 2017: Cost...... 80 835 915 Accumulatedamortisationandimpairmentloss..... (8) (47) (55) Exchangerealignment...... 2 51 53
Net carrying amount ...... 74 839 913
31 December 2018
Cost at 1 January 2018, net of accumulated amortisationandimpairmentloss...... 74 839 913 Additions...... 68 — 68 Exchangerealignment...... (5) (37) (42) Impairment loss (note 6 and note 15) ...... — (715) (715) Amortisation during the year (note 6)...... (30) (87) (117)
At 31 December 2018 ...... 107 — 107
At 31 December 2018: Cost...... 148 835 983 Accumulatedamortisationandimpairmentloss..... (38) (849) (887) Exchangerealignment...... (3) 14 11
Net carrying amount ...... 107 — 107
– I-50 – APPENDIX I ACCOUNTANTS’ REPORT
Software Trademarks Total US$’000 US$’000 US$’000
31 December 2019
Cost at 1 January 2019, net of accumulated amortisationandimpairmentloss...... 107 — 107 Additions...... 182 — 182 Exchangerealignment...... (3) — (3) Amortisation during the year (note 6)...... (79) — (79)
At 31 December 2019 ...... 207 — 207
At 31 December 2019: Cost...... 330 835 1,165 Accumulatedamortisationandimpairmentloss..... (117) (849) (966) Exchangerealignment...... (6) 14 8
Net carrying amount ...... 207 — 207
30 June 2020
Cost at 1 January 2020, net of accumulated amortisationandimpairmentloss...... 207 — 207 Additions...... 53 — 53 Exchangerealignment...... (2) — (2) Amortisation during the period (note 6) ...... (107) — (107)
At30June2020...... 151 — 151
At 30 June 2020: Cost...... 383 835 1,218 Accumulatedamortisationandimpairmentloss..... (224) (849) (1,073) Exchangerealignment...... (8) 14 6
Net carrying amount ...... 151 — 151
17. INVENTORIES
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Rawmaterials...... 1,596 934 912 710 Workinprogress...... 190 272 31 133 Finishedgoods...... 20,421 24,805 33,517 39,311
Less:provisionforinventories..... (238) (591) (1,182) (2,230)
21,969 25,420 33,278 37,924
At 31 December 2017, the inventories stored in Amazon Fulfillment Centers and the Group’s warehouse located at the United States with a carrying amount of US$16,915,000 were pledged as security for the Group’s Amazon loans, as further detailed in note 24(d).
At 31 December 2018 and 2019 and 30 June 2020, the inventories owned by Etekcity US, Arovast US, Atekcity US and L&H Y US with aggregate carrying amounts of US$20,772,000, US$28,106,000 and US$19,542,000, respectively, were pledged as security for the Group’s bank loans, as further detailed in note 24(i).
– I-51 – APPENDIX I ACCOUNTANTS’ REPORT
18. TRADE RECEIVABLES
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Trade receivables ...... 2,099 4,521 18,304 19,272 Impairment...... (525) (590) (424) (651)
1,574 3,931 17,880 18,621
The credit period is generally one month, sometimes extending up to three months. Each customer has a maximum credit limit. The Group seeks to maintain strict control over its outstanding receivables. Overdue balances are reviewed regularly by senior management.
As at 31 December 2017, 2018 and 2019 and 30 June 2020, the receivable balances of US$1,186,000, nil, nil and nil were held as collateral for Amazon loans (note 24(d)).
An ageing analysis of the trade receivables as at the end of each of the Relevant Periods, based on the transaction date and net of loss allowance, is as follows:
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Within3months...... 1,037 3,836 17,756 18,055 3to6months...... 60 95 94 532 6to12months...... 33 — 30 34 1to2years...... 444 ———
1,574 3,931 17,880 18,621
The movements in the loss allowance for impairment of trade receivables are as follows:
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Atbeginningofyear/period...... 521 525 590 424 Disposalofasubsidiary...... ——(202) — Impairmentlosses,net...... 4 65 36 227
Atendofyear/period...... 525 590 424 651
– I-52 – APPENDIX I ACCOUNTANTS’ REPORT
An impairment analysis is performed at the end of each of the Relevant Periods using a provision matrix to calculate ECLs for trade receivables from customers other than the largest retailer. The provision rates are based on days past due of these customers. For the largest retailer, the provision rate is based on the Moody’s credit rating.
Set out below is the information about the credit risk exposure on the Group’s trade receivables:
As at 31 December 2017 Gross carrying Expected Expected amount credit loss rate credit losses US$’000 US$’000
Thelargestcustomer...... 1,127 0.15% 2 Others...... 972 53.81% 523
2,099 25.01% 525
As at 31 December 2018 Gross carrying Expected Expected amount credit loss rate credit losses US$’000 US$’000
Thelargestcustomer...... 3,829 0.10% 4 Others...... 692 84.68% 586
4,521 13.05% 590
As at 31 December 2019 Gross carrying Expected Expected amount credit loss rate credit losses US$’000 US$’000
Thelargestcustomer...... 17,533 0.10% 17 Others...... 771 52.79% 407
18,304 2.32% 424
As at 30 June 2020 Gross carrying Expected Expected amount credit loss rate credit losses US$’000 US$’000
Thelargestcustomer...... 16,926 0.06% 10 Others...... 2,346 27.32% 641
19,272 3.38% 651
– I-53 – APPENDIX I ACCOUNTANTS’ REPORT
19. PREPAYMENTS, OTHER RECEIVABLES AND OTHER ASSETS
Group
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Deposits and other receivables ..... 3,841 3,869 4,563 6,081 Prepayments...... 800 1,496 1,239 2,505 Deferredlistingexpenses...... — 195 387 1,083 Othercurrentassets...... 30 25 1,226 850
4,671 5,585 7,415 10,519
The financial assets included in the above balances relate to receivables for which there was no recent history of default and past due amounts. As at 31 December 2017, 2018 and 2019 and 30 June 2020, the loss allowance was assessed to be minimal.
At 31 December 2019, a subsidiary, Shenzhen Chenbei, has pledged export tax refund receivables of US$610,000 to secure the Group’s bank loans, as further detailed in note 24(h).
Company
As at As at 31 December 2019 30 June 2020 US$’000 US$’000
Other receivables...... 97 —
20. LOANS TO DIRECTORS
Loans to directors, disclosed pursuant to section 383(1)(d) of the Hong Kong Companies Ordinance and Part 3 of the Companies (Disclosure of Information about Benefits of Directors) Regulation, are as follows:
Maximum At Maximum At Maximum At Maximum amount 31 December amount 31 December amount 31 December amount At outstanding 2017 and outstanding 2018 and outstanding 2019 and outstanding 1January during 1January during 1January during 1January during At 30 June 2017 the year 2018 the year 2019 the year 2020 the period 2020 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Ms.YangLin..... 373 465 465 705 609 1,069 951 951 951 Mr. Yang Yuzheng . . —————19 19 19 19
373 465 609 970 970
The loans to directors are interest free and have no fixed terms of repayment.
– I-54 – APPENDIX I ACCOUNTANTS’ REPORT
21. CASH AND CASH EQUIVALENTS AND PLEDGED DEPOSITS
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Cashandbankbalances...... 2,843 9,856 9,170 15,136 Timedeposits...... ——533 541
2,843 9,856 9,703 15,677
Less: Pledged deposits: Pledgedforbankloans...... ——(546) (541) Pledgedforalawsuit...... ——(42) (91)
Cashandcashequivalents...... 2,843 9,856 9,115 15,045
DenominatedinHKD...... 10 503 5 23 DenominatedinRMB...... 334 243 2,544 291 DenominatedinUSD...... 2,087 8,211 5,954 13,962 DenominatedinEUR...... 412 899 602 611 DenominatedinJPY...... ——10 158
Cashandcashequivalents...... 2,843 9,856 9,115 15,045
The RMB is not freely convertible into other currencies, however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.
Cash at banks earns interest at floating rates based on daily bank deposit rates. Short term time deposits are made for varying periods of between one day and four months depending on the immediate cash requirements of the Group, and earn interest at the respective short term time deposit rates. Short term time deposits of US$533,000 and US$541,000 as at 31 December 2019 and 30 June 2020 were pledged for loan facilities. The account balance of US$13,000 as at 31 December 2019 was escrowed and pledged for bank loans of RMB5,000,000 detailed in note 24(h). The account balances of US$42,000 and US$91,000 as at 31 December 2019 and 30 June 2020 were restricted to use due to a lawsuit brought by a former employee alleging that one of the Group’s subsidiaries breached a labour contract. The bank balances and pledged deposits are deposited with creditworthy banks with no recent history of default.
– I-55 – APPENDIX I ACCOUNTANTS’ REPORT
22. TRADE PAYABLES
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Tradepayables...... 10,026 8,201 19,418 32,033
An ageing analysis of the trade payables as at the end of each of the Relevant Periods, based on the transaction date, is as follows:
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Within3months...... 8,522 7,370 18,010 28,874 3to12months...... 947 262 887 2,822 Over1year...... 557 569 521 337
10,026 8,201 19,418 32,033
Trade payables are non-interest-bearing and are normally settled on 90-day terms.
23. OTHER PAYABLES AND ACCRUALS
As at 31 December As at 30 June 2017 2018 2019 2020 Notes US$’000 US$’000 US$’000 US$’000
Contract liabilities . . . (a) 116 167 180 79 Refund liabilities.... 452 1,813 5,899 1,197 Interestpayable..... — 112 153 — Payrollpayable..... 1,357 2,258 2,492 2,487 Tax payables other than corporate incometax...... 1,933 4,875 5,080 2,737 Accrued listing expenses...... — 252 99 1,910 Otherpayables..... (b) 440 680 464 603
4,298 10,157 14,367 9,013
Notes:
(a) Contract liabilities represented the obligations to transfer goods to a customer for which the Group has received consideration. The changes in the contract liabilities are mainly attributable to short-term advances received from customers in relation to sale of products.
(b) Loans from employees are included in other payables. These balances are unsecured, bear interests between 7.2% and 12% per annum and have no fixed terms of repayment.
Except for loans from employees, other payables are non-interest-bearing and repayable on demand.
– I-56 – APPENDIX I ACCOUNTANTS’ REPORT
24. INTEREST-BEARING BANK AND OTHER BORROWINGS
As at 31 December 2017 As at 31 December 2018 As at 31 December 2019 As at 30 June 2020 Effective Effective Effective Effective interest interest interest interest rate Maturity rate Maturity rate Maturity rate Maturity (%) US$’000 (%) US$’000 (%) US$’000 (%) US$’000
Current Current portion of long-term bank loans — 5.19 2018 12 5.19 2019 12 5.19 2020 10 5.19 2020 4 secured US$58,000 (a) ...... Current portion of long-term bank loans — 5.99 2018 22 ——————— —— secured US$100,000 (b) ...... Current portion of long-term bank loans — 5.99 2018 21 ——————— —— secured US$100,000 (c) ...... Current portion of long-term bank loans — ———WSJP*+1 2019 10,000 WSJP*+1 2020 14,952 WSJP*+1 2020 3,465 secured(i)...... Current portion of long-term other borrowings HIBOR* 2018 2,559 HIBOR* 2019 3,845 ———— —— — secured HK$50,000,000 (f)...... +7.24 +11.24 HIBOR* +11.24 Current portion of long-term bank loans — ————————— 1 2020–2021 980 secured US$2,572,000 (k) ...... Current portion of long-term bank loans — ————————— 1 2020–2021 60 secured US$155,000 (l) ...... Unsecuredbankoverdraft(j)...... — 2018 108 — 2019 142 — 2020 107 — 2020 92 UPS loans — secured(e)...... WSJP*+2 2018 983 ——————— —— Amazon loans — secured(d)...... 12.9 2018 571 ——————— —— Bank loans — secured RMB5,000,000 (h) . . . ——————5.4 2020 717 ——— Other loans — secured HK$20,000,000 (g) . . ——————5.5 2020 2,568 ———
4,276 13,999 18,354 4,601
Non-current Bank loans — secured US$58,000 (a) ..... 5.19 2019– 20 5.19 2020 9 ———— —— 2020 Bank loans — secured US$100,000 (b)..... 5.99 2019– 37 ——————— —— 2020 Bank loans — secured US$100,000 (c) ..... 5.99 2019– 38 ——————— —— 2020 Other loans — secured HK$50,000,000 (f). . . HIBOR* 2019 3,839 ——————— —— +11.24 Bank loans — secured US$2,572,000 (k).... ————————— 1 2021–2022 1,592 Bank loans — secured US$156,000 (l) ..... ————————— 1 2021–2022 96
3,934 9 — 1,688
8,210 14,008 18,354 6,289
* HIBOR refers to the Hong Kong Interbank Offered Rate
* WSJP refers to Wall Street Journal Prime Rate
– I-57 – APPENDIX I ACCOUNTANTS’ REPORT
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Analysed into: Bank loans repayable: Within one year or on demand . 163 10,154 15,786 4,601 Inthesecondyear...... 52 9 — 1,688 In the third to fifth years, inclusive...... 43 ———
258 10,163 15,786 6,289
Other borrowings repayable: Within one year or on demand . 4,113 3,845 2,568 — Inthesecondyear...... 3,839 ———
7,952 3,845 2,568 —
8,210 14,008 18,354 6,289
Notes:
(a) The bank loans are secured by shelving and forklifts, which had aggregate carrying values of US$46,000, US$39,000, US$32,000 and US$29,000 as at 31 December 2017, 2018 and 2019 and 30 June 2020, respectively. The loans are repayable by 60 monthly equal instalments commencing in September 2015. Ms. Yang Lin has guaranteed these loans.
(b) The bank loans are repayable by 59 monthly equal instalments commencing in October 2015 and Ms. Yang Lin has guaranteed these loans.
(c) The bank loans are repayable by 59 monthly equal instalments commencing in November 2015. Ms. Yang Lin has guaranteed these loans.
(d) The Amazon loans are secured by all inventories, accounts, equipment, goods and other tangible property Etekcity US owned.
(e) The UPS loans are pledged by bill of lading of Atekcity US and L&H Y US, which had approximate carrying values of US$1,404,000 as at 31 December 2017.
In addition, Ms. Yang Lin and Etekcity US have guaranteed these borrowings.
(f) The other borrowings are secured by 20% of Shenzhen Chenbei’s issued share capital owned by Mr. Yang Yuzheng.
In addition, Ms. Yang Lin has guaranteed these borrowings.
– I-58 – APPENDIX I ACCOUNTANTS’ REPORT
(g) The other borrowings are secured by:
(i) 20% of issued shares of the Company owned by Caerus Co., Ltd (‘‘Caerus BVI’’);
(ii) 20% of issued shares of Arcsync BVI owned by the Company; and
(iii) 20% of issued shares of WFOE owned by Ecomine HK.
In addition, Ms. Yang Lin and the Company have guaranteed these borrowings.
(h) The bank loans are secured by:
(i) the pledge of a subsidiary’s export tax refund receivables of US$610,000 as at 31 December 2019 and the right of charge on the future export tax refund receivables generated during the period from 5 June 2019 to 5 September 2022; and
(ii) the pledge of deposit amounting to US$13,000 as at 31 December 2019 (note 21).
In addition, Ms. Yang Lin and Chongqing Xiaodao have guaranteed these loans.
(i) The bank loans with amount of US$10,000,000, US$14,952,000 and US$3,465,000 as at 31 December 2018, 2019 and 30 June 2020, respectively are secured by:
(i) inventory, chattel paper, accounts, equipment and general intangibles assets owned by Etekcity US, Arovast US, Atekcity US and L&H Y US; and
(ii) all patents, trademarks, trademark registrations, trademark applications and trademark licenses held by Etekcity US, Arovast US, Atekcity US and L&H Y US.
In addition, Ms. Yang Lin has guaranteed these loans.
(j) The unsecured bank overdraft is an overdraft from credit cards.
(k) The bank loans are repayable by 18 monthly equal instalments beginning in December 2020 and are guaranteed by the U.S. Small Business Administration (‘‘SBA’’). If the proceeds of Loans were used by Etekcity US for eligible expenses as defined in Section 1102 of the CARES Act to include payroll costs, continuation of heath care benefits, employee salaries, mortgage interest, rent, utilities, balances on SBA Economic Injury Disaster Loans (‘‘EIDL’’) and interest on other outstanding debt incurred prior to February 15, 2020 (‘‘Eligible Expenses’’), then Etekcity US may apply for loan forgiveness of all Eligible Expenses excluding interest on outstanding non-mortgage debt, and existing EIDL balances not used for forgivable purposes from the SBA.
(l) The bank loans are repayable by 18 monthly equal instalments beginning in December 2020 and are guaranteed by the SBA. If the proceeds of Loans were used by Vesync US for Eligible Expenses, then Vesync US may apply for loan forgiveness of all Eligible Expenses excluding interest on outstanding non-mortgage debt, and existing EIDL balances not used for forgivable purposes from the SBA.
(m) Except for the other loans of HK$50,000,000 and HK$20,000,000 which are denominated in Hong Kong dollars and the bank loans of RMB5,000,000 which are denominated in RMB, all borrowings are in USD.
The guarantees provided by Ms. Yang Lin as disclosed above will be released upon the listing.
– I-59 – APPENDIX I ACCOUNTANTS’ REPORT
25. PROVISION
Warranties Lawsuits Surcharges Total US$’000 US$’000 US$’000 US$’000
At 1 January 2017 ...... 39 ——39
Additionalprovision...... 102 — 508 610 Amounts utilised during the year ...... (78) ——(78)
At 31 December 2017 and 1 January 2018 ...... 63 — 508 571
Additionalprovision...... 241 425 453 1,119 Amounts utilised during the year ...... (129) ——(129)
At 31 December 2018 and 1 January 2019 ...... 175 425 961 1,561
Additionalprovision...... 469 106 857 1,432 Amounts utilised during the year ...... (382) (425) — (807)
At 31 December 2019 and 1 January 2020 ...... 262 106 1,818 2,186
Additionalprovision...... 564 — 1,131 1,695 Amounts utilised during the period ...... (394) (26) (43) (463)
At30June2020...... 432 80 2,906 3,418
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Analysed into: Portion classified as current liabilities 63 600 368 1,097 Non-currentportion...... 508 961 1,818 2,321
571 1,561 2,186 3,418
Warranties
The Group provides one-year warranties to its customers on their products sold. The amount of the provision for the warranties is estimated based on sales volumes and past experience of the level of replacements. The estimation basis is reviewed on an ongoing basis and revised where appropriate.
Lawsuits
The provision is mainly attributable to legal proceeding in relation to product liability dispute with customers and patent infringement.
Surcharges
The provision is mainly attributable to tax surcharges in relation to custom duty, sales tax and income tax mainly due to late payment and late filing of taxes.
– I-60 – APPENDIX I ACCOUNTANTS’ REPORT
26. DEFERRED TAX
The movements in deferred tax assets and liabilities during the Relevant Periods are as follows:
Deferred tax assets
Depreciation allowance Losses Unrealised difference Inventory available for Impairment profit from between tax cost offsetting of trade inter-company Inventory Lease Other and deduction against future receivables transactions provision liabilities payable accounting difference taxable profits Total US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
At1January2017...... 101 722 119 574 10 7 99 — 1,632
Deferred tax credited/(charged) to profit or loss during the year (note 10) ...... (6) 1,024 (38) (267) 55 — (28) — 740 Exchangerealignment...... — ——— (3) —— — (3)
At 31 December 2017 and1January2018...... 95 1,746 81 307 62 7 71 — 2,369
Deferred tax credited/(charged) to profit or loss during the year (note 10) ...... 16 (421) 98 102 40 — 29 477 341 Exchangerealignment...... ———13 —— — 4
At 31 December 2018 and1January2019...... 111 1,325 179 410 105 7 100 477 2,714
Deferred tax credited/(charged) to profit or loss during the year (note 10) ...... 13 607 128 1,005 2 13 56 (244) 1,580 Disposal of a subsidiary (note 30) .(33) ———— —— —(33) Exchangerealignment...... — ——— (1) —— — (1)
At 31 December 2019 and 1January2020...... 91 1,932 307 1,415 106 20 156 233 4,260
Deferred tax credit/(charged) to profit or loss during the period (note 10) ...... 60 (75) 281 1,029 (2) — (35) (233) 1,025 Exchangerealignment...... — (1) —— — (1)
At30June2020...... 151 1,857 588 2,444 103 20 121 — 5,284
– I-61 – APPENDIX I ACCOUNTANTS’ REPORT
Deferred tax liabilities
Fair value adjustment, amortisation and impairment of intangible Right-of-use assets assets Total US$’000 US$’000 US$’000
At 1 January 2017 ...... — 518 518
Acquisition of subsidiaries ...... 209 — 209 Deferred tax credited to profit or loss during the year (note 10) . . . . (11) (243) (254) Exchangerealignment...... 12 — 12
At 31 December 2017 and 1 January 2018 ...... 210 275 485
Deferred tax charged/(credited) to profit or loss during the year (note 10) ...... (210) 127 (83)
At 31 December 2018 and 1 January 2019 ...... — 402 402
Deferred tax charged to profit or loss during the year (note 10) .... — 1,021 1,021
At 31 December 2019 and 1 January 2020 ...... — 1,423 1,423
Deferred tax charged to profit or loss during the period (note 10) .. — 1,003 1,003
At30June2020...... — 2,426 2,426
– I-62 – APPENDIX I ACCOUNTANTS’ REPORT
For presentation purposes, certain deferred tax assets and liabilities have been offset in the statement of financial position. The following is an analysis of the deferred tax balances of the Group for financial reporting purposes:
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Net deferred tax liabilities recognised in the consolidated statements of financialposition...... 210 ——— Net deferred tax assets recognised in the consolidated statements of financialposition...... 2,094 2,312 2,837 2,858
Deferred tax assets have not been recognised in respect of these losses as they have arisen in subsidiaries that have been loss-making for some time and it is not considered probable that taxable profits will be available against which the tax losses can be utilised.
Deferred tax assets have not been recognised in respect of the following item:
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Tax losses arising in: MainlandChina...... 261 507 611 76 UnitedStates...... 17 27 30 32 Japan...... ——78 73 Others...... ——35 68
278 534 754 249
The above tax losses arising in Mainland China will expire in one to five years, tax losses arising in Japan will expire in nine years and tax losses arising in the United States are available indefinitely for offsetting against future taxable profit of the companies in which the losses arose.
Pursuant to the PRC Corporate Income Tax Law, a 10% withholding tax is levied on dividends declared to foreign investors from the foreign investment enterprises established in Mainland China. The requirement is effective from 1 January 2008 and applies to earnings after 31 December 2007. A lower withholding tax rate may be applied if there is a tax treaty between Mainland China and the jurisdiction of the foreign investors. For the Group, the applicable rate is 10%. The Group is therefore liable for withholding taxes on dividends distributed by those subsidiaries established in Mainland China in respect of earnings generated from 1 January 2008. Pursuant to the US Corporate Income Tax Law, a 30% withholding tax is levied on dividends declared to foreign investors from the foreign investment enterprises established in the United States. Pursuant to the European Union Corporate Income Tax Law, a 25% withholding tax plus 5.5% solidarity surcharge is levied on dividends declared to foreign investors from the foreign investment enterprises established in the states of European Union.
At 31 December 2017, 2018 and 2019 and 30 June 2020, no deferred tax has been recognised for withholding taxes that would be payable on the unremitted earnings that are subject to withholding taxes of the Group’s subsidiaries established in Mainland China, United States and European Union. In the opinion of the directors, it is not probable that these subsidiaries in Mainland China, United States and European Union will distribute such earnings in the foreseeable future. The aggregate amount of temporary differences associated with investments in subsidiaries in Mainland China, United States and European Union which deferred tax liabilities have not been recognised totalled approximately US$1,625,000, US$2,102,000, US$2,954,000 and US$5,468,000 as at 31 December 2017, 2018 and 2019 and 30 June 2020, respectively.
– I-63 – APPENDIX I ACCOUNTANTS’ REPORT
27. SHARE CAPITAL
As at As at 31 December 2019 30 June 2020 US$’000 US$’000
Issued: 31 December 2019: 1,000,000 ordinary shares of HK$0.01 each . . 1 — 30 June 2020: 1,052,631 ordinary shares of HK$0.01 each ...... — 1
The movement in the Company’s share capital and share premium during the Relevant Periods is as follows:
Number of ordinary shares in issue Share capital Share premium US$’000 US$’000
At 9 January 2019 (date of incorporation)...... 1 —— Issueofshares...... 999,999 1 4,210
At 31 December 2019 and 1 January 2020 ...... 1,000,000 1 4,210 Issueofshares...... 52,631 ——
At30June2020...... 1,052,631 1 —
The Company was incorporated as an exempted company with limited liability under the laws of the Cayman Islands on 9 January 2019 with an authorised share capital of HK$380,000 divided into 38,000,000 shares of HK$0.01 each.
Upon its incorporation, one share was allotted and issued to the initial subscriber, which was transferred it to Ms. Yang Lin on the same day.
On 22 March 2019, nine shares were further allotted and issued to Ms. Yang Lin at par.
On 25 June 2019, pursuant to the gift deeds, Ms. Yang Lin transferred six shares and four shares to Karis I LLC and Karis II LLC, respectively, by way of gift. Following the aforesaid transfers and allotments, the Company was held as to 60% and 40% by Karis I LLC and Karis II LLC, respectively.
On 12 September 2019, 304,525 shares, 203,016 shares, 459,649 shares, 12,632 shares, 10,084 shares and 10,084 shares were allotted and issued to Karis I LLC, Karis II LLC, Caerus BVI, Chen Wangcai Holdings Limited (‘‘Chen Wangcai BVI’’), The Gongjin Limited (‘‘Gongjin BVI’’)andArceusCo.,Ltd(‘‘Arceus BVI’’), respectively, at a subscription price of US$4,211,000. Following the aforesaid allotments, the Company was held as to 30.4531%, 20.3020%, 45.9649%, 1.2632%, 1.0084% and 1.0084% by Karis I LLC, Karis II LLC, Caerus BVI, Chen Wangcai BVI, Gongjin BVI and Arceus BVI, respectively.
– I-64 – APPENDIX I ACCOUNTANTS’ REPORT
To recognise and reward the contributions of certain eligible employees of the Group and to incentivize them for their future contribution to the Group, the Company adopted Pre-IPO Share Award Scheme on 16 June 2020. Pursuant to the Trust Deed signed between the Company and Bank of Communications Trustee Limited (‘‘BOCT’’) on 16 June 2020, BOCT was appointed as Trustee under the Share Award Trust to hold shares on trust for the benefit of the selected employees as determined by the board of directors. On 22 June 2020, 52,631 shares were allotted and issued to BOCT at par for the purpose of the Pre-IPO share award scheme. Following the aforesaid allotments, the Company was held as to 28.9305%, 19.2869%, 43.6667%, 1.2000%, 0.9580%, 0.9580% and 4.9999% by Karis I LLC, Karis II LLC, Caerus BVI, Chen Wangcai BVI, Gongjin BVI, Arceus BVI and BOCT, respectively.
28. RESERVES
The amounts of the Group’s reserves and the movements therein for the Relevant Periods are presented in the consolidated statements of changes in equity.
Capital reserve
The capital reserve of the Group represents the paid-up capital of the companies comprising the Group prior to the incorporation of the Company. Details of the movements in the capital reserve are set out in the consolidated statements of changes in equity.
Statutory surplus reserve
In accordance with the Company Law of the PRC, certain subsidiaries of the Group which are domestic enterprises are required to allocate 10% of their profit after tax, as determined in accordance with the relevant PRC accounting standards, to their respective statutory surplus reserves until the reserves reach 50% of their respective registered capital. Subject to certain restrictions set out in the Company Law of the PRC, part of the statutory surplus reserves may be converted to increase share capital, provided that the remaining balance after the capitalisation is not less than 25% of the registered capital.
Exchange fluctuation reserve
The exchange fluctuation reserve is used to record exchange differences arising from the translation of the financial statements of entities of which the functional currency is not US$.
29. BUSINESS COMBINATION
On 4 January 2017, the Group acquired 100% interests in Shenzhen City Zhilun Technology Company Limited (‘‘Shenzhen Zhilun’’) and Shenzhen City Dedu Technology Company Limited (‘‘Shenzhen Dedu’’) from third parties. Shenzhen Zhilun and Shenzhen Dedu are mainly engaged in the manufacture of lighting products. The acquisition was made as part of the Group’s strategy to expand its control on the processing unit products. The consideration for the acquisition was in the form of cash of RMB5,000,000, which is equivalent of US$720,000, paid on 27 May 2017.
– I-65 – APPENDIX I ACCOUNTANTS’ REPORT
The fair values of the identifiable assets and liabilities of Shenzhen Zhilun and Shenzhen Dedu as at the date of acquisition were as follows:
Fair value recognised on acquisition Notes US$’000
Property,plantandequipment...... 13 70 Otherintangibleassets...... 16 836 Cashandbankbalances...... 226 Inventories...... 154 Trade receivables ...... 7 Prepaymentsandotherreceivables...... 140 Tradepayables...... (232) Other payables and accruals ...... (512) Other unpaid tax ...... (18) Deferred tax liabilities ...... (209)
Totalidentifiablenetassetsatfairvalue...... 462 Goodwill on acquisition ...... 258
Satisfiedbycash...... 720
The fair values of the trade receivables and other receivables as at the date of acquisition amounted to US$7,000 and US$83,000, respectively. The gross contractual amounts of trade receivables and other receivables were US$7,000 and US$83,000, respectively.
None of the goodwill recognised was expected to be deductible for income tax purposes.
An analysis of the cash flows in respect of the acquisition of subsidiaries is as follows:
US$’000
Cashconsideration...... 720 Cashandbankbalancesacquired...... (226)
Net outflow of cash and cash equivalents included in cash flows from investing activities . . . . . 494
Since the acquisition, the Group gradually transferred the business of Shenzhen Zhilun and Shenzhen Dedu to Dongguan Zhilun, which sells goods to subsidiaries of the Group. Shenzhen Zhilun and Shenzhen Dedu were deregistered in 2019.
Since the acquisition, Shenzhen Zhilun and Shenzhen Dedu contributed nil, nil, nil and nil to the Group’s revenue after inter-company sales eliminations and US$114,000, US$73,000, US$100,000 and US$31,000 to the consolidated profit for the years ended 31 December 2017, 2018 and 2019 and the six months ended 30 June 2020, respectively.
Had the combination taken place at the beginning of the year of 2017, the revenue and the profit of the Group remained unchanged.
– I-66 – APPENDIX I ACCOUNTANTS’ REPORT
30. DISPOSAL OF A SUBSIDIARY
Pursuant to the share transfer agreement date 3 June 2019 and as part of the Reorganisation, Chengdu Xiaodu transferred the entire issued share capital of The HL Y Limited (‘‘HL Y’’) to Mr. Yang Yuzheng at a consideration of US$1,640,000, which was determined with reference to the acquisition cost of HL Y by Chengdu Xiaodu in December 2015, which in turn was based on the then net assets value of HL Y. Upon completion of the said transfer, HL Y ceased to be a subsidiary of the Group.
The assets and liabilities of HL Y as at the date of disposal were as follows:
3 June 2019 Note US$’000
Cashandbankbalances...... 22 Inventories...... 15 Prepaymentsandotherreceivables...... 58 Duefromarelatedparty...... 79 Duetorelatedparties...... (93) Deferredtaxassets...... 26 33 Tradepayables...... (53) Taxpayable...... (72)
(11) Deemedcontributionfromacontrollingshareholder...... 1,651
1,640
There was no cash flow in respect of the disposal of a subsidiary. The consideration of disposal of HL Y of US$1,640,000 to Mr. Yang Yuzheng was netted off with the payables of acquisition of HL Y of US$1,640,000 to Ms. Yang Lin (note 32).
31. PLEDGE OF ASSETS
Details of the Group’s assets pledged for the Group’s bank loans is included in note 24 to the Historical Financial Information.
32. NOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
(a) Major non-cash transactions
The Group had non-cash additions to right-of-use assets of US$1,214,000, US$1,538,000, US$6,501,000, US$1,563,000 and US$4,502,000 and non-cash additions to lease liabilities of US$1,214,000, US$1,538,000, US$6,501,000, US$1,563,000 and US$4,502,000 for the years ended 31 December 2017, 2018 and 2019 and the six months ended 30 June 2019 and 2020, respectively, in respect of lease arrangements for offices, warehouses, machinery and equipment.
– I-67 – APPENDIX I ACCOUNTANTS’ REPORT
The consideration of disposal of HL Y of US$1,640,000 (note 30) to Mr. Yang Yuzheng was netted off with the payables of acquisition of HL Y of US$1,640,000 to Ms. Yang Lin.
(b) Changes in liabilities arising from financing activities
Loans Bank and Loans Loans from Lease other Interest from from arelated liabilities borrowings payable directors* employees** party*** US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
At1January2017...... 2,351 990 ——297 — Changes from financing cashflows...... (955) 7,220 (495) — (297) — Interestexpense...... 151 — 495 ——— Newleases...... 1,214 ————— Exchange realignment . . . . 78 —————
At 31 December 2017 and 1January2018...... 2,839 8,210 ———— Changes from financing cashflows...... (1,224) 5,798 (692) 514 422 976 Interestexpense...... 142 — 804 ——— Newleases...... 1,538 ————— Exchange realignment . . . . (81) —————
At 31 December 2018 and 1January2019...... 3,214 14,008 112 514 422 976 Changes from financing cashflows...... (1,578) 4,346 (1,034) 975 (393) 56 Interestexpense...... 208 — 1,075 ——— Newleases...... 6,501 ————— Exchange realignment . . . . (43) —————
At 31 December 2019 and 1January2020...... 8,302 18,354 153 1,489 29 1,032 Changes from financing cashflows...... (1,315) (12,078) (473) (1,489) 12 (1,032) Interestexpense...... 310 13 320 ——— Newleases...... 4,502 ———— Exchange realignment . . . . (37) —————
At 30 June 2020 ...... 11,762 6,289 ——41 —
* Loans from directors are included in amounts due to directors.
** Loans from employees are included in other payables.
*** Loans from a related party are included in amount due to a related party.
– I-68 – APPENDIX I ACCOUNTANTS’ REPORT
(c) Total cash outflow for leases
The total cash outflow for leases included in the consolidated statements of cash flows is as follows:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Withinoperatingactivities..... 77 239 191 88 310 Within investing activities ..... 35 43 80 30 — Withinfinancingactivities..... 955 1,224 1,578 779 1,315
1,067 1,506 1,849 897 1,625
33. RELATED PARTY TRANSACTIONS
Details of the Group’s principal related parties are as follows:
Name Relationship with the Company
Ms.YangLin...... Adirectorandthecontrolling shareholder Mr.YangHai...... Adirectorandthecontrolling shareholder Mr. Yang Yuzheng . . . A director and the controlling shareholder Mr.ChenZhaojun.... Adirector Ms.JiangJunxiu..... Ashareholderandadirectorofasubsidiary HLY...... Anentity controlled by Mr. Yang Yuzheng KarisILLC...... Anentity controlled by Ms. Yang Lin KarisIILLC...... Anentity controlled by Ms. Yang Lin ArceusBVI...... Anentity controlled by Mr. Yang Hai CaerusBVI...... Anentity controlled by Mr. Yang Yuzheng
– I-69 – APPENDIX I ACCOUNTANTS’ REPORT
(a) In addition to the transactions detailed elsewhere in the Historical Financial Information, the Group had the following transactions with related parties during the Relevant Periods:
Loans granted to related parties
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
HLY...... ——310 —— Ms.JiangJunxiu...... — 195 ——— ArceusBVI...... ———— 7 CaerusBVI...... ———— 7
— 195 310 — 14
Loans from a related party
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Ms.JiangJunxiu*...... — 976 4,330 2,327 947
— 976 4,330 2,327 947
* Yoowo HK has guaranteed certain loans up to US$1,457,000, US$2,150,000 and US$2,150,000 to third-party finance companies for Ms. Jiang Junxiu, who borrowed funds from the third-party finance companies and lent the same amount to Shenzhen Chenbei, as at 31 December 2018 and 2019 and 30 June 2020, respectively. Besides, an account held by Yoowo HK was in escrow to third-party finance companies. The maximum liabilities under the guarantees were US$874,000, US$889,000 and nil as at 31 December 2018 and 2019 and 30 June 2020, respectively. The loans from Ms. Jiang Junxiu bear interest at 12% per annum.
Yoowo HK did not pay or incur any liability during the years ended 31 December 2018 and 2019 and the six months ended 30 June 2020 for the purpose of fulfilling the guarantees. The guarantees will expire on 24 May 2021.
Loans granted to directors
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Ms.YangLin...... 92 240 712 554 — Mr.YangYuzheng...... ——19 ——
92 240 731 554 —
– I-70 – APPENDIX I ACCOUNTANTS’ REPORT
Loans from a director
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Mr.ChenZhaojun*...... — 540 1,290 ——
* The loans from Mr. Chen Zhaojun bear interest at 12% per annum.
Interest expenses incurred for loans from a related party and a director
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Ms.JiangJunxiu...... — 27 138 58 20 Mr.ChenZhaojun...... — 19 58 10 65
— 46 196 68 85
(b) Other transactions with related parties:
(i) Mr. Yang Yuzheng pledged 20% of Shenzhen Chenbei’s shares for borrowings of HK$50,000,000 from CMBC Capital Finance Limited until August 2019.
(ii) Ms. Yang Lin has guaranteed certain of the Group’s bank and other borrowings of up to US$7,531,000, US$13,866,000, US$18,247,000 and US$3,469,000 as at 31 December 2017, 2018 and 2019 and 30 June 2020, respectively and such guarantee provided by Ms. Yang Lin will be released upon the listing. Further details of information of guarantee of relatedpartiesareincludedinnote24totheHistorical Financial Information.
(iii) On 3 June 2019, Chengdu Xiaodu transferred the entire issued share capital of a subsidiary, HL Y, to the controlling shareholder, Mr. Yang Yuzheng, at a consideration of US$1,640,000 based on the acquisition costs of HL Y by Chengdu Xiaodu in December 2015. Further details of the transaction are included in note 30 to the Historical Financial Information.
– I-71 – APPENDIX I ACCOUNTANTS’ REPORT
(c) Outstanding balances with related parties:
Group
Due from directors
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Ms.YangLin...... 465 609 951 951 Mr.YangYuzheng...... ——19 19
465 609 970 970
Due from related parties
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
KarisILLC...... ——1,303 — KarisIILLC...... ——869 — ArceusBVI...... ——43 7 CaerusBVI...... ——1,967 7 Ms.JiangJunxiu...... 64 150 81 — HLY...... ——362 334
64 150 4,625 348
Due to directors
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Mr.ChenZhaojun...... — 514 1,489 — Ms.YangLin...... 3,838 3,838 4,369 — Mr.YangHai...... ——43 — Mr.YangYuzheng...... ——1,967 —
3,838 4,352 7,868 —
Due to a related party
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Mr. Jiang Junxiu ...... — 976 1,032 —
— 976 1,032 —
– I-72 – APPENDIX I ACCOUNTANTS’ REPORT
Company
Due from related parties
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
HLY...... ———— KarisILLC...... ——1,303 — KarisIILLC...... ——869 — ArceusBVI...... ——43 — CaerusBVI...... ——1,967 —
——4,182 —
Due to a related party
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
YoowoHK...... ——12 19
The balances with directors and related parties are non-trade in nature, unsecured, interest-free and repayable on demand except for amount due to Mr. Chen Zhaojun bears interest at 12% per annum and all balances will be settled prior to listing.
(d) Compensation of key management personnel of the Group:
Year ended 31 December Six months ended 30 June 2017 2018 2019 2019 2020 US$’000 US$’000 US$’000 US$’000 US$’000 (unaudited)
Short term employee benefits . . . 401 619 830 424 438 Pension scheme contributions . . . 30 21 27 15 11
Total compensation paid to key managementpersonnel...... 431 640 857 439 449
Further details of directors’ and the chief executive’s emoluments are included in note 8 to the Historical Financial Information.
– I-73 – APPENDIX I ACCOUNTANTS’ REPORT
34. FINANCIAL INSTRUMENTS BY CATEGORY
The carrying amounts of each of the categories of financial instruments as at the end of each of the Relevant Periods are as follows:
Group
Financial assets at amortised cost
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Trade receivables ...... 1,574 3,931 17,880 18,621 Financial assets included in prepayments, other receivables andotherassets...... 3,841 3,869 4,563 6,081 Duefromdirectors...... 465 609 970 970 Duefromrelatedparties...... 64 150 4,625 348 Pledgeddeposits...... ——588 632 Cashandcashequivalents...... 2,843 9,856 9,115 15,045
8,787 18,415 37,741 41,697
Financial liabilities at amortised cost
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Tradepayables...... 10,026 8,201 19,418 32,033 Financial liabilities included in other payables and accruals ...... 440 1,044 716 2,513 Interest-bearing bank and other borrowings...... 8,210 14,008 18,354 6,289 Duetodirectors...... 3,838 4,352 7,868 — Duetorelatedparties...... — 976 1,032 —
22,514 28,581 47,388 40,835
Company
Financial assets at amortised cost
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Other receivables...... ——97 — Duefromrelatedparties...... ——4,182 —
——4,279 —
– I-74 – APPENDIX I ACCOUNTANTS’ REPORT
Financial liability at amortised cost
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Duetoarelatedparty...... ——12 19
35. FAIR VALUE AND FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS
Management has assessed that the fair values of cash and cash equivalents, pledged deposits, trade receivables, trade payables, financial assets included in prepayments, other receivables and other assets, financial liabilities included in other payables and accruals, amounts due from/to directors and related parties and the current portion of interest-bearing bank and other borrowings approximate to their carrying amounts largely due to the short term maturities of these instruments. The carrying amounts of long term interest-bearing bank and other borrowings, which incur interest at floating interest rate, also approximate to their fair values as the interest rate is periodically adjusted to market rate.
The fair values of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The fair value of lease liabilities have been calculated by discounting the expected future cash flows using rates currently available for instruments with similar terms, credit risk and remaining maturities. The changes in fair value as a result of the Group’s own non-performance risk of lease liabilities as at 31 December 2017, 2018 and 2019 were assessed to be insignificant.
Fair value hierarchy
The Group did not have any financial assets and financial liabilities measured at fair value as at the end of each of the Relevant Periods.
36. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group’s principal financial instruments comprise interest-bearing bank and other borrowings, cash and cash equivalents and pledged deposits. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.
The main risks arising from the Group’s financial instruments are foreign currency risk, credit risk and liquidity risk. The board of directors reviews and agrees policies for managing each of these risks and they are summarised below.
Foreign currency risk
Foreign currency risk is the risk of loss resulting from changes in foreign currency exchange rates. Fluctuations in exchange rates between US$ and other currencies in which the Group conducts business may affect the Group’s financial condition and results of operations. The Group seeks to limit its exposure to foreign currency risk by minimising its net foreign currency position.
– I-75 – APPENDIX I ACCOUNTANTS’ REPORT
The following table demonstrates the sensitivity at the end of each of the Relevant Periods to a reasonably possible change in foreign currency exchange rates, with all other variables held constant, of the Group’s profit before tax (due to changes in the fair value of monetary assets and liabilities).
Increase/ Increase/ (decrease) (decrease) in foreign in profit before currency rate tax %US$’000
31 December 2017
IftheUSDweakensagainsttheRMB...... 5 (156) IftheUSDstrengthensagainsttheRMB...... (5) 156 IftheUSDweakensagainsttheHKD...... 5 (96) IftheUSDstrengthensagainsttheHKD...... (5) 96 IftheUSDweakensagainsttheEUR...... 5 17 IftheUSDstrengthensagainsttheEUR...... (5) (17)
31 December 2018
IftheUSDweakensagainsttheRMB...... 5 (8) IftheUSDstrengthensagainsttheRMB...... (5) 8 IftheUSDweakensagainsttheHKD...... 5 (125) IftheUSDstrengthensagainsttheHKD...... (5) 125 IftheUSDweakensagainsttheEUR...... 5 35 IftheUSDstrengthensagainsttheEUR...... (5) (35)
31 December 2019
IftheUSDweakensagainsttheRMB...... 5 (49) IftheUSDstrengthensagainsttheRMB...... (5) 49 IftheUSDweakensagainsttheHKD...... 5 (96) IftheUSDstrengthensagainsttheHKD...... (5) 96 IftheUSDweakensagainsttheEUR...... 5 43 IftheUSDstrengthensagainsttheEUR...... (5) (43)
30 June 2020
IftheUSDweakensagainsttheRMB...... 5 (150) IftheUSDstrengthensagainsttheRMB...... (5) 150 IftheUSDweakensagainsttheHKD...... 5 21 IftheUSDstrengthensagainsttheHKD...... (5) (21) IftheUSDweakensagainsttheEUR...... 5 46 IftheUSDstrengthensagainsttheEUR...... (5) (46)
Credit risk
The carrying amounts of cash and cash equivalents, trade receivables, financial assets included in prepayments, other receivables and other assets included in the consolidated statements of financial position represent the Group’s maximum exposure to credit risk in relation to its financial assets as at the end of each of the Relevant Periods.
All cash and cash equivalents were deposited in high quality financial institutions without significant credit risk.
The Group groups financial instruments on basis of shared credit risk characteristics, such as instrument type and credit risk rating for the purpose of determining significant increases in credit risk and calculation of impairment. To manage risk arising from trade receivables, the Group has policies in place to ensure that credit terms are made only to counterparties with an appropriate credit history and the management performs ongoing credit evaluations of the Group’s counterparties. The credit period granted to the customers is generally from 30 to 60 days and the credit quality of these customers is assessed, taking into account their financial position, past
– I-76 – APPENDIX I ACCOUNTANTS’ REPORT
experience and other factors. The Group also has other monitoring procedures to ensure that follow-up action is taken to recover overdue receivables. In addition, the Group reviews regularly the recoverable amount of trade receivables to ensure that adequate impairment losses are made for irrecoverable amounts.
The Group applies the simplified approach in calculating ECLs prescribed by HKFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. The expected credit losses also incorporated forward looking information based on key economic variables.
A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired includes observable data about the following events:
. significant financial difficulty of the debtor;
. a breach of contract such as a default or past due event;
. it is probable that the debtor will enter bankruptcy or other financial reorganisation;
The Group has established a policy to perform an assessment of whether a financial instrument’screditrisk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. The Group groups its receivables except for trade receivables into Stage 1, Stage 2 and Stage 3, as described below:
Stage 1 When receivables except for trade receivables are first recognised, the Group recognises an allowance based on 12 months’ ECLs.
Stage 2 When receivables except for trade receivables have shown a significant increase in credit risk since origination, the Group records an allowance for the lifetime ECLs.
Stage 3 When receivables except for trade receivables are considered credit-impaired, the Group records an allowance for the lifetime ECLs.
The credit quality of the financial assets included in prepayments, other receivables and other assets is considered to be ‘‘normal’’ when they are not past due and there is no information indicating that the financial assets had a significant increase in credit risk since initial recognition. The Group classified financial assets included in prepayments, other receivables and other assets in Stage 1 and continuously monitored their credit risk. The directors of the Company believe that there is no material credit risk inherent in the Group’s outstanding balance of financial assets included in prepayments, other receivables and other assets. At the end of each of the Relevant Periods, the Group had certain concentrations of credit risk as 71.47%, 97.35%, 97.98% and 90.84% of the Group’s trade receivables were due from the Group’s largest customer.
Liquidity risk
The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of interest-bearing bank borrowings to meet its working capital requirements.
– I-77 – APPENDIX I ACCOUNTANTS’ REPORT
The maturity profile of the Group’s financial liabilities as at the end of each of the Relevant Periods, based on the contractual undiscounted payments, is as follows:
31 December 2017 On Less than 3to 1to Over demand 3months 12 months 3 years 3 years Total US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Tradepayables...... 3,356 6,670 ———10,026 Interest-bearing bank andotherborrowings...... — 2,735 2,009 4,163 — 8,907 Financial liabilities included in other payables and accruals...... 440 ————440 Duetodirectors...... 3,838 ————3,838 Lease liabilities ...... — 282 842 1,578 365 3,067
7,634 9,687 2,851 5,741 365 26,278
31 December 2018 On Less than 3to 1to Over demand 3months 12 months 3 years 3 years Total US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Tradepayables...... 824 7,377 ———8,201 Interest-bearing bank andotherborrowings...... — 1,511 13,332 11 — 14,854 Financial liabilities included in other payables and accruals...... 1,044 ————1,044 Duetodirectors...... 4,352 ————4,352 Duetoarelatedparty...... 976 ————976 Lease liabilities ...... — 392 907 1,807 343 3,449
7,196 9,280 14,239 1,818 343 32,876
31 December 2019 On Less than 3to 1to Over demand 3months 12 months 3 years 3 years Total US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Tradepayables...... 1,408 18,010 ———19,418 Interest-bearing bank andotherborrowings...... — 155 19,145 ——19,300 Financial liabilities included in other payables and accruals...... 716 ————716 Duetodirectors...... 7,868 ————7,868 Duetoarelatedparty...... 1,032 ————1,032 Lease liabilities ...... — 458 1,526 3,649 3,876 9,509
11,024 18,623 20,671 3,649 3,876 57,843
– I-78 – APPENDIX I ACCOUNTANTS’ REPORT
30 June 2020 On Less than 3to 1to Over demand 3months 12 months 3 years 3 years Total US$’000 US$’000 US$’000 US$’000 US$’000 US$’000
Tradepayables...... 3,159 28,874 ———32,033 Interest-bearing bank andotherborrowings...... — 108 4,606 1,696 — 6,410 Financial liabilities included in other payables and accruals...... 2,513 ————2,513 Lease liabilities ...... — 635 1,909 5,966 5,183 13,693
5,672 29,617 6,515 7,662 5,183 54,649
Capital management
The primary objectives of the Group’s capital management are to safeguard the Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholders’ value.
The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Group is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.
The Group monitors capital using a gearing ratio, which is total debt divided by total equity. Total debt includes interest-bearing bank and other borrowings, trade payables, other payables and accruals, lease liabilities and amounts due to directors and a related party, less cash and cash equivalents and pledged deposits. The gearing ratios as at the end of each of the Relevant Periods were as follows:
As at 31 December As at 30 June 2017 2018 2019 2020 US$’000 US$’000 US$’000 US$’000
Tradepayables...... 10,026 8,201 19,418 32,033 Interest-bearing bank and other borrowings...... 8,210 14,008 18,354 6,289 Other payables and accruals . . 4,298 10,157 14,367 9,013 Duetodirectors...... 3,838 4,352 7,868 — Duetoarelatedparty...... — 976 1,032 — Lease liabilities ...... 2,839 3,214 8,302 11,762 Less: Cash and cash equivalents (2,843) (9,856) (9,115) (15,045) Pledgeddeposits...... ——(588) (632)
Netdebt...... 26,368 31,052 59,638 43,420
Equity attributable to owners of theparent...... 5,161 8,364 16,394 34,129
Total capital and net debt . . . . 31,529 39,416 76,032 77,549
Gearingratio...... 84% 79% 78% 56%
– I-79 – APPENDIX I ACCOUNTANTS’ REPORT
37. EVENTS AFTER THE RELEVANT PERIODS
On 1 November 2020, the Company granted 10,000 shares to Ms. Jiang Junxiu under the Pre-IPO Share Award Scheme and BOCT transferred 10,000 shares, all fully paid at par, to Gongjin BVI, an investment holding vehicle of Ms. Jiang Junxiu. Following the aforesaid transfer, Ms. Jiang Junxiu was interested in 1.9080% equity interest in the Company.
On 1 December, 2020, the Company increased its authorised share capital from HK$380,000 divided into 38,000,000 shares to HK$20,000,000 divided into 2,000,000,000 shares with a par value of HK$0.01 each by the creation of an additional 1,962,000,000 shares.
38. SUBSEQUENT FINANCIAL STATEMENTS
No audited financial statements have been prepared by the Company, the Group or any of the companies now comprising the Group in respect of any period subsequent to 30 June 2020.
– I-80 – APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following information does not form part of the Accountants’ Report from Ernst & Young, Certified Public Accountants, Hong Kong, the Company’s reporting accountants, as set out in Appendix I to this prospectus, and is included herein for information purposes only. The unaudited pro forma financial information should be read in conjunction with ‘‘Financial Information’’ and the Accountants’ Report set out in Appendix I to this prospectus.
A. UNAUDITED PRO FORMA ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS
The following unaudited pro forma adjusted consolidated net tangible assets of the Group have been prepared in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited and with reference to Accounting Guideline 7 ‘‘Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars’’ issued by the Hong Kong Institute of Certified Public Accountants for illustration purposes only, and is set out here to illustrate the effect of the Global Offering on the consolidated net tangible assets of the Group attributable to owners of the Company as at 30 June 2020 as if Global Offering had taken place on 30 June 2020.
The unaudited pro forma adjusted consolidated net tangible assets attributable to the owners of the Company has been prepared for illustrative purposes only and because of its hypothetical nature, it may not give a true picture of the financial position of the Group had the Global Offering been completed as at 30 June 2020 or any future date. It is prepared based on the consolidated net tangible assets attributable to the owners of the Company as at 30 June 2020 as set out in the Accountants’ Report as set out in Appendix I to this prospectus, and adjusted as described below. The unaudited pro forma adjusted consolidated net tangible assets attributable to the owners of the Company does not form part of the Accountants’ Report as set out in Appendix I to this prospectus.
Unaudited pro forma adjusted consolidated Consolidated net net tangible Unaudited pro forma tangible assets assets adjusted consolidated net attributable to Estimated net attributable to tangible assets attributable owners of proceeds from owners of the to owners of the Company the parent as at the Global Company as at per Share as at 30 June 2020 Offering 30 June 2020 30 June 2020 US$’000 US$’000 US$’000 US$ HK$ equivalent (Note 1) (Note 2) (Note 3) (Note 4)
BasedonanOfferPriceof HK$4.68 per Share 33,978 160,519 194,497 0.17 1.32
BasedonanOfferPriceof HK$5.52 per Share 33,978 190,053 224,031 0.20 1.55
– II-1 – APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
Notes:
(1) The consolidated net tangible assets attributable to owners of the parent as at 30 June 2020 is arrived at after deducting other intangible assets of US$151,000 from the consolidated equity attributable to owners of the parent of US$34,129,000 as at 30 June 2020, as shown in the Accountants’ Report, the text of which is set out in Appendix I to this Prospectus.
(2) The estimated net proceeds from the Global Offering are based on the Offer Price of HK$4.68 per Share or HK$5.52 per Share, being the low-end price and high-end price, after deduction of the underwriting fees and related expenses payable by the Company and do not take into account any Shares which may be issued upon exercise of the Over-allotment Option.
(3) The unaudited pro forma adjusted consolidated net tangible assets attributable to owners of the Company per Share is calculated based on 1,123,104,800 Shares in issue immediately following the completion of the Global Offering without taking into account any Shares which may be issued upon exercise of the Over- allotment Option or any option which may be granted under the Share Option Scheme or any Shares which may be allotted and issued or repurchased under the general mandates for the allotment and issue or repurchase of the Shares as described in ‘‘Appendix IV—Statutory and General Information’’.
(4) The unaudited pro forma adjusted consolidated net tangible assets attributable to owners of the Company per Share is converted into Hong Kong dollars at an exchange rate of HK$7.7525 to US$1.00.
(5) No adjustment has been made to reflect any trading results or other transactions entered into by our Group subsequent to 30 June 2020.
– II-2 – APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following is the text of a report received from our reporting accountants, Ernst & Young, Certified Public Accountants, Hong Kong, prepared for the purposes of incorporation in this prospectus, in respect of the pro forma financial information of the Group.
B. INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE COMPILATION OF PRO FORMA FINANCIAL INFORMATION
To the Directors of Vesync Co., Ltd
We have completed our assurance engagement to report on the compilation of pro forma financial information of Vesync Co., Ltd (the ‘‘Company’’) and its subsidiaries (hereinafter collectively referred to as the ‘‘Group’’) by the directors of the Company (the ‘‘Directors’’)for illustrative purposes only. The pro forma financial information consists of the pro forma consolidated net tangible assets as at 30 June 2020, and related notes as set out on pages II-1 to II- 2 of the prospectus dated 8 December 2020 issued by the Company (the ‘‘Pro Forma Financial Information’’). The applicable criteria on the basis of which the Directors have compiled the Pro Forma Financial Information are described in Appendix II(A) to the prospectus.
The Pro Forma Financial Information has been compiled by the Directors to illustrate the impact of the global offering of shares of the Company on the Group’s financial position as at 30 June 2020 as if the transaction had taken place at 30 June 2020. As part of this process, information about the Group’s financial position, has been extracted by the Directors from the Group’s financial statements for the period ended 30 June 2020, on which an accountants’ report has been published.
Directors’ responsibility for the Pro Forma Financial Information
The Directors are responsible for compiling the Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’) and with reference to Accounting Guideline (‘‘AG’’)7Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants (the ‘‘HKICPA’’).
– II-3 – APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
Our independence and quality control
We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the HKICPA, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.
Our firm applies Hong Kong Standard on Quality Control 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements, and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.
Reporting accountants’ responsibilities
Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.
We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus issued by the HKICPA. This standard requires that the reporting accountants plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the Pro Forma Financial Information in accordance with paragraph 4.29 of the Listing Rules and with reference to AG 7 issued by the HKICPA.
For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the Pro Forma Financial Information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the Pro Forma Financial Information.
The purpose of the Pro Forma Financial Information included in the Prospectus is solely to illustrate the impact of the global offering of shares of the Company on unadjusted financial information of the Group as if the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the transaction would have been as presented.
– II-4 – APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION
A reasonable assurance engagement to report on whether the Pro Forma Financial Information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the compilation of the Pro Forma Financial Information provide a reasonable basis for presenting the significant effects directly attributable to the transaction, and to obtain sufficient appropriate evidence about whether:
. the related pro forma adjustments give appropriate effect to those criteria; and
. the Pro Forma Financial Information reflects the proper application of those adjustments to the unadjusted financial information.
The procedures selected depend on the reporting accountants’ judgment, having regard to the reporting accountants’ understanding of the nature of the Group, the transaction in respect of which the Pro Forma Financial Information has been compiled, and other relevant engagement circumstances.
The engagement also involves evaluating the overall presentation of the Pro Forma Financial Information.
We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion:
(a) the Pro Forma Financial Information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purpose of the Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.
Yours faithfully,
Ernst & Young Certified Public Accountants Hong Kong
8 December 2020
– II-5 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
Set out below is a summary of certain provisions of the Memorandum and Articles of Association of the Company and of certain aspects of Cayman company law.
The Company was incorporated in the Cayman Islands as an exempted company with limited liability on January 9, 2019 under the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands (the ‘‘Companies Law’’). The Company’s constitutional documents consist of its Amended and Restated Memorandum of Association (the ‘‘Memorandum’’)andits Amended and Restated Articles of Association (the ‘‘Articles’’).
1. MEMORANDUM OF ASSOCIATION
(a) The Memorandum states, inter alia, that the liability of members of the Company is limited to the amount, if any, for the time being unpaid on the shares respectively held by them and that the objects for which the Company is established are unrestricted (including acting as an investment company), and that the Company shall have and be capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit, as provided in section 27(2) of the Companies Law and in view of the fact that the Company is an exempted company that the Company will not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands.
(b) The Company may by special resolution alter its Memorandum with respect to any objects, powers or other matters specified therein.
2. ARTICLES OF ASSOCIATION
The Articles were conditionally adopted on December 1, 2020 with effect from the Listing Date. The following is a summary of certain provisions of the Articles:
(a) Shares
(i) Classes of shares
The share capital of the Company consists of ordinary shares.
(ii) Variation of rights of existing shares or classes of shares
Subject to the Companies Law, if at any time the share capital of the Company is divided into different classes of shares, all or any of the special rights attached to the shares or any class of shares may (unless otherwise provided for by the terms of issue of that class) be varied, modified or abrogated either with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class. To every such separate general meeting the provisions of the Articles relating to general meetings will mutatis mutandis apply, but so that the
– III-1 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
necessary quorum (other than at an adjourned meeting) shall be two persons holding or representing by proxy not less than one-third in nominal value of the issued shares of that class and at any adjourned meeting two holders present in person or by proxy (whatever the number of shares held by them) shall be a quorum. Every holder of shares of the class shall be entitled to one vote for every such share held by him.
Any special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to the terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
(iii) Alteration of capital
The Company may by ordinary resolution of its members:
(i) increase its share capital by the creation of new shares;
(ii) consolidate all or any of its capital into shares of larger amount than its existing shares;
(iii) divide its shares into several classes and attach to such shares any preferential, deferred, qualified or special rights, privileges, conditions or restrictions as the Company in general meeting or as the directors may determine;
(iv) subdivide its shares or any of them into shares of smaller amount than is fixed by the Memorandum; or
(v) cancel any shares which, at the date of passing of the resolution, have not been taken and diminish the amount of its capital by the amount of the shares so canceled.
The Company may reduce its share capital or any capital redemption reserve or other undistributable reserve in any way by special resolution.
(iv) Transfer of shares
All transfers of shares may be effected by an instrument of transfer in the usual or common form or in a form prescribed by The Stock Exchange of Hong Kong Limited (the ‘‘Stock Exchange’’) or in such other form as the board may approve and which may be under hand or, if the transferor or transferee is a clearing house or its nominee(s), by hand or by machine imprinted signature or by such other manner of execution as the board may approve from time to time.
– III-2 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
Notwithstanding the foregoing, for so long as any shares are listed on the Stock Exchange, titles to such listed shares may be evidenced and transferred in accordance with the laws applicable to and the rules and regulations of the Stock Exchange that are or shall be applicable to such listed shares. The register of members in respect of its listed shares (whether the principal register or a branch register) may be kept by recording the particulars required by Section 40 of the Companies Law in a form otherwise than legible if such recording otherwise complies with the laws applicable to and the rules and regulations of the Stock Exchange that are or shall be applicable to such listed shares.
The instrument of transfer shall be executed by or on behalf of the transferor and the transferee provided that the board may dispense with the execution of the instrument of transfer by the transferee. The transferor shall be deemed to remain the holder of the share until the name of the transferee is entered in the register of members in respect of that share.
The board may, in its absolute discretion, at any time transfer any share upon the principal register to any branch register or any share on any branch register to the principal register or any other branch register.
The board may decline to recognize any instrument of transfer unless a fee (not exceeding the maximum sum as the Stock Exchange may determine to be payable) determined by the Directors is paid to the Company, the instrument of transfer is properly stamped (if applicable), it is in respect of only one class of share and is lodged at the relevant registration office or registered office or such other place at which the principal register is kept accompanied by the relevant share certificate(s) and such other evidence as the board may reasonably require to show the right of the transferor to make the transfer (and if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do).
The registration of transfers may be suspended and the register closed on giving notice by advertisement in any newspaper or by any other means in accordance with the requirements of the Stock Exchange, at such times and for such periods as the board may determine. The register of members must not be closed for periods exceeding in the whole thirty (30) days in any year.
Subject to the above, fully paid shares are free from any restriction on transfer and free of all liens in favor of the Company.
– III-3 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
(v) Power of the Company to purchase its own shares
The Company is empowered by the Companies Law and the Articles to purchase its own shares subject to certain restrictions and the board may only exercise this power on behalf of the Company subject to any applicable requirements imposed from time to time by the Stock Exchange.
Where the Company purchases for redemption a redeemable share, purchases not made through the market or by tender must be limited to a maximum price determined by the Company in general meeting. If purchases are by tender, tenders must be made available to all members alike.
The board may accept the surrender for no consideration of any fully paid share.
(vi) Power of any subsidiary of the Company to own shares in the Company
There are no provisions in the Articles relating to ownership of shares in the Companybyasubsidiary.
(vii) Calls on shares and forfeiture of shares
The board may from time to time make such calls upon the members in respect of any monies unpaid on the shares held by them respectively (whether on account of the nominal value of the shares or by way of premium). A call may be made payable either in one lump sum or by installments. If the sum payable in respect of any call or installment is not paid on or before the day appointed for payment thereof, the person or persons from whom the sum is due shall pay interest on the same at such rate not exceeding twenty per cent. (20%) per annum as the board may agree to accept from the day appointed for the payment thereof to the time of actual payment, but the board may waive payment of such interest wholly or in part. The board may, if it thinks fit, receive from any member willing to advance the same, either in money or money’sworth,allor any part of the monies uncalled and unpaid or installments payable upon any shares held by him, and upon all or any of the monies so advanced the Company may pay interest at such rate (if any) as the board may decide.
If a member fails to pay any call on the day appointed for payment thereof, the board may serve not less than fourteen (14) clear days’ notice on him requiring payment of so much of the call as is unpaid, together with any interest which may have accrued and which may still accrue up to the date of actual payment and stating that, in the event of non-payment at or before the time appointed, the shares in respect of which the call wasmadewillbeliabletobeforfeited.
– III-4 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
If the requirements of any such notice are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the board to that effect. Such forfeiture will include all dividends and bonuses declared in respect of the forfeited share and not actually paid before the forfeiture.
A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares but shall, notwithstanding, remain liable to pay to the Company all monies which, at the date of forfeiture, were payable by him to the Company in respect of the shares, together with (if the board shall in its discretion so require) interest thereon from the date of forfeiture until the date of actual payment at such rate not exceeding twenty per cent. (20%) per annum as the board determines.
(b) Directors
(i) Appointment, retirement and removal
At each annual general meeting, one third of the Directors for the time being (or if their number is not a multiple of three, then the number nearest to but not less than one third) shall retire from office by rotation provided that every Director shall be subject to retirement at an annual general meeting at least once every three years. The Directors to retire by rotation shall include any Director who wishes to retire and not offer himself for re-election. Any further Directors so to retire shall be those who have been longest in office since their last re-election or appointment but as between persons who became or were last re-elected Directors on the same day those to retire will (unless they otherwise agree among themselves) be determined by lot.
Neither a Director nor an alternate Director is required to hold any shares in the Company by way of qualification. Further, there are no provisions in the Articles relating to retirement of Directors upon reaching any age limit.
The Directors have the power to appoint any person as a Director either to fill a casual vacancy on the board or as an addition to the existing board. Any Director appointed to fill a casual vacancy shall hold office until the first general meeting of members after his appointment and be subject to re-election at such meeting and any Director appointed as an addition to the existing board shall hold office only until the next following annual general meeting of the Company and shall then be eligible for re- election.
A Director may be removed by an ordinary resolution of the Company before the expiration of his period of office (but without prejudice to any claim which such Director may have for damages for any breach of any contract between him and the Company)
– III-5 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
and members of the Company may by ordinary resolution appoint another in his place. Unless otherwise determined by the Company in general meeting, the number of Directors shall not be less than two. There is no maximum number of Directors.
The office of director shall be vacated if:
(aa) he resigns by notice in writing delivered to the Company;
(bb) he becomes of unsound mind or dies;
(cc) without special leave, he is absent from meetings of the board for six (6) consecutive months, and the board resolves that his office is vacated;
(dd) he becomes bankrupt or has a receiving order made against him or suspends payment or compounds with his creditors;
(ee) he is prohibited from being a director by law; or
(ff) he ceases to be a director by virtue of any provision of law or is removed from office pursuant to the Articles.
The board may appoint one or more of its body to be managing director, joint managing director, or deputy managing director or to hold any other employment or executive office with the Company for such period and upon such terms as the board may determine and the board may revoke or terminate any of such appointments. The board may delegate any of its powers, authorities and discretions to committees consisting of such Director or Directors and other persons as the board thinks fit, and it may from time to time revoke such delegation or revoke the appointment of and discharge any such committees either wholly or in part, and either as to persons or purposes, but every committee so formed must, in the exercise of the powers, authorities and discretions so delegated, conform to any regulations that may from time to time be imposeduponitbytheboard.
(ii) Power to allot and issue shares and warrants
Subject to the provisions of the Companies Law and the Memorandum and Articles and to any special rights conferred on the holders of any shares or class of shares, any share may be issued (a) with or have attached thereto such rights, or such restrictions, whether with regard to dividend, voting, return of capital, or otherwise, as the Directors may determine, or (b) on terms that, at the option of the Company or the holder thereof, it is liable to be redeemed.
The board may issue warrants or convertible securities or securities of similar nature conferring the right upon the holders thereof to subscribe for any class of shares or securities in the capital of the Company on such terms as it may determine.
– III-6 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
Subject to the provisions of the Companies Law and the Articles and, where applicable, the rules of the Stock Exchange and without prejudice to any special rights or restrictions for the time being attached to any shares or any class of shares, all unissued shares in the Company are at the disposal of the board, which may offer, allot, grant options over or otherwise dispose of them to such persons, at such times, for such consideration and on such terms and conditions as it in its absolute discretion thinks fit, but so that no shares shall be issued at a discount to their nominal value.
Neither the Company nor the board is obliged, when making or granting any allotment of, offer of, option over or disposal of shares, to make, or make available, any such allotment, offer, option or shares to members or others with registered addresses in any particular territory or territories being a territory or territories where, in the absence of a registration statement or other special formalities, this would or might, in the opinion of the board, be unlawful or impracticable. Members affected as a result of the foregoing sentence shall not be, or be deemed to be, a separate class of members for any purpose whatsoever.
(iii) Power to dispose of the assets of the Company or any of its subsidiaries
There are no specific provisions in the Articles relating to the disposal of the assets of the Company or any of its subsidiaries. The Directors may, however, exercise all powers and do all acts and things which may be exercised or done or approved by the Company and which are not required by the Articles or the Companies Law to be exercised or done by the Company in general meeting.
(iv) Borrowing powers
The board may exercise all the powers of the Company to raise or borrow money, to mortgage or charge all or any part of the undertaking, property and assets and uncalled capital of the Company and, subject to the Companies Law, to issue debentures, bonds and other securities of the Company, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.
(v) Remuneration
The ordinary remuneration of the DirectorsistobedeterminedbytheCompanyin general meeting, such sum (unless otherwise directed by the resolution by which it is voted) to be divided amongst the Directors in such proportions and in such manner as the board may agree or, failing agreement, equally, except that any Director holding office for part only of the period in respect of which the remuneration is payable shall only rank in such division in proportion to the time during such period for which he held office. The Directors are also entitled to be prepaid or repaid all traveling, hotel and incidental expenses reasonably expected to be incurred or incurred by them in attending
– III-7 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
any board meetings, committee meetings or general meetings or separate meetings of any class of shares or of debentures of the Company or otherwise in connection with the discharge of their duties as Directors.
Any Director who, by request, goes or resides abroad for any purpose of the Company or who performs services which in the opinion of the board go beyond the ordinary duties of a Director may be paid such extra remuneration as the board may determine and such extra remuneration shall be in addition to or in substitution for any ordinary remuneration as a Director. An executive Director appointed to be a managing director, joint managing director, deputy managing director or other executive officer shall receive such remuneration and such other benefits and allowances as the board may from time to time decide. Such remuneration may be either in addition to or in lieu of his remuneration as a Director.
The board may establish or concur or join with other companies (being subsidiary companies of the Company or companies with which it is associated in business) in establishing and making contributions out of the Company’smoniestoanyschemesor funds for providing pensions, sickness or compassionate allowances, life assurance or other benefits for employees (which expression as used in this and the following paragraph shall include any Director or past Director who may hold or have held any executive office or any office of profit with the Company or any of its subsidiaries) and ex-employees of the Company and their dependents or any class or classes of such persons.
The board may pay, enter into agreements to pay or make grants of revocable or irrevocable, and either subject or not subject to any terms or conditions, pensions or other benefits to employees and ex-employees and their dependents, or to any of such persons, including pensions or benefits additional to those, if any, to which such employees or ex-employees or their dependents are or may become entitled under any such scheme or fund as is mentioned in the previous paragraph. Any such pension or benefit may, as the board considers desirable, be granted to an employee either before and in anticipation of, or upon or at any time after, his actual retirement.
The board may resolve to capitalize all or any part of any amount for the time being standing to the credit of any reserve or fund (including a share premium account and the profit and loss account) whether or not the same is available for distribution by applying suchsuminpayingupunissuedsharestobeallottedto(i)employees(including directors) of the Company and/or its affiliates (meaning any individual, corporation, partnership, association, joint-stock company, trust, unincorporated association or other entity (other than the Company) that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, the Company) upon exercise or vesting of any options or awards granted under any share incentive scheme or employee benefit scheme or other arrangement which relates to such persons
– III-8 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
that has been adopted or approved by the members in general meeting, or (ii) any trustee of any trust to whom shares are to be allotted and issued by the Company in connection with the operation of any share incentive scheme or employee benefit scheme or other arrangement which relates to such persons that has been adopted or approved by the members in general meeting.
(vi) Compensation or payments for loss of office
Pursuant to the Articles, payments to any Director or past Director of any sum by way of compensation for loss of office or as consideration for or in connection with his retirement from office (not being a payment to which the Director is contractually entitled) must be approved by the Company in general meeting.
(vii) Loans and provision of security for loans to Directors
The Company must not make any loan, directly or indirectly, to a Director or his close associate(s) if and to the extent it would be prohibited by the Companies Ordinance (Chapter 622 of the laws of Hong Kong) as if the Company were a company incorporated in Hong Kong.
(viii) Disclosure of interests in contracts with the Company or any of its subsidiaries
A Director may hold any other office or place of profit with the Company (except that of the auditor of the Company) in conjunction with his office of Director for such period and upon such terms as the board may determine, and may be paid such extra remuneration therefor in addition to any remuneration provided for by or pursuant to the Articles. A Director may be or become a director or other officer of, or otherwise interested in, any company promoted by the Company or any other company in which the Company may be interested, and shall not be liable to account to the Company or the members for any remuneration, profits or other benefits received by him as a director, officer or member of, or from his interest in, such other company. The board may also cause the voting power conferred by the shares in any other company held or owned by the Company to be exercised in such manner in all respects as it thinks fit, including the exercise thereof in favor of any resolution appointing the Directors or any of them to be directors or officers of such other company, or voting or providing for the payment of remuneration to the directors or officers of such other company.
No Director or proposed or intended Director shall be disqualified by his office from contracting with the Company, either with regard to his tenure of any office or place of profit or as vendor, purchaser or in any other manner whatsoever, nor shall any such contract or any other contract or arrangement in which any Director is in any way interested be liable to be avoided, nor shall any Director so contracting or being so interested be liable to account to the Company or the members for any remuneration, profit or other benefits realized by any such contract or arrangement by reason of such
– III-9 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
Director holding that office or the fiduciary relationship thereby established. A Director who to his knowledge is in any way, whether directly or indirectly, interested in a contract or arrangement or proposed contract or arrangement with the Company must declare the nature of his interest at the meeting of the board at which the question of entering into the contract or arrangement is first taken into consideration, if he knows his interest then exists, or in any other case, at the first meeting of the board after he knows that he is or has become so interested.
A Director shall not vote (nor be counted in the quorum) on any resolution of the board approving any contract or arrangement or other proposal in which he or any of his close associates is materially interested, but this prohibition does not apply to any of the following matters, namely:
(aa) any contract or arrangement for giving to such Director or his close associate(s) any security or indemnity in respect of money lent by him or any of his close associates or obligations incurred or undertaken by him or any of his close associates at the request of or for the benefit of the Company or any of its subsidiaries;
(bb) any contract or arrangement for the giving of any security or indemnity to a third party in respect of a debt or obligation of the Company or any of its subsidiaries for which the Director or his close associate(s) has himself/ themselves assumed responsibility in whole or in part whether alone or jointly under a guarantee or indemnity or by the giving of security;
(cc) any contract or arrangement concerning an offer of shares or debentures or other securities of or by the Company or any other company which the Company may promote or be interested in for subscription or purchase, where the Director or his close associate(s) is/are or is/are to be interested as a participant in the underwriting or sub-underwriting of the offer;
(dd) any contract or arrangement in which the Director or his close associate(s) is/ are interested in the same manner as other holders of shares or debentures or other securities of the Company by virtue only of his/their interest in shares or debentures or other securities of the Company; or
(ee) any proposal or arrangement concerning the adoption, modification or operation of a share option scheme, a pension fund or retirement, death, or disability benefits scheme or other arrangement which relates both to Directors, his close associates and employees of the Company or of any of its subsidiaries and does not provide in respect of any Director, or his close associate(s), as such any privilege or advantage not accorded generally to the class of persons to which such scheme or fund relates.
– III-10 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
(c) Proceedings of the Board
The board may meet for the despatch of business, adjourn and otherwise regulate its meetings as it considers appropriate. Questions arising at any meeting shall be determined by a majority of votes. In the case of an equality of votes, the chairman of the meeting shall have an additional or casting vote.
(d) Alterations to constitutional documents and the Company’sname
The Articles may be rescinded, altered or amended by the Company in general meeting by special resolution. The Articles state that a special resolution shall be required to alter the provisions of the Memorandum, to amend the Articles or to change the name of the Company.
(e) Meetings of members
(i) Special and ordinary resolutions
A special resolution of the Company must be passed by a majority of not less than three-fourths of the votes cast by such members as, being entitled so to do, vote in person or, in the case of such members as are corporations, by their duly authorized representatives or, where proxies are allowed, by proxy at a general meeting of which notice has been duly given in accordance with the Articles.
Under the Companies Law, a copy of any special resolution must be forwarded to the Registrar of Companies in the Cayman Islands within fifteen (15) days of being passed.
An ordinary resolution is defined in the Articles to mean a resolution passed by a simple majority of the votes of such members of the Company as, being entitled to do so, vote in person or, in the case of corporations, by their duly authorized representatives or, where proxies are allowed, by proxy at a general meeting of which notice has been duly given in accordance with the Articles.
(ii) Voting rights and right to demand a poll
Subject to any special rights or restrictions as to voting for the time being attached to any shares, at any general meeting on a poll every member present in person or by proxy or, in the case of a member being a corporation, by its duly authorized representative shall have one vote for every fully paid share of which he is the holder but so that no amount paid up or credited as paid up on a share in advance of calls or installments is treated for the foregoing purposes as paid up on the share. A member entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way.
– III-11 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
At any general meeting a resolution put to the vote of the meeting is to be decided by way of a poll save that the chairman of the meeting may in good faith, allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands in which case every member present in person (or being a corporation, is present by a duly authorized representative), or by proxy(ies) shall have one vote provided that where more than one proxy is appointed by a member which is a clearing house (or its nominee(s)), each such proxy shall have one vote on a show of hands.
If a recognized clearing house (or its nominee(s)) is a member of the Company it may authorize such person or persons as it thinks fit to act as its representative(s) at any meeting of the Company or at any meeting of any class of members of the Company provided that, if more than one person is so authorized, the authorization shall specify the number and class of shares in respect of which each such person is so authorized. A person authorized pursuant to this provision shall be deemed to have been duly authorized without further evidence of the facts and be entitled to exercise the same powers on behalf of the recognized clearing house (or its nominee(s)) as if such person was the registered holder of the shares of the Company held by that clearing house (or its nominee(s)) including, where a show of hands is allowed, the right to vote individually on a show of hands.
Where the Company has any knowledge that any shareholder is, under the rules of the Stock Exchange, required to abstain from voting on any particular resolution of the Company or restricted to voting only for or only against any particular resolution of the Company, any votes cast by or on behalf of such shareholder in contravention of such requirement or restriction shall not be counted.
(iii) Annual general meetings and extraordinary general meetings
The Company must hold an annual general meeting of the Company every year within a period of not more than fifteen (15) months after the holding of the last preceding annual general meeting or a period of not more than eighteen (18) months from the date of adoption of the Articles, unless a longer period would not infringe the rules of the Stock Exchange.
Extraordinary general meetings may be convened on the requisition of one or more shareholders holding, at the date of deposit of the requisition, not less than one-tenth of the paid up capital of the Company having the right of voting at general meetings. Such requisition shall be made in writing to the board or the secretary for the purpose of requiring an extraordinary general meeting to be called by the board for the transaction of any business specified in such requisition. Such meeting shall be held within 2 months after the deposit of such requisition. If within 21 days of such deposit, the board fails to proceed to convene such meeting, the requisitionist(s) himself/herself (themselves) may
– III-12 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
do so in the same manner, and all reasonable expenses incurred by the requisitionist(s) as a result of the failure of the board shall be reimbursed to the requisitionist(s) by the Company.
(iv) Notices of meetings and business to be conducted
An annual general meeting must be called by notice of not less than twenty-one (21) clear days and not less than twenty (20) clear business days. All other general meetings must be called by notice of at least fourteen (14) clear days and not less than ten (10) clear business days. The notice is exclusive of the day on which it is served or deemed to be served and of the day for which it is given, and must specify the time and place of the meeting and particulars of resolutions to be considered at the meeting and, in the case of special business, the general nature of that business.
In addition, notice of every general meeting must be given to all members of the Company other than to such members as, under the provisions of the Articles or the terms of issue of the shares they hold, are not entitled to receive such notices from the Company, and also to, among others, the auditors for the time being of the Company.
Any notice to be given to or by any person pursuant to the Articles may be served on or delivered to any member of the Company personally, by post to such member’s registered address or by advertisement in newspapers in accordance with the requirements of the Stock Exchange. Subject to compliance with Cayman Islands law and the rules of the Stock Exchange, notice may also be served or delivered by the Company to any member by electronic means.
All business that is transacted at an extraordinary general meeting and at an annual general meeting is deemed special, save that in the case of an annual general meeting, each of the following business is deemed an ordinary business:
(aa) the declaration and sanctioning of dividends;
(bb) the consideration and adoption of the accounts and balance sheet and the reports of the directors and the auditors;
(cc) the election of directors in place of those retiring;
(dd) the appointment of auditors and other officers; and
(ee) the fixing of the remuneration of the directors and of the auditors.
– III-13 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
(v) Quorum for meetings and separate class meetings
No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the appointment of a chairman.
The quorum for a general meeting shall be two members present in person (or, in the case of a member being a corporation, by its duly authorized representative) or by proxy and entitled to vote. In respect of a separate class meeting (other than an adjourned meeting) convened to sanction the modification of class rights the necessary quorum shall be two persons holding or representing by proxy not less than one-third in nominal value of the issued shares of that class.
(vi) Proxies
Any member of the Company entitled to attend and vote at a meeting of the Company is entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting. A proxy need not be a member of the Company and is entitled to exercise the same powers on behalf of a member who is an individual and for whom he acts as proxy as such member could exercise. In addition, a proxy is entitled to exercise the same powers on behalf of a member which is a corporation and for which he acts as proxy as such member could exercise as if it were an individual member. Votes may be given either personally (or, in the case of a member being a corporation, by its duly authorized representative) or by proxy.
(f) Accounts and audit
The board shall cause true accounts to be kept of the sums of money received and expended by the Company, and the matters in respect of which such receipt and expenditure take place, and of the property, assets, credits and liabilities of the Company and of all other matters required by the Companies Law or necessary to give a true and fair view of the Company’s affairs and to explain its transactions.
The accounting records must be kept at the registered office or at such other place or places as the board decides and shall always be open to inspection by any Director. No member (other than a Director) shall have any right to inspect any accounting record or book or document of the Company except as conferred by law or authorized by the board or the Company in general meeting. However, an exempted company must make available at its registered office in electronic form or any other medium, copies of its books of account or parts thereof as may be required of it upon service of an order or notice by the Tax Information Authority pursuant to the Tax Information Authority Law of the Cayman Islands.
– III-14 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
A copy of every balance sheet and profit and loss account (including every document required by law to be annexed thereto) which is to be laid before the Company at its general meeting, together with a printed copy of the Directors’ report and a copy of the auditors’ report, shall not less than twenty-one (21) days before the date of the meeting and at the same time as the notice of annual general meeting be sent to every person entitled to receive notices of general meetings of the Company under the provisions of the Articles; however, subject to compliance with all applicable laws, including the rules of the Stock Exchange, the Company may send to such persons summarized financial statements derived from the Company’s annual accounts and the directors’ report instead provided that any such person may by notice in writing served on the Company, demand that the Company sends to him, in addition to summarized financial statements, a complete printed copy of the Company’s annual financial statement and the directors’ report thereon.
At the annual general meeting or at a subsequent extraordinary general meeting in each year, the members shall appoint an auditor to audit the accounts of the Company and such auditor shall hold office until the next annual general meeting. Moreover, the members may, at any general meeting, by special resolution remove the auditor at any time before the expiration of his terms of office and shall by ordinary resolution at that meeting appoint another auditor for the remainder of his term. The remuneration of the auditors shall be fixed by the Company in general meeting or in such manner as the members may determine.
The financial statements of the Company shall be audited by the auditor in accordance with generally accepted auditing standards which may be those of a country or jurisdiction other than the Cayman Islands. The auditor shall make a written report thereon in accordance with generally accepted auditing standards and the report of the auditor must be submitted to the members in general meeting.
(g) Dividends and other methods of distribution
The Company in general meeting may declare dividends in any currency to be paid to the members but no dividend shall be declared in excess of the amount recommended by the board.
The Articles provide dividends may be declared and paid out of the profits of the Company, realized or unrealized, or from any reserve set aside from profits which the directors determine is no longer needed. With the sanction of an ordinary resolution dividends may also be declared and paid out of share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Law.
Except in so far as the rights attaching to, or the terms of issue of, any share may otherwise provide, (i) all dividends shall be declared and paid according to the amounts paid up on the shares in respect whereof the dividend is paid but no amount paid up on a share in advance of calls shall for this purpose be treated as paid up on the share and (ii) all dividends shall be apportioned and paid pro rata accordingtotheamountpaiduponthesharesduring
– III-15 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
any portion or portions of the period in respect of which the dividend is paid. The Directors may deduct from any dividend or other monies payable to any member or in respect of any shares all sums of money (if any) presently payable by him to the Company on account of calls or otherwise.
Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared on the share capital of the Company, the board may further resolve either (a) that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that the shareholders entitled thereto will be entitled to elect to receive such dividend (or part thereof) in cash in lieu of such allotment, or (b) that shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as the board may think fit.
The Company may also upon the recommendation of the board by an ordinary resolution resolve in respect of any one particular dividend of the Company that it may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders to elect to receive such dividend in cash in lieu of such allotment.
Any dividend, interest or other sum payable in cash to the holder of shares may be paid by cheque or warrant sent through the post addressed to the holder at his registered address, or in the case of joint holders, addressed to the holder whose name stands first in the register of the Company in respect of the shares at his address as appearing in the register or addressed to such person and at such addresses as the holder or joint holders may in writing direct. Every such cheque or warrant shall, unless the holder or joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on the register in respect of such shares, and shall be sent at his or their risk and payment of the cheque or warrant by the bank on which it is drawn shall constitute a good discharge to the Company. Any one of two or more joint holders may give effectual receipts for any dividends or other moneys payable or property distributable in respect of the shares held by such joint holders.
Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared the board may further resolve that such dividend be satisfied wholly or in part by the distribution of specific assets of any kind.
All dividends or bonuses unclaimed for one year after having been declared may be invested or otherwise made use of by the board for the benefit of the Company until claimed and the Company shall not be constituted a trustee in respect thereof. All dividends or bonuses unclaimed for six years after having been declared may be forfeited by the board and shall revert to the Company.
No dividend or other monies payable by the Company on or in respect of any share shall bear interest against the Company.
– III-16 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
(h) Inspection of corporate records
Pursuant to the Articles, the register and branch register of members shall be open to inspection for at least two (2) hours during business hours by members without charge, or by any other person upon a maximum payment of HK$2.50 or such lesser sum specified by the board, at the registered office or such other place at which the register is kept in accordance with the Companies Law or, upon a maximum payment of HK$1.00 or such lesser sum specified by the board, at the office where the branch register of members is kept, unless the register is closed in accordance with the Articles.
(i) Rights of minorities in relation to fraud or oppression
There are no provisions in the Articles relating to rights of minority shareholders in relation to fraud or oppression. However, certain remedies are available to shareholders of the Company under Cayman Islands law, as summarized in paragraph 3(f) of this Appendix.
(j) Procedures on liquidation
A resolution that the Company be wound up by the court or be wound up voluntarily shall be a special resolution.
Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any class or classes of shares:
(i) if the Company is wound up and the assets available for distribution amongst the members of the Company shall be more than sufficient to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu amongst such members in proportion to the amount paid up on the shares held by them respectively; and
(ii) if the Company is wound up and the assets available for distribution amongst the members as such shall be insufficient to repay the whole of the paid-up capital, such assets shall be distributed so that, as nearly as may be, the losses shall be borne by the members in proportion to the capital paid up, or which ought to have been paid up, at the commencement of the winding up on the shares held by them respectively.
If the Company is wound up (whether the liquidation is voluntary or by the court) the liquidator may, with the authority of a special resolution and any other sanction required by the Companies Law divide among the members in specie or kind the whole or any part of the assets of the Company whether the assets shall consist of property of one kind or shall consist of properties of different kinds and the liquidator may, for such purpose, set such value as he deems fair upon any one or more class or classes of property to be divided as aforesaid and may determine how such division shall be carried out as between the members or different
– III-17 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
classes of members. The liquidator may, with the like authority, vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator, with the like authority, shall think fit, but so that no contributory shall be compelled to accept any shares or other property in respect of which there is a liability.
(k) Subscription rights reserve
The Articles provide that to the extent that it is not prohibited by and is in compliance with the Companies Law, if warrants to subscribe for shares have been issued by the Company and the Company does any act or engages in any transaction which would result in the subscription price of such warrants being reduced below the par value of a share, a subscription rights reserve shall be establishedandappliedinpayingupthedifference between the subscription price and the par value of a share on any exercise of the warrants.
3. CAYMAN ISLANDS COMPANY LAW
The Company is incorporated in the Cayman Islands subject to the Companies Law and, therefore, operates subject to Cayman Islands law. Set out below is a summary of certain provisions of Cayman company law, although this does not purport to contain all applicable qualifications and exceptions or to be a complete review of all matters of Cayman company law and taxation, which may differ from equivalent provisions in jurisdictions with which interested parties may be more familiar:
(a) Company operations
As an exempted company, the Company’s operations must be conducted mainly outside the Cayman Islands. The Company is required to file an annual return each year with the Registrar of Companies of the Cayman Islands and pay a fee which is based on the amount of its authorized share capital.
(b) Share capital
The Companies Law provides that where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the value of the premiums on those shares shall be transferred to an account, to be called the ‘‘share premium account’’.At the option of a company, these provisions may not apply to premiums on shares of that company allotted pursuant to any arrangement in consideration of the acquisition or cancelation of shares in any other company and issued at a premium.
The Companies Law provides that the share premium account may be applied by the company subject to the provisions, if any, of its memorandum and articles of association in (a) paying distributions or dividends to members; (b) paying up unissued shares of the company to be issued to members as fully paid bonus shares; (c) the redemption and repurchase of
– III-18 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
shares (subject to the provisions of section 37 of the Companies Law); (d) writing-off the preliminary expenses of the company; and (e) writing-off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company.
No distribution or dividend may be paid to members out of the share premium account unless immediately following the date on which the distribution or dividend is proposed to be paid, the company will be able to pay its debts as they fall due in the ordinary course of business.
The Companies Law provides that, subject to confirmation by the Grand Court of the Cayman Islands (the ‘‘Court’’), a company limited by shares or a company limited by guarantee and having a share capital may, if so authorized by its articles of association, by special resolution reduce its share capital in any way.
(c) Financial assistance to purchase shares of a company or its holding company
There is no statutory restriction in the Cayman Islands on the provision of financial assistance by a company to another person for the purchase of, or subscription for, its own or its holding company’s shares. Accordingly, a company may provide financial assistance if the directors of the company consider, in discharging their duties of care and acting in good faith, for a proper purpose and in the interests of the company, that such assistance can properly be given. Such assistance should be on an arm’s-length basis.
(d) Purchase of shares and warrants by a company and its subsidiaries
A company limited by shares or a company limited by guarantee and having a share capital may, if so authorized by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or a shareholder and the Companies Law expressly provides that it shall be lawful for the rights attaching to any shares to be varied, subject to the provisions of the company’s articles of association, so as to provide that such shares are to be or are liable to be so redeemed. In addition, such a company may, if authorized to do so by its articles of association, purchase its own shares, including any redeemable shares. However, if the articles of association do not authorize the manner and terms of purchase, a company cannot purchase any of its own shares unless the manner and terms of purchase have first been authorized by an ordinary resolution of the company. At no time may a company redeem or purchase its shares unless they are fully paid. A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any issued shares of the company other than shares held as treasury shares. A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which the payment is proposed to be made, the company shall be able to pay its debts as they fall due in the ordinary course of business.
– III-19 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
Shares purchased by a company is to be treated as canceled unless, subject to the memorandum and articles of association of the company, the directors of the company resolve to hold such shares in the name of the company as treasury shares prior to the purchase. Where shares of a company are held as treasury shares, the company shall be entered in the register of members as holding those shares, however, notwithstanding the foregoing, the company is not be treated as a member for any purpose and must not exercise any right in respect of the treasury shares, and any purported exercise of such a right shall be void, and a treasury share must not be voted, directly or indirectly, at any meeting of the company and must not be counted in determining the total number of issued shares at any given time, whether for the purposes of the company’s articles of association or the Companies Law.
A company is not prohibited from purchasing and may purchase its own warrants subject to and in accordance with the terms and conditions of the relevant warrant instrument or certificate. There is no requirement under Cayman Islands law that a company’s memorandum or articles of association contain a specific provision enabling such purchases and the directors of a company may rely upon the general power contained in its memorandum of association to buy and sell and deal in personal property of all kinds.
Under Cayman Islands law, a subsidiary may hold shares in its holding company and, in certain circumstances, may acquire such shares.
(e) Dividends and distributions
The Companies Law permits, subject to a solvency test and the provisions, if any, of the company’s memorandum and articles of association, the payment of dividends and distributions out of the share premium account. With the exception of the foregoing, there are no statutory provisions relating to the payment of dividends. Based upon English case law, which is regarded as persuasive in the Cayman Islands, dividends may be paid only out of profits.
No dividend may be declared or paid, and no other distribution (whether in cash or otherwise) of the company’s assets (including any distribution of assets to members on a winding up) may be made to the company, in respect of a treasury share.
(f) Protection of minorities and shareholders’ suits
The Courts ordinarily would be expected to follow English case law precedents which permit a minority shareholder to commence a representative action against or derivative actions in the name of the company to challenge (a) an act which is ultra vires the company or illegal, (b) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company, and (c) an irregularity in the passing of a resolution which requires a qualified (or special) majority.
– III-20 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
In the case of a company (not being a bank) having a share capital divided into shares, the Court may, on the application of members holding not less than one fifth of the shares of the company in issue, appoint an inspector to examine into the affairs of the company and to report thereon in such manner as the Court shall direct.
Any shareholder of a company may petition the Court which may make a winding up order if the Court is of the opinion that it is just and equitable that the company should be wound up or, as an alternative to a winding up order, (a) an order regulating the conduct of the company’s affairs in the future, (b) an order requiring the company to refrain from doing or continuing an act complained of by the shareholder petitioner or to do an act which the shareholder petitioner has complained it has omitted to do, (c) an order authorizing civil proceedings to be brought in the name and on behalf of the company by the shareholder petitioner on such terms as the Court may direct, or (d) an order providing for the purchase of the shares of any shareholders of the company by other shareholders or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly.
Generally claims against a company by its shareholders must be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by the company’s memorandum and articles of association.
(g) Disposal of assets
The Companies Law contains no specific restrictions on the power of directors to dispose of assets of a company. However, as a matter of general law, every officer of a company, which includes a director, managing director and secretary, in exercising his powers and discharging his duties must do so honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
(h) Accounting and auditing requirements
A company must cause proper books of account to be kept with respect to (i) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place; (ii) all sales and purchases of goods by the company; and (iii) the assets and liabilities of the company.
Proper books of account shall not be deemed to be kept if there are not kept such books as are necessary to give a true and fair view of the state of the company’saffairsandto explain its transactions.
– III-21 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
An exempted company must make available at its registered office in electronic form or any other medium, copies of its books of account or parts thereof as may be required of it upon service of an order or notice by the Tax Information Authority pursuant to the Tax Information Authority Law of the Cayman Islands.
(i) Exchange control
There are no exchange control regulations or currency restrictions in the Cayman Islands.
(j) Taxation
Pursuant to the Tax Concessions Law of the Cayman Islands, the Company has obtained an undertaking:
(1) that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciationshallapplytotheCompanyorits operations; and
(2) that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable on or in respect of the shares, debentures or other obligations of the Company.
The undertaking for the Company is for a period of twenty years from January 23, 2019.
The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likelytobematerialtotheCompanyleviedbythe Government of the Cayman Islands save for certain stamp duties which may be applicable, from time to time, on certain instruments executed in or brought within the jurisdiction of the Cayman Islands. The Cayman Islands are a party to a double tax treaty entered into with the United Kingdom in 2010 but otherwise is not party to any double tax treaties.
(k) Stamp duty on transfers
No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands companies except those which hold interests in land in the Cayman Islands.
(l) Loans to directors
There is no express provision in the Companies Law prohibiting the making of loans by a company to any of its directors.
– III-22 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
(m) Inspection of corporate records
Members of the Company have no general right under the Companies Law to inspect or obtain copies of the register of members or corporate records of the Company. They will, however, have such rights as may be set out in the Company’sArticles.
(n) Register of members
An exempted company may maintain its principal register of members and any branch registers at such locations, whether within or without the Cayman Islands, as the directors may, from time to time, think fit. The register of members shall contain such particulars as required by Section 40 of the Companies Law. A branch register must be kept in the same manner in which a principal register is by the Companies Law required or permitted to be kept. The company shall cause to be kept at the place where the company’s principal register is kept a duplicate of any branch register duly entered up from time to time.
There is no requirement under the Companies Law for an exempted company to make any returns of members to the Registrar of Companies of the Cayman Islands. The names and addresses of the members are, accordingly, not a matter of public record and are not available for public inspection. However, an exempted company shall make available at its registered office, in electronic form or any other medium, such register of members, including any branch register of members, as may be required of it upon service of an order or notice by the Tax Information Authority pursuant to the Tax Information Authority Law of the Cayman Islands.
(o) Register of Directors and Officers
The Company is required to maintain at its registered office a register of directors and officers which is not available for inspection by the public. A copy of such register must be filed with the Registrar of Companies in the Cayman Islands and any change must be notified to the Registrar within thirty (30) days of any change in such directors or officers.
(p) Beneficial Ownership Register
An exempted company is required to maintain a beneficial ownership register at its registered office that records details of the persons who ultimately own or control, directly or indirectly, 25% or more of the equity interests or voting rights of the company or have rights to appoint or remove a majority of the directors of the company. The beneficial ownership register is not a public document and is only accessible by a designated competent authority of the Cayman Islands. Such requirement does not, however, apply to an exempted company with its shares listed on an approved stock exchange, which includes the Stock Exchange. Accordingly, for so long as the shares of the Company are listed on the Stock Exchange, the Company is not required to maintain a beneficial ownership register.
– III-23 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
(q) Winding up
A company may be wound up (a) compulsorily by order of the Court, (b) voluntarily, or (c) under the supervision of the Court.
The Court has authority to order winding up in a number of specified circumstances including where the members of the company have passed a special resolution requiring the company to be wound up by the Court, or where the company is unable to pay its debts, or where it is, in the opinion of the Court, just and equitable to do so. Where a petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the Court has the jurisdiction to make certain other orders as an alternative to a winding-up order, such as making an order regulating the conduct of the company’s affairs in the future, making an order authorizing civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the Court may direct, or making an order providing for the purchase of the shares of any of the members of the company by other members or by the company itself.
A company (save with respect to a limited duration company) may be wound up voluntarily when the company so resolves by special resolution or when the company in general meeting resolves by ordinary resolution that it be wound up voluntarily because it is unable to pay its debts as they fall due. In the case of a voluntary winding up, such company is obliged to cease to carry on its business (except so far as it may be beneficial for its winding up) from the time of passing the resolution for voluntary winding up or upon the expiry of the period or the occurrence of the event referred to above.
For the purpose of conducting the proceedings in winding up a company and assisting the Court therein, there may be appointed an official liquidator or official liquidators; and the court may appoint to such office such person, either provisionally or otherwise, as it thinks fit, and if more persons than one are appointed to such office, the Court must declare whether any act required or authorized to be done by the official liquidator is to be done by all or any one or more of such persons. The Court may also determine whether any and what security is to be given by an official liquidator on his appointment; if no official liquidator is appointed, or during any vacancy in such office, all the property of the company shall be in the custody of the Court.
As soon as the affairs of the company are fully wound up, the liquidator must make a report and an account of the winding up, showing how the winding up has been conducted and how the property of the company has been disposed of, and thereupon call a general meeting of the company for the purposes of laying before it the account and giving an explanation thereof. This final general meeting must be called by at least 21 days’ notice to each contributory in any manner authorized by the company’s articles of association and published in the Gazette.
– III-24 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
(r) Reconstructions
There are statutory provisions which facilitate reconstructions and amalgamations approved by a majority in number representing seventy-five per cent. (75%) in value of shareholders or class of shareholders or creditors, as the case may be, as are present at a meeting called for such purpose and thereafter sanctioned by the Court. Whilst a dissenting shareholder would have the right to express to the Court his view that the transaction for which approval is sought would not provide the shareholders with a fair value for their shares, the Court is unlikely to disapprove the transaction on that ground alone in the absence of evidence of fraud or bad faith on behalf of management.
(s) Take-overs
Where an offer is made by a company for the shares of another company and, within four (4) months of the offer, the holders of not less than ninety per cent. (90%) of the shares which are the subject of the offer accept, the offeror may at any time within two (2) months after the expiration of the said four (4) months, by notice in the prescribed manner require the dissenting shareholders to transfer their shares on the terms of the offer. A dissenting shareholder may apply to the Court within one (1) month of the notice objecting to the transfer. The burden is on the dissenting shareholder to show that the Court should exercise its discretion, which it will be unlikely to do unless there is evidence of fraud or bad faith or collusion as between the offeror and the holders of the shares who have accepted the offer as a means of unfairly forcing out minority shareholders.
(t) Indemnification
Cayman Islands law does not limit the extent to which a company’sarticlesof association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Court to be contrary to public policy (e.g. for purporting to provide indemnification against the consequences of committing a crime).
(u) Economic Substance Requirements
Pursuant to the International Tax Cooperation (Economic Substance) Law, 2018 of the Cayman Islands (‘‘ES Law’’) that came into force on January 1, 2019, a ‘‘relevant entity’’ is required to satisfy the economic substance test set out in the ES Law. A ‘‘relevant entity’’ includes an exempted company incorporated in the Cayman Islands as is the Company; however, it does not include an entity that is tax resident outside the Cayman Islands. Accordingly, for so long as the Company is a tax resident outside the Cayman Islands, including in Hong Kong, it is not required to satisfy the economic substance test set out in the ES Law.
– III-25 – APPENDIX III SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW
4. GENERAL
Conyers Dill & Pearman, the Company’s special legal counsel on Cayman Islands law, have sent to the Company a letter of advice summarizing certain aspects of Cayman Islands company law. This letter, together with a copy of the Companies Law, is available for inspection as referred to in the paragraph headed ‘‘Documents Delivered to the Registrar of Companies in Hong Kong and Available for Inspection’’ in Appendix V to this prospectus. Any person wishing to have a detailed summary of Cayman Islands company law or advice on the differences between it and the laws of any jurisdiction with which he is more familiar is recommended to seek independent legal advice.
– III-26 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
A. FURTHER INFORMATION ABOUT OUR COMPANY AND ITS SUBSIDIARIES
1. Incorporation of Our Company
Our Company was incorporated in the Cayman Islands under the Cayman Companies Law as an exempted company with limited liability on January 9, 2019. The Company has established its principal place of business in Hong Kong at 40th Floor, Sunlight Tower, No. 248 Queen’s Road East, Wanchai, Hong Kong and was registered as a non-Hong Kong company under Part 16 of the Companies Ordinance on June 15, 2020. The Company has appointedMs.ZhangXiao(張瀟) of 40th Floor, Sunlight Tower, No. 248 Queen’sRoadEast, Wanchai, Hong Kong as the authorized representative of our Company for the acceptance of service of process and notices in Hong Kong.
Since our Company was incorporated in the Cayman Islands, its operation is subject to the Cayman Companies Law and its constitution comprising the Memorandum and the Articles. A summary of various provisions of the Company’s constitution and certain relevant aspects of the Cayman Companies Law is set out in Appendix III to this prospectus.
2. Changes in Share Capital of Our Company
As of the date of incorporation of our Company on January 9, 2019, its authorized share capital was HK$380,000 divided into 38,000,000 Shares with a par value of HK$0.01 each. Upon its incorporation, one Share was allotted and issued to its initial subscriber fully paid at par, who then transferred the same to Ms. Yang on the same day.
On March 22, 2019, our Company further allotted and issued nine Shares, fully paid at par, to Ms. Yang.
On June 25, 2019, Ms. Yang transferred six Shares and four Shares at par to Karis I LLC and Karis II LLC, respectively.
On September 12, 2019, our Company allotted and issued 304,525 Shares, 203,016 Shares, 459,649 Shares, 12,632 Shares, 10,084 Shares and 10,084 Shares, to Karis I LLC, Karis II LLC, Caerus BVI, Chen Wangcai BVI, Gongjin BVI and Arceus BVI, at the consideration of Hong Kong dollars equivalent to RMB9,091,089, RMB6,060,726, RMB13,721,813, RMB377,088, RMB301,042 and RMB301,042, respectively.
On June 22, 2020, our Company allotted and issued 52,631 Shares, fully paid at par, to BOCT, the trustee of the Share Award Trust, and BOCT will hold the Shares for the benefit of the selected employees pursuant to the rules of the Pre-IPO Share Award Scheme.
On December 1, 2020, the Company increased its authorized share capital from HK$380,000 divided into 38,000,000 Shares to HK$20,000,000 divided into 2,000,000,000 Shares with a par value of HK$0.01 each by the creation of an additional 1,962,000,000 Shares.
– IV-1 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
Assuming that the Global Offering becomes unconditional and the issue of the Shares pursuant to the Global Offering and the Capitalization Issue mentioned herein are made, but not taking into account of any Shares which may be issued upon the exercise of the Over- allotment Option and any Shares which may be issued upon the exercise of any options which may be granted under the Share Option Scheme, the issued share capital of our Company will be HK$11,231,048 divided into 1,123,104,800 Shares fully paid or credited as fully paid.
Other than pursuant to any options which may be granted under the Share Option Scheme, the exercise of the Over-allotment Option or the exercise of the general mandate to issue shares referred to in paragraph headed ‘‘— A. Further Information about our Company and its Subsidiaries—3. Written Resolutions of all the Shareholders passed on December 1, 2020’’ belowinthissection,thereisnopresentintentiontoissueanypartoftheauthorized but unissued share capital of our Company and, without prior approval of the Shareholders in general meeting, no issue of Shares will be made which would effectively alter the control of our Company.
Save as disclosed herein and in paragraph headed ‘‘— A. Further Information about our Company and its Subsidiaries—4. Corporate Reorganization’’ below in this section, there has been no alteration in the share capital of our Company since its incorporation.
3. Written Resolutions of all the Shareholders passed on December 1, 2020
On December 1, 2020, written resolutions of all the Shareholders were passed pursuant to which, among others:
(a) the Memorandum be and was thereby approved and adopted with immediate effect and the Articles be and were thereby conditionally approved and adopted which will come into effect on the Listing Date, the terms of which are summarized in Appendix III to this prospectus;
(b) the authorized share capital of the Company be increased from HK$380,000 divided into 38,000,000 Shares with a par value of HK$0.01 each to HK$20,000,000 divided into 2,000,000,000 Shares with a par value of HK$0.01 each by the creation of an additional 1,962,000,000 Shares ranking pari passu with the existing Shares with immediate effect;
(c) conditional on (A) the Listing Committee granting the listing of, and permission to deal in, the Shares in issue and the Shares to be issued as mentioned herein (including any Shares which may be issued pursuant to the Global Offering, the Capitalization Issue, the Over-allotment Option and the Share Option Scheme); (B) the entering into of the agreement on the Offer Price between the Joint Global Coordinators (for themselves and on behalf of the Underwriters) and the Company; and (C) the obligations of the Underwriters under the Underwriting Agreements becoming unconditional (including, if relevant, as a result of the waiver of any condition(s) by the Joint Global Coordinators (for themselves and on behalf of the
– IV-2 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
Underwriters)), and not being terminated in accordance with the terms of such agreement or otherwise, in each case on or before the date determined in accordance with the terms of the Underwriting Agreements:
(i) the Global Offering was approved and our Directors were authorized to effect the same and to allot and issue the Offer Shares pursuant to the Global Offering;
(ii) the Over-allotment Option was approved and our Directors were authorized to allot and issue any Shares which may be required to be issued if the Over- allotment Option is exercised;
(iii) the rules of the Share Option Scheme, the principal terms of which are set out in paragraph ‘‘— D. Other Information—2. Share Option Scheme’’ below, were approved and adopted and our Directors were authorized, at their absolute discretion, to grant options to subscribe for Shares under the Share Option Scheme and to allot, issue and deal with Shares issued pursuant thereunder and to take all such steps as they consider necessary or desirable to implement the Share Option Scheme and to vote on any matter connected therewith notwithstanding that they or any of them may be interested in the same; and
(iv) conditional upon the share premium amount of our Company being credited as a result of the Global Offering, our Directors were authorized to capitalize the amount of HK$8,410,521.69 from the amount standing to the credit of the share premium account of our Company to pay up in full at par 841,052,169 Shares for allotment and issue to the person(s) whose name(s) appears on the register of members of our Company as of the date of the passing of the resolution, on a pro rata basis;
(d) a general unconditional mandate was given to our Directors authorizing them to exercise all the powers of our Company to allot, issue and deal in (otherwise than by way of rights issue or an issue of shares upon the exercise of the Over-allotment Option or any subscription or conversion rights attaching to any warrants or any securities which are convertible into Shares or pursuant to the exercise of any options which may be granted under the Share Option Scheme, or any other option scheme or similar arrangement for the time being adopted for the grant or issue to officers and/or employees of our Company and/or any of its subsidiaries or any other person of share or rights to acquire Shares or any scrip dividend schemes or similar arrangements providing for the allotment and issue of Shares in lieu of the whole or part of a dividend on Shares in accordance with the Articles or a specific authority granted by the Shareholders in general meeting) any unissued Shares with a total nominal value not exceeding 20% of the aggregate of the total nominal value of the share capital of our Company in issue immediately following completion of the Global Offering and the Capitalization Issue (excluding any Shares that may be
– IV-3 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
issued upon exercise of the Over-allotment Option or pursuant to the exercise of any options which may be granted under the Share Option Scheme) and to make or grant offers, agreements and options (including but not limited to warrants, bonds and debentures convertible into Shares) which might require the exercise of such power to issue Shares either during or after the end of the Relevant Period (as defined below), such mandate to remain in effect until whichever is the earliest of:
(i) the conclusion of the next annual general meeting of our Company;
(ii) the expiration of the period within which the next annual general meeting of our Company is required by the Articles or any applicable laws of the Cayman Islands to be held; or
(iii) the passing of an ordinary resolution of the Shareholders in general meeting revoking, varying or renewing such mandate;
(e) a general unconditional mandate was given to our Directors authorizing them to exercise all powers of our Company to repurchase on the Stock Exchange or on any other stock exchange on which the Shares may be listed, and which is recognized by the SFC and the Stock Exchange for this purpose, such number of Shares with a total nominal value not exceeding 10% of the aggregate of the total nominal value of the share capital of the Company in issue immediately following completion of the Global Offering and the Capitalization Issue (excluding any Shares that may be issued upon exercise of the Over-allotment Option or pursuant to the exercise of any options which may be granted under the Share Option Scheme), such mandate to remain in effect until whichever is the earliest of:
(i) the conclusion of the next annual general meeting of our Company;
(ii) the expiration of the period within which the next annual general meeting of our Company is required by the Articles or applicable laws of the Cayman Islands to be held; or
(iii) the passing of an ordinary resolution of the Shareholders in general meeting revoking, varying or renewing such mandate;
(f) the general unconditional mandate mentioned in paragraph (d) above was extended by the addition to the aggregate nominal value of the share capital of our Company which may be allotted or agreed conditionally or unconditionally to be allotted by our Directors pursuant to such general mandate of an amount representing the aggregate nominal value of the share capital of our Company repurchased by our Company pursuant to the mandate to repurchase Shares referred to in paragraph (e) above provided that such extended amount shall not exceed 10% of the aggregate of the total nominal value of the share capital of our Company in issue immediately following completion of the Global Offering and the Capitalization Issue (excluding
– IV-4 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
any Shares that may be issued upon exercise of the Over-allotment Option or pursuant to the exercise of any options which may be granted under the Share Option Scheme).
4. Corporate Reorganization
In preparation for the Listing, the companies comprising our Group underwent the Reorganization to rationalize the corporate structure of our Group. For further details, please refer to the section headed ‘‘History, Reorganization and Corporate Structure— Reorganization’’ in this prospectus.
5. Changes in Share Capital of Our Subsidiaries
Save as disclosed in the section headed ‘‘History, Reorganization and Corporate Structure’’ in this prospectus, there has been no alterations in the share capital of any of our subsidiaries within the two years preceding the date of this prospectus.
6. Particulars of Our Subsidiaries
Particulars of our subsidiaries are set forth in the Accountants’ Report, the text of which is set forth in Appendix I to this prospectus.
7. Repurchase of Our Own Securities
This paragraph includes the information required by the Stock Exchange to be included in this prospectus concerning the repurchase by our Company of its own securities.
(a) Provisions of the Listing Rules
The Listing Rules permit companies whose primary listing is on the Stock Exchange to repurchase their securities on the Stock Exchange subject to certain restrictions, the most important of which are summarized below:
(i) Shareholders’ approval
All proposed repurchases of securities on the Stock Exchange by a company with its primary listing on the Stock Exchange must be approved in advance by an ordinary resolution, either by way of general mandate or by specific approval in relation to specific transactions.
Note: Pursuant to the written resolution of all the Shareholders passed on December 1, 2020, a general unconditional mandate (the ‘‘Repurchase Mandate’’) was given to the Directors authorizing any repurchase by the Company of Shares as described above in the paragraph headed ‘‘— A. Further Information about our Company and its Subsidiaries— 3. Written Resolutions of all the Shareholders passed on December 1, 2020.’’
– IV-5 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(ii) Source of funds
Any repurchases must be financed out of funds legally available for the purpose in accordance with the Memorandum and Articles and the applicable laws and regulations of the Cayman Islands.
(b) Funding of Repurchases
In repurchasing securities, our Company may only apply funds legally available for such purpose in accordance with the Memorandum, the Articles and the applicable laws and regulations of the Cayman Islands.
Pursuant to the Repurchase Mandate, repurchases will be made out of funds of our Company legally permitted to be utilized in this connection, including profits of our Company or out of a fresh issue of Shares made for the purpose of the repurchase or, if authorized by the Articles and subject to the Cayman Companies Law, out of capital and, in the case of any premium payable on the repurchase, out of the profits of our Company or from sums standing to the credit of the share premium account of our Company or, if authorized by the Articles and subject to the Cayman Companies Law, out of capital of our Company. Our Company may not repurchase securities on the Stock Exchange for a consideration other than cash or for settlement otherwise than in accordance with the trading rules of the Stock Exchange from time to time.
(c) Reasons for Repurchases
Repurchases of Shares will only be made when our Directors believe that such a repurchase will benefit our Company and the Shareholders as a whole. Such repurchases may, depending on market conditions and funding arrangements at the time, lead to an enhancement of the net assets value of our Company and/or its earnings per Share.
(d) Exercise of the Repurchase Mandate
The exercise in full of the Repurchase Mandate, on the basis of 1,123,104,800 Shares in issue immediately after completion of the Global Offering and the Capitalization Issue without taking into account of any Shares which may be issued upon the exercise of the Over-allotment Option and any options which may be granted under the Share Option Scheme, would result in up to 112,310,480 Shares being repurchased by our Company during the course of the period (the ‘‘Relevant Period’’) prior to the earliest of:
(i) the conclusion of the next annual general meeting of our Company;
(ii) the expiration of the period within which the next annual general meeting of our Company is required by the Articles and the applicable laws and regulations of the Cayman Islands to be held; or
– IV-6 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(iii) the revocation, variation or renewal of the Repurchase Mandate by ordinary resolution of the Shareholders in general meeting.
(e) General
Neither the Directors nor, to the best of their knowledge having made all reasonable enquiries, any of their respective associates (as defined in the Listing Rules) has any present intention, if the Repurchase Mandate is approved by the Shareholders, to sell any Shares to our Company or its subsidiaries.
There might be a material adverse impact on the working capital or gearing position of our Company (as compared with the position disclosed in this prospectus) in the event that the Repurchase Mandate is exercised in full. However, our Directors do not propose to exercise the Repurchase Mandate to such extent as would, in the circumstances, have a material adverse effect on the working capital requirements of our Company or on its gearing levels which in the opinion of our Directors are from time to time appropriate for our Company.
Our Directors have undertaken to the Stock Exchange that, so far as the same may be applicable, they will exercise the Repurchase Mandate in accordance with the Listing Rules, the Memorandum, the Articles and the applicable laws and regulations of the Cayman Islands.
If, as a result of a repurchase of Shares, a Shareholder’s proportionate interest in the voting rights of our Company increases, such increase will be treated as an acquisition for the purpose of the Takeovers Code. As a result, a Shareholder, or a group of Shareholders acting in concert (within the meaning under the Takeovers Code), depending on the level of increase of the Shareholder(s), could obtain or consolidate control of our Company and become(s) obliged under Rule 26 of the Takeovers Code to make a mandatory offer as a result of a repurchase of Shares made after the Listing. Save as aforesaid, our Directors are not aware of any other consequences under the Takeovers Code as a result of a repurchase of Shares made immediately after the Listing.
No connected person (as defined in the Listing Rules) of our Company has notified us that he/she/it has a present intention to sell any Shares to our Company, or has undertaken not to do so, if the Repurchase Mandate is exercised.
– IV-7 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
B. FURTHER INFORMATION ABOUT OUR BUSINESS
1. Summary of Material Contracts
The following contracts (not being contracts in the ordinary course of business of our Group) have been entered into by members of our Group within the two years preceding the date of this prospectus and are or may be material:
(1) the equity transfer agreement dated June 28, 2019 among Ms. Yang, Mr. Yang Yuzheng, Ms. Xu Jindi, Mr. Yang Hai, Ms. Jiang Junxiu and WFOE, pursuant to which Ms. Yang, Mr. Yang Yuzheng, Ms. Xu Jindi, Mr. Yang Hai and Ms. Jiang Junxiu together transferred the entire equity interest in Shenzhen Chenbei to WFOE at the consideration of RMB15,151,815, RMB13,721,813, RMB377,088, RMB301,042 and RMB301,042, respectively;
(2) the share purchase agreement dated September 29, 2019 between Chengdu Xiaodu and Arcsync BVI, pursuant to which Chengdu Xiaodu transferred 5,000 shares of Etekcity US to Arcsync BVI at the consideration of US$1,016,427.44;
(3) the share purchase agreement dated October 11, 2019 between Arcsync BVI and L&H Y US, pursuant to which Arcsync BVI transferred 5,000 shares of Etekcity US to L&H Y US at the consideration of US$1,016,427.44;
(4) the share purchase agreement dated September 29, 2019 between Chengdu Xiaodu and Arcsync BVI, pursuant to which Chengdu Xiaodu transferred 1,000 shares of Atekcity US to Arcsync BVI at the consideration of US$70,415.87;
(5) the share purchase agreement dated October 11, 2019 between Arcsync BVI and L&H Y US, pursuant to which Arcsync BVI transferred 1,000 shares of Atekcity US to L&H Y US at the consideration of US$70,415.87;
(6) the share purchase agreement dated September 29, 2019 between Chengdu Xiaodu and Arcsync BVI, pursuant to which Chengdu Xiaodu transferred 5,000 shares of L&H Y US to Arcsync BVI at the consideration of US$1,111,162.69;
(7) the share purchase agreement dated January 30, 2020 between Etekcity US and Arcsync BVI, pursuant to which Etekcity US transferred 1,000 shares of Vesync US to Arcsync BVI at the consideration of US$0.01;
(8) the transfer agreement dated August 3, 2020 among Ms. Jiang Junxiu, Mr. Chen Zhaojun, Vitasync BVI, Ecomine HK, Mr. Zhao Shanchuang and Ms. Luo Liyan, pursuant to which Ms. Jiang Junxiu transferred one share of MOP17,500 in Etekcity Macau to Ecomine HK at a consideration of MOP17,500, and Mr. Chen Zhaojun transferred one share of MOP7,500 in Etekcity Macau to Vitasync BVI at the consideration of MOP7,500;
– IV-8 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(9) the deed of indemnity dated December 1, 2020 executed by Karis I LLC, Karis II LLC, Caerus BVI, Arceus BVI, Ms. Yang, Mr. Yang Yuzheng and Mr. Yang Hai in favor of our Company (for itself and as trustee for its subsidiaries) containing the indemnities referred to in the sub-paragraph headed ‘‘— D. Other Information—3. Estate duty, Tax and Other Indemnity’’ in this appendix;
(10) a deed of undertaking dated December 1, 2020 executed by Ms. Yang (in the capacity of the grantor of the Annuity Trusts) in favour of the Company and the Family Trusts, pursuant to which the fixed annuity and any net income of the Annuity Trusts in excess of the aforesaid annuity annually and/or any future fixed annuities under the additional annuity trusts and/or any annuity property vested in Ms. Yang under the Annuity Trusts will be directed or redirected back to the Family Trusts, and all remaining assets of the Annuity Trusts (and any additional annuity trusts) includable in Ms. Yang’s estate for U.S. estate tax purposes will be directed to be distributed to the Family Trusts;.
(11) a cornerstone investment agreement dated December 4, 2020 entered into among our Company, the Joint Sponsors, the Joint Global Coordinators, Gaoling Fund and YHG, details of which are included in the section headed ‘‘Cornerstone Investors’’ in this prospectus;
(12) a cornerstone investment agreement dated December 4, 2020 entered into among our Company, the Joint Sponsors, the Joint Global Coordinators, Orchid China and LMA SPC, details of which are included in the section headed ‘‘Cornerstone Investors’’ in this prospectus;
(13) a cornerstone investment agreement dated December 4, 2020 entered into among our Company, the Joint Sponsors, the Joint Global Coordinators and Meridian Future, details of which are included in the section headed ‘‘Cornerstone Investors’’ in this prospectus; and
(14) the Hong Kong Underwriting Agreement.
2. Intellectual Property of our Group
(a) Trademarks
As of the Latest Practicable Date, we were the registered owner of the following trademarks which are material to our business:
Registration Trademark Place of No. Trademark No. Owner Registration Class Duration of validity
1 ETEKCITY ...... 4225339 Etekcity US The United 9 From October 16, 2012 States to October 16, 2022 2 ETEKCITY ...... 4674488 Etekcity US The United 9 From January 20, 2015 States to January 20, 2025 3 ETEKCITY ...... 6004990 Etekcity US The United 8,10,28 From March 10, 2020 States to March 10, 2030
– IV-9 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
Registration Trademark Place of No. Trademark No. Owner Registration Class Duration of validity
4 ETEKCITY ...... 6030043 Etekcity US The United 7,9 From April 7, 2020 States to April 7, 2030 5 ETEKCITY ...... 5768990 Etekcity US The United 11 From June 4, 2019 States to June 4, 2029 6 . . 5971341 Etekcity US The United 9 From January 28, 2020 States to January 28, 2030 7 ETEKCITY ...... 014447321 Etekcity US EU 9 From November 18, 2015 to August 4, 2025 8 ETEKCITY ...... 017960453 Etekcity US EU 7,9,10,11 From February 9, 2019 to September 21, 2028 9 ETEKCITY ...... 15604426 Etekcity US PRC 9 From December 21, 2015 to December 20, 2025 10 . . 29560604 Etekcity US PRC 11 From December 14, 2019 to December 13, 2029 11 . . 304767003 Yoowo HK Hong Kong 7,9,10,11,20,35 From September 23, 2019 to December 11, 2028 12 ETEKCITY ...... 6074223 Etekcity US Japan 11,20 From August 24, 2018 to August 24, 2028 13 LEVOIT ...... 5006872 Yoowo HK The United 3,11 From July 26, 2016 States to July 25, 2026 14 LEVOIT ...... 5768527 Yoowo HK The United 11 From June 4, 2019 States to June 4, 2029 15 ...... 5866037 Yoowo HK The United 11 From September 24, 2019 States to September 24, 2029 16 LEVOIT ...... 016239022 Yoowo HK EU 3,11 From April 25, 2017 to January 10, 2027 17 LEVOIT ...... 018136191 Yoowo HK EU 7,11 From February 21, 2020 to October 11, 2029 18 ...... 22618931 Yoowo HK PRC 11 From February 14, 2018 to February 13, 2028 19 ...... 304766996 Yoowo HK Hong Kong 11,35 From December 12, 2018 to December 11, 2028 20 ...... 6086489 Arovast US Japan 11 From October 5, 2018 to October 4, 2028 21 COSORI ...... 4998059 Cosori US The United 11 From July 12, 2016 States to July 12, 2026 22 COSORI ...... 5241506 Cosori US The United 7,11,21 From July 11, 2017 States to July 11, 2027 23 COSORI ...... 018022781 Yoowo HK EU 7,11,21,35 From September 3, 2019 to February 14, 2029 24 COSORI ...... 33549010 Cosori US PRC 11 From August 14, 2019 to August 13, 2029 25 COSORI ...... 304766987 Yoowo HK Hong Kong 7,11,21,35 From December 12, 2018 to December 11, 2028 26 COSORI ...... 6208293 Yoowo HK Japan 7,11,21 From December 20, 2019 to December 20, 2029 27 ...... 5037237 Vesync US The United 9 From September 6, 2016 States to September 6, 2026 28 VESYNC ...... 018021935 Yoowo HK EU 9,35,38,42 From September 3, 2019 to February 12, 2029 29 ...... 33415428 Vesync US PRC 9 From July 21, 2019 to July 20, 2029 30 ...... 38465643 Vesync US PRC 9 From May 14, 2020 to May 13, 2030 31 VESYNC ...... 304766950 Yoowo HK Hong Kong 9,35,38,42 From September 23, 2019 to December 11, 2028 32 ...... 304928590 Yoowo HK Hong Kong 7,9,10,11,20 From May 17, 2019 to May 16, 2029 33 LEVOIT ...... 6108810 Yoowo HK The United 7 From July 21, 2019 States to July 21, 2030
– IV-10 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
As of the Latest Practicable Date, we applied to register the following trademarks which are material to our business:
Place of Date of No. Trademark Application Applicant Class Application Application No.
1 . The United States Etekcity US 10 April 28, 2019 88405732
2 ETEKCITY ...... Canada Etekcity Macau 7,9,10,11,20 May 9, 2019 1962134
3 . . . . . Canada Etekcity Macau 3,7,9,11 May 9, 2019 1962135
4 COSORI ...... Canada Etekcity Macau 7,9,11,21 May 9, 2019 1962136 5 Vesync ...... The United States Vesync US 9,35,45 December 30, 2019 88742335 6 ARIZE ...... The United States Vesync US 9,35,45 February 26, 2020 88811492
7 . . . . . PRC Vesync US 9 April 15, 2020 45470703
(b) Domain names As of the Latest Practicable Date, we were the registered proprietor of the following domain names:
No. Registrant Domain name Date of Registration Expiry date
1 YoowoHK...... etekcity.com November22,2011 November22,2024 2 YoowoHK...... levoit.com October15,2015 October15,2027 3 CosoriUS...... cosori.com July30,2015 July30,2022 4 VesyncUS...... vesync.com January17,2015 January17,2021 5 Vesync US arizehub.com February 21, 2020 February 21, 2021 6 Vesync US vesync.eu November 6, 2019 November 6, 2021 7 VesyncUS...... vesync.ca March9,2020 March9,2022 8 VesyncUS...... vesync.kr March9,2020 March9,2022 9 Chongqing Xiaodao . . etekcity.com August 27, 2014 August 27, 2024 10 Dongguan Zhilun . . . raiwee.com November 19, 2015 November 19, 2023 11 Dongguan Zhilun . . . raiwee.cn November 19, 2015 November 19, 2023 12 ArovastUS...... cosori.com.es March10,2020 March10,2022 13 ArovastUS...... cosori.uk March10,2020 March10,2022 14 ArovastUS...... levoit.ca March10,2020 March10,2022 15 ArovastUS...... levoit.com.es March10,2020 March10,2022 16 ArovastUS...... levoit.kr March10,2020 March10,2022 17 ArovastUS...... levoit.uk March10,2020 March10,2022 18 EtekcityUS...... etekcity.ca March9,2020 March9,2022 19 EtekcityUS...... etekcity.uk March9,2020 March9,2022 20 EtekcityJapan...... vesync.co.jp April15,2020 April29,2021 21 EtekcityJapan...... vesync.jp April16,2020 April29,2021 22 Etekcity Japan levoit.jp November 29, 2019 November 29, 2020 23 Shenzhen Chenbei . . . Cosori.cn June 21, 2017 June 21, 2023 24 Shenzhen Chenbei . . . Cosori.com.cn June 21, 2017 June 21, 2023 25 Shenzhen Chenbei . . . Vesync.cn June 22, 2017 June 22, 2022 26 Shenzhen Chenbei . . . vesync.com.cn June 22, 2017 June 22, 2022 27 Etekcity Germany cosori.eu November 6, 2019 November 6, 2021 28 Etekcity Germany levoit.eu November 6, 2019 November 6, 2021
– IV-11 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(c) Patents
As of the Latest Practicable Date, we had registered the following patents which are material to our business:
Place of Date of No. Patent Patent No. Patentee Registration Patent Type Application Expiry Date
1 Air Fryer ...... D883, 729 Etekcity US The United Community October 25, May 12, 2035 States Designs 2018 2 Smart Scale ...... D884, 527 Etekcity US The United Community December 11, May 19, 2035 States Designs 2018 3 Halo Lamp...... D808, 572 Etekcity US The United Community November 2, January 23, States Designs 2016 2033 4 Aroma Diffuser ...... D857, 870 Etekcity US The United Community November 30, August 27, States Designs 2017 2034 5WIFI開關 (新ID) . . . . . CN201830405853.2 Shenzhen PRC Community July 26, 2018 July 25, 2028 Chenbei Designs 6 空氣淨化器 Air Purifier CN201930082704.1 Shenzhen PRC Community March 1, 2019 March 1, 2029 (vista400) ...... Chenbei Designs 7 Air fryer ...... CN201930163698.2 Shenzhen PRC Community April 11, 2019 April 11, 2029 Chenbei Designs 8 體脂秤 (ESF28)...... CN201930316076.9 Shenzhen PRC Community June 18, 2019 June 18, 2029 Chenbei Designs 9WiFi插座 ...... CN201630374301.0 Shenzhen PRC Community August 8, 2016 August 8, 2026 Chenbei Designs 10 Salt Lamp with Audio US16369352 Shenzhen The United Invention March 29, March 28, Arrangement...... Chenbei States 2019 2039 11 Thermal Immersion US15842940 Shenzhen The United Invention December 15, December 14, Circulator...... Chenbei States 2017 2037 12 Scent Dispenser with US15695712 Shenzhen The United Invention September 5, November 25, Illuminating Chenbei States 2017 2037 Arrangement...... 13 水箱底蓋及加濕器 . . . . CN201920614374.0 Shenzhen PRC Utility Model April 29, 2019 April 28, 2029 Chenbei 14 空氣床 ...... CN201920205439.6 Shenzhen PRC Utility Model February 15, February 14, Chenbei 2019 2029 15 加濕器 ...... CN201920057738.X Shenzhen PRC Utility Model January 14, January 13, Chenbei 2019 2029 16 插座及具有USB接口的插 CN201821527161.6 Shenzhen PRC Utility Model September 18, September 17, 座 ...... Chenbei 2018 2028 17 一種光感控溫的慢煮機 . CN201820073242.7 Shenzhen PRC Utility Model January 17, January 16, Chenbei 2018 2028 18 一種帶微噴霧化功能的香 CN201721168413.6 Shenzhen PRC Utility Model September 13, September 12, 薰機...... Chenbei 2017 2027 19 一種空氣加濕装置 . . . . CN201920252835.4 Shenzhen PRC Utility Model February 28, February 27, Chenbei 2019 2029 20 一種控制終端設備的方 CN201910763614.8 Shenzhen PRC Invention August 19, August 18, 法、控制裝置及終端 Chenbei 2019 2029 設備 21 一種空氣炸鍋 CN201921556548.9 Shenzhen PRC Utility Model September 18, September 17, Chenbei 2019 2029 22 Backlight Illuminating US10788189 Shenzhen The United Invention December 29, December 28, Module Chenbei States 2019 2039
– IV-12 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
As of the Latest Practicable Date, we applied to register the following patents which are material to our business:
Place of Date of No. Patent Application No. Applicant Application Patent Type Application
1 一種防水裝置及加濕器 ...... PCT/CN2020/086440 Shenzhen Chenbei PRC Invention April 23, 2020 2 一種加濕器 ...... PCT/CN2020/086442 Shenzhen Chenbei PRC Invention April 23, 2020 3 一種溫控設備及發酵茶製造方法 PCT/CN2019/129056 Shenzhen Chenbei PRC Invention December 27, 2019 4 Humidifier ...... US16859919 Shenzhen Chenbei The United States Invention April 27, 2020 5 Humidifier ...... US16882281 Shenzhen Chenbei The United States Invention May 22, 2020 6 Air Purifying Prompting System. US16779537 Shenzhen Chenbei The United States Invention January 31, 2020 7 Air Filtering System ...... US16714471 Shenzhen Chenbei The United States Invention December 13, 2019 8 Rotatable Electric Plug ...... US16714448 Shenzhen Chenbei The United States Invention December 13, 2019 9 Air Purifier and Its Air US16726774 Shenzhen Chenbei The United States Invention December 24, Purification Method ...... 2019 10 Aromatherapy Diffuser ...... US16442293 Shenzhen Chenbei The United States Invention June 14, 2019 11 Air Purifier with Air Outlet US16586477 Shenzhen Chenbei The United States Invention September 27, Guider...... 2019 12 Humidifier with Waterproof US16813461 Shenzhen Chenbei The United States Invention March 9, 2020 Arrangement...... 13 Portable Steamer with Ironing US15842930 Etekcity US The United States Invention December 15, Arrangement...... 2017 14 空氣淨化器 ...... CN201811525254.X Shenzhen Chenbei PRC Invention December 13, 2018 15 一種任務確定方法及相關設備 . . CN201911321698.6 Shenzhen Chenbei PRC Invention December 17, 2019 16 加濕器 ...... CN201911308326.X Shenzhen Chenbei PRC Invention December 18, 2019 17 一種雙水位監測加濕器以及數據 CN201911324762.6 Shenzhen Chenbei PRC Invention December 18, 處理的方法 ...... 2019 18 一種數據處理方法及相關設備 . . CN202010090218.6 Shenzhen Chenbei PRC Invention February 12, 2020 19 智能設備測試方法、裝置、服務 CN202010099055.8 Shenzhen Chenbei PRC Invention February 18, 器及存儲介質 ...... 2020 20 稱重傳感裝置及電子秤 ...... CN202010113130.1 Shenzhen Chenbei PRC Invention February 24, 2020 21 固定支架及應用其的電子設備 . . CN202010321141.9 Shenzhen Chenbei PRC Invention April 22, 2020 22 飲料製備裝置 ...... CN202010338856.5 Shenzhen Chenbei PRC Invention April 26, 2020 23 飲料製備方法及飲料製備裝置 . . CN202010338443.7 Shenzhen Chenbei PRC Invention April 26, 2020 24 一種風扇與一種烹飪設備 . . . . . CN202020569817.1 Shenzhen Chenbei PRC Utility model April 16, 2020
– IV-13 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(d) Copyrights
As of the Latest Practicable Date, we had registered the following copyrights which are material to our business:
Place of Registration No. Registered Owner Title of Copyright Registration No. Registration Date
1 Shenzhen Chenbei 基於藍牙4.0技術的電子秤控 2017SR116809 PRC April 15, 2017 制軟件
2 Shenzhen Chenbei Etekcity香薰機管理系統軟件 2017SR099584 PRC March 31, 2017
3 Shenzhen Chenbei 基於智能終端的WiFi插座控 2017SR099578 PRC March 31, 2017 制軟件
4 Shenzhen Chenbei 基於智能終端的超級智能客 2017SR099575 PRC March 31, 2017 戶端軟件
5 Shenzhen Chenbei 基於藍牙4.0技術的香薰機 2017SR064961 PRC March 2, 2017 APP控制軟件(IOS)
6 Shenzhen Chenbei 基於智能終端的物聯網家電 2017SR734448 PRC December 27, 平台客戶端軟件(ios版) 2017
7 Shenzhen Chenbei 基於智能終端的物聯網家電 2017SR734534 PRC December 27, 平台客戶端軟件(Android版) 2017
8 Shenzhen Chenbei 基於智能終端的物聯網家電 2019SR0691041 PRC July 4, 2019 平台客戶端軟件(ios版)
9 Shenzhen Chenbei 基於智能終端的物聯網家電 2019SR0690920 PRC July 4, 2019 平台客戶端軟件(Android版)
C. FURTHER INFORMATION ABOUT OUR DIRECTORS, MANAGEMENT AND SUBSTANTIAL SHAREHOLDERS
1. Interests and Short Positions of Directors in the Shares Capital of Our Company
Interests in our Company
Immediately following completion of the Global Offering and the Capitalization Issue (taking no account of Shares which may be issued pursuant to the exercise of, the Over-allotment Option and options which may be granted under the Share Option Scheme), the interests or short positions of each of the Directors and the chief executives in the share capital, underlying shares and debentures of our Company and which, once the Shares are listed, will have to be notified to our Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he is taken or deemed to have under such provisions of the SFO) or which will be required, pursuant to section 352 of the SFO, to be entered in the register required to be kept therein or which, once the Shares are listed, will be required pursuant
– IV-14 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules to be notified to the Company and the Stock Exchange are set out as follows:
Number and Approximate Class of Percentage of Name of Director Capacity/Nature of Interest Securities(1) Shareholding
Ms. Yang(2)(5).... Grantor of the Annuity 781,827,000 69.6130% Trusts (L)
Mr. Yang Hai(3)(5). Interest in controlled 781,827,000 69.6130% corporation (L)
Mr. Yang Interest in controlled 781,827,000 69.6130% Yuzheng(4)(5) . . . corporation (L)
Notes:
1. The letter ‘‘L’’ denotes the person’s long position in the Shares.
2. Karis I LLC and Karis II LLC will hold approximately 21.6921% and 14.4613% of the issued share capital of our Company, respectively. Each of Karis I LLC and Karis II LLC is wholly owned by North Point Trust Company L.L.C., the trustee of the Annuity Trusts, on trust for the benefit of the Annuity Trusts, which were established by Ms. Yang for the ultimate benefit of the Family Trusts, pursuant to certain arrangements. The Family Trust I and Family Trust II were established by Ms. Yang as both the settlor and the trustee, and the beneficiaries of which are anychildrenborntooradoptedbyMs.Yangandtheirrespectiveissue,andMr.RyanXu,being Ms. Yang’s child, during his lifetime, and any charitable organizations to be subsequently determined by the independent trustee (if any) at its discretion upon its appointment, respectively. Pursuant to the Annuity Trusts, Ms. Yang, as the powerholder, has the power to appoint additional trustees and remove and replace North Point Trust Company L.L.C., and as the sole manager of Karis I LLC and Karis II LLC, has the authority to make all decisions in relation to them. Ms. Yang is deemed to be interested in both Karis I LLC and Karis II LLC, and is therefore deemed to be interested in any Shares in which each of Karis I LLC and Karis II LLC is interested.
3. Arceus BVI will hold 0.7183% of the issued share capital of our Company. Arceus BVI is wholly owned by Mr. Yang Hai. Mr. Yang Hai is therefore deemed to be interested in any Shares in which Arceus BVI is interested.
4. Caerus BVI will hold 32.7413% of the issued share capital of our Company. Caerus BVI is wholly owned by Mr. Yang Yuzheng. Mr. Yang Yuzheng is therefore deemed to be interested in any Shares in which Caerus BVI is interested.
5. Each of Ms. Yang, Mr. Yang Yuzheng and Mr. Yang Hai is family member of one another, and is therefore deemed to be interested in any Shares in which one another is interested.
– IV-15 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
2. Interests and Short Positions of Substantial Shareholders in the Share Capital of Our Company
Interests in our Company
So far as our Directors are aware, immediately following completion of the Global Offering and the Capitalization Issue (assuming the Over-allotment Option is not exercised and without taking into account any Shares which may be issued upon exercise of any options which may be granted under the Share Option Scheme), in addition to the interests disclosed under ‘‘— 1. Interests and Short Positions of Directors in the Share Capital of Our Company’’ above, the persons (not being a director or chief executive of our Company) who will have interests or short positions in the Shares or underlying Shares which are required to be disclosed to our Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO are as follows:
Number and Approximate Class of Percentage of Name of Shareholder Capacity/Nature of Interest Securities(1) Shareholding
North Point Trust Trustee 406,040,800 36.1534% Company L.L.C.(2) .. (L)
Karis I LLC(2)...... Beneficialowner 243,624,800 21.6921% (L)
Karis II LLC(2) ...... Beneficialowner 162,416,000 14.4613% (L)
Caerus BVI(3) ...... Beneficialowner 367,719,200 32.7413% (L) Arceus BVI(4) ...... Beneficialowner 8,067,200(L) 0.7183%
Mr. Xu Bo(5) ...... Interestofspouse 781,827,000 69.6130% (L)
Ms. Li Jisu(6) ...... Interestofspouse 781,827,000 69.6130% (L)
Ms. Chen Shuyong(7) . . Interest of spouse 781,827,000 69.6130% (L)
Notes:
(1) The letter ‘‘L’’ denotes the person’s long position in the Shares.
– IV-16 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(2) Karis I LLC and Karis II LLC will hold approximately 21.6921% and 14.4613% of the issued share capital of our Company, respectively. Each of Karis I LLC and Karis II LLC is wholly owned by North Point Trust Company L.L.C., the trustee of the Annuity Trusts, on trust for the benefit of the Annuity Trusts, which were established by Ms. Yang for the ultimate benefit of the Family Trusts, pursuant to certain arrangements. The Family Trust I and Family Trust II were established by Ms. Yang as both the settlor and the trustee, and the beneficiaries of which are any children born to or adopted by Ms. Yang and their respective issue and Mr. Ryan Xu, being Ms. Yang’s child, during his lifetime, and any charitable organizations to be subsequently determined by the independent trustee (if any) at its discretion upon its appointment, respectively. Pursuant to the Annuity Trusts, Ms. Yang, as the powerholder, has the power to appoint additional trustees and remove and replace North Point Trust Company L.L.C., and as the sole manager of Karis I LLC and Karis II LLC, has the authority to make all decisions in relation to them. Ms. Yang is deemed to be interested in both Karis I LLC and Karis II LLC, and is therefore deemed to be interested in any Shares in which each of Karis I LLC and Karis II LLC is interested.
(3) Caerus BVI is wholly owned by Mr. Yang Yuzheng. Mr. Yang Yuzheng is therefore deemed to be interested in any Shares in which Caerus BVI is interested.
(4) Arceus BVI is wholly owned by Mr. Yang Hai. Mr. Yang Hai is therefore deemed to be interested in any Shares in which Arceus BVI is interested.
(5) Mr. Xu Bo is the spouse of Ms. Yang. Under the SFO, Mr. Xu Bo is deemed to be interested in any Shares in which Ms. Yang is interested.
(6) Ms. Li Jisu is the spouse of Mr. Yang Yuzheng. Under the SFO, Ms. Li Jisu is deemed to be interested in any Shares in which Mr. Yang Yuzheng is interested.
(7) Ms. Chen Shuyong is the spouse of Mr. Yang Hai. Under the SFO, Ms. Chen Shuyong is deemed to be interested in any Shares in which Mr. Yang Hai is interested.
3. Directors’ Service Contracts and Remuneration
(a) Directors’ Service Contracts
Each of our executive Directors and non-executive Director (other than the independent non-executive Directors) has entered into a service contract with our Company for a term of three years commencing from the date thereof, which may be terminated by not less than three months’ notice in writing served by either party on the other.
Each of our independent non-executive Directors has entered into a letter of appointment with our Company for a term of three years commencing from the Listing Date, which may be terminated by not less than three months’ notice in writing served by either party on the other.
(b) Directors’ Remuneration
For the year ended December 31, 2017, 2018 and 2019 and six months ended June 30, 2020, the aggregate amount paid to our Directors as remuneration (including salaries, bonuses, allowances, benefits in kind and pension scheme contributions) were US$431,000, US$640,000, US$857,000 and US$449,000, respectively.
– IV-17 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
For the year ending December 31, 2020, the estimated total compensation payable to the Directors amounts to US$1.15 million (excluding any discretionary bonus).
There was no arrangement under which a Director has waived or agreed to waive any emoluments for each of the three financial years immediately preceding the issue of this prospectus.
4. Disclaimers
Save as disclosed in this prospectus:
(a) none of our Directors nor any of the persons whose names are listed in ‘‘— 9. Consents of Experts’’ in this Appendix has any direct or indirect interest in the promotion of, or in any assets which have been, within the two years immediately preceding the date of this prospectus, acquired or disposed of by or leased to any member of our Group, or are proposed to be acquired or disposed of by or leased to any member of our Group;
(b) none of our Directors nor any of the persons whose names are listed in ‘‘— 9. Consents of Experts’’ in this Appendix is materially interested in any contract or arrangement subsisting at the date of this prospectus which is significant in relation to the business of our Group;
(c) none of our Directors is materially interested in any contract or arrangement subsisting at the date of this prospectus whichissignificantinrelationtothe business of our Group taken as a whole;
(d) none of our Directors or their associates (as defined in the Listing Rules) or existing shareholders or our Company (who, to the knowledge of our Directors, owns more than 5% of our issued share capital) has any interest in any of the five largest customers of the Company; and
(e) none of our Directors or their associates (as defined in the Listing Rules) or our existing shareholders of our Company (who, to the knowledge of our Directors, owns more than 5% of our issued share capital) has any interest in any or the five largest suppliers of our Company.
– IV-18 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
D. OTHER INFORMATION
1. Pre-IPO Share Award Scheme
The Pre-IPO Share Award Scheme was adopted on June 16, 2020, the principal terms of which are summarized below. The Pre-IPO Share Award Scheme is not subject to the provisions of Chapter 17 of the Listing Rules as the Pre-IPO Share Award Scheme does not involve the grant of options by our Company to subscribe for new Shares.
(1) Purpose
The Pre-IPO Share Award Scheme aims to (i) recognize and reward the contributions of certain eligible employees of our Group; and (ii) incentivize them for their future contribution to the continual operation and development of our Group.
(2) Implementation
Pursuant to the Trust Deed, BOCT was appointed as trustee under the Share Award Trust to hold the Awarded Shares (as defined below) on trust for the benefit of the selected employee(s) (the ‘‘Selected Employee(s)’’) as determined by our Board pursuant to the rules of the Pre-IPO Share Award Scheme.
On June 22, 2020, for the purpose of the Pre-IPO Share Award Scheme, a total of 52,631 Shares (the ‘‘Awarded Shares’’) were issued and allotted to BOCT, representing approximately 4.9999% of the total issued share capital of our Company upon the Capitalization Issue but without taking into account the new Shares to be issued pursuant to the Global Offering and approximately 3.7490% of the total issued share capital of our Company immediately upon completion of the Capitalization Issue and the Global Offering (assuming the Over-allotment Option is not exercised and taking into no account of the Shares which may be issued pursuant to the exercise of the options which may be granted under the Share Option Scheme).
Awarded Shares granted on or before the Listing
A total of 10,000 Awarded Shares have been granted to and vested in one Selected Employee, Ms. Jiang Junxiu, a director Yoowo HK before Listing on a one-off basis with details set out below:
Number of Awarded Name of the grantee Position held within the Group Consideration Shares granted
Jiang Junxiu . . . . director of Yoowo HK HK$100 10,000
– IV-19 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
Awarded Shares to be granted after the Listing
The remaining 42,631 Awarded Shares will be granted to the Selected Employees after the Listing at full discretion of our Board pursuant to the rules of the Pre-IPO Share Award Scheme.
Other than pursuant to the Capitalization Issue, and save as disclosed above, no further Shares will be transferred and no new Shares will be issued by our Company for the purpose of the Pre-IPO Share Award Scheme. We may adopt other share option scheme(s) or similar incentive scheme(s) after Listing. Thereupon, we will comply with all applicable legal and regulatory requirements, including the Listing Rules, in respect of the adoption and implementation of such share option scheme(s) or any incentive scheme(s).
(3) Administration
The Pre-IPO Share Award Scheme shall be subject to the administration of our Board in accordance with the rules of the Pre-IPO Share Award Scheme. Our Board will make all determination in relation to the Pre-IPO Share Award Scheme. Our Board may delegate the authority to administer this scheme to any committee thereof or any third party duly appointed thereby, including without limitation third-party service providers and professional trustees (collectively, the ‘‘Authorized Administrators’’). Any decision of our Board made with respect to any matter arising under the Pre-IPO Share Award Scheme (including the interpretation of any rules therein) shall be final and binding on all parties.
(4) Term
Subject to any early termination pursuant thereto, the Pre-IPO Share Award Scheme shall be valid and effective for a term of ten (10) years, commencing from the date of adoption.
(5) Grant of Awarded Shares
A grant of the Awarded Shares to any Selected Employee shall be made by a grant notice (the ‘‘Grant Notice’’) specifying the number of Awarded Shares so granted and the conditions (if any) upon which such Awarded Shares were granted.
A grant of the Awarded Shares shall be deemed to have been accepted when the acceptance form attached to the Grant Notice is duly signed and delivered to our Company by the Selected Employee within five (5) business days after the date of the Grant Notice.
– IV-20 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(6) Awarded Shares to be Personal to the Selected Employees
The Awarded Shares granted pursuant to the Pre-IPO Share Award Scheme shall be personal to the Selected Employees. Before the Awarded Shares are vested in a Selected Employee pursuant to the Pre-IPO Share Award Scheme, the Awarded Shares shall not be assignable or transferrable. The Selected Employees shall not sell, transfer, charge, mortgage, encumber or create any interest in favor of any other person over or in relation to any Awarded Shares granted to him or any interest or benefits therein.
(7) Vesting of Awarded Shares
The vesting principles of the Pre-IPO Share Award Scheme are summarized as follows:
(i) A Selected Employee is not entitled to enjoy the voting rights nor any rights in respect of the Awarded Shares, including but not limited to, any dividends or other distributions, before such Awarded Shares are vested in him.
(ii) Subject to the terms of the Pre-IPO Share Award Scheme and the specific terms and conditions set out in the Grant Notice to each Selected Employee, the Awarded Shares shall be vested in such Selected Employee in accordance with the following schedule provided that the vesting conditions set out in the Grant Notice applicable to such Selected Employee are satisfied:
(a) As to the 10,000 Awarded Shares granted to Ms. Jiang Junxiu (a director of Yoowo HK) as the Selected Employee before Listing (the ‘‘Pre-IPO Vested Awarded Shares’’),theyshallbevestedonMs.JiangJunxiuon a one-off basis on or before the Listing, and subject to a five-year undertaking period on the Pre-IPO Vested Awarded Shares from the date of vesting as imposed by the Board (the ‘‘Undertaking Period’’), and the Pre-IPO Vested Awarded Shares granted to Ms. Jiang Junxiu will be considered as fulfilled during the Undertaking Period in accordance with the following schedule (the ‘‘Fulfillment Schedule’’):
. 10% of Ms. Jiang Junxiu’s vested Shares shall become fulfilled upon the first anniversary of the date of vesting;
. 10% of Ms. Jiang Junxiu’s vested Shares shall become fulfilled upon the second anniversary of the date of vesting;
. 20% of Ms. Jiang Junxiu’s vested Shares shall become fulfilled upon the third anniversary of the date of vesting;
. 30% of Ms. Jiang Junxiu’s vested Shares shall become fulfilled upon the fourth anniversary of the date of vesting; and
– IV-21 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
. 30% of Ms. Jiang Junxiu’s vested Shares shall become fulfilled upon the fifth anniversary of the date of vesting.
During the Undertaking Period, if Ms. Jiang Junxiu ceases to be able to satisfy the vesting conditions applicable to her including but not limited to paragraph (7)(iii) below, Ms. Jiang Junxiu shall pay to our Company an amount equivalent to the difference between the vesting price as specified in the Grant Notice (the ‘‘Vesting Price’’) and the Offer Price multiplied by the unfulfilled portion of the Pre-IPO Vested Awarded Shares according to the Fulfillment Schedule based on the following formula:
A=B×C
Where:
A is the amount to be paid by Ms. Jiang Junxiu
B is the difference between the Vesting Price and the Offer Price
C is the number of Shares representing the unfulfilled portion of the Pre- IPO Vested Awarded Shares according to the Fulfillment Schedule
(b) As to the 42,631 Awarded Shares granted to the Selected Employees after the Listing, they shall be vested in such Selected Employee in three tranches on the following vesting dates:
. 20% on the first anniversary of the date of grant;
. 30% on the second anniversary of the date of grant; and
. 50% on the third anniversary of the date of grant;
For the avoidance of doubt, except for the Pre-IPO Vested Awarded Shares, the Awarded Shares which are vested in three tranches after the Listing are not subject to the requirements in relation to the Undertaking Period as specified in paragraph (ii)(a) above.
(iii) Our Board and/or the Authorized Administrator(s) has absolute discretion in determining whether the vesting conditions applicable to a Selected Employee are satisfied. The vesting conditions include but not limited to:
(a) the Selected Employee shall remain an employee of our Group on the relevant vesting dates;
– IV-22 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(b) there shall be no occurrence of triggering events for the surrender of the Awarded Shares as specified in paragraph (8) below; and
(c) the Selected Employee and his associate(s) shall not be employed by or operate or invest in any entity, during the period from the date of grant to the relevant vesting dates, the business of which competes with the core business of our Group.
(8) Triggering Events for Surrender of Awarded Shares
Unless our Board determines otherwise, the unvested Awarded Shares will be deemed to have been surrendered by a Selected Employee upon the occurrence of any of the following events:
(i) termination of employment with or without any cause;
(ii) unsatisfactory performance leading to demotion;
(iii) failure to meet performance appraisal rating for the previous year according to the performance appraisal rating policy of our Company (as amended from time to time);
(iv) no renewal of the employment contract upon the expiration; or
(v) any other event to be determined by our Board.
For the purpose of the Pre-IPO Share Award Scheme, ‘‘cause’’ means, with respect to a Selected Employee, the termination of employment on any of the following grounds: (i) the Selected Employee voluntarily resigns before any of the vesting dates; (ii) unsatisfactory performance; (iii) dishonest behavior or serious misconduct; (iv) negligent conduct; or (v) any other conducts or omission, in our Company’s conclusive opinion, which may affect adversely such Selected Employee’s performance or our Company’s reputation.
The unvested Awarded Shares deemed to have been surrendered shall be held by BOCT and BOCT may, under our Board’s instructions, re-allocate such Awarded Shares to other Selected Employees, or in case no other Selected Employees can be identified, re-allocate such Awarded Shares to any other person designated by our Company.
– IV-23 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(9) Cancelation of Awarded Shares
In the event that a Selected Employee is dismissed by the Company as a result of his serious violation of our Company’s policies or causing detriment to the interest of our Group, or a Selected Employee violates any applicable laws, rules or regulation which results conviction, the unvested Awarded Shares which are granted to such Selected Employee will be canceled. The canceled Awarded Shares will be held by BOCT and may be granted to other Selected Employees.
(10) Change and Termination of Pre-IPO Share Award Scheme
The Board may at any time modify or terminate the operation of the Pre-IPO Share Award Scheme. If the Board terminates the Pre-IPO Share Award Scheme prior to the expiry of the effective term of the Pre-IPO Share Award Scheme, all the unvested Awarded Shares (the ‘‘Remaining Shares’’)willbeheldbyBOCT.TheBoardmayatits full discretion to direct and procure BOCT to transfer, repurchase, reallocate or to make on-market disposal of such Remaining Shares within reasonable time and our Company is entitled to receive the net proceeds from such disposal.
2. Share Option Scheme
Summary of terms
The following is a summary of the principal terms of the Share Option Scheme conditionally approved and adopted by the written resolutions of all Shareholders of our Company passed on December 1, 2020. Our Directors confirm that the terms of the Share Option Scheme comply with the requirements under Chapter 17 of the Listing Rules.
(a) Purpose
The purpose of the Share Option Scheme is to provide incentive or reward to Eligible Persons (as defined in paragraph (b) below) for their contribution to, and continuing efforts to promote the interests of, our Group and for such other purposes as the Board may approve from time to time.
(b) Who may join
The Board may, at its absolute discretion, offer eligible persons (being any director or employee (whether full time or part time), consultant or advisor of our Group who in the sole discretion of the Board has contributed to and/or will contribute to our Group) (the ‘‘Eligible Persons’’) to subscribe for such number of Shares in accordance with the terms of the Share Option Scheme.
– IV-24 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(c) Maximum number of Shares
(i) The maximum aggregate number of Shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Share Option Scheme and any other share option schemes of our Company, must not, in aggregate, exceed 30% of the total number of Shares in issue from time to time. No options may be granted under the Share Option Scheme and any other share option schemes of the Company if this will result in such limit being exceeded.
(ii) Subject to paragraphs (c)(i), (iv) and (v), at the time of adoption by our Company of the Share Option Scheme or any new share option scheme (the ‘‘New Scheme’’), the aggregate number of Shares which may be issued upon exercise of all options to be granted under the Share Option Scheme, the New Scheme and all schemes existing at such time (the ‘‘Existing Schemes’’)of our Company must not in aggregate exceed 10% of the total number of the Shares in issue as of the Listing Date (the ‘‘Scheme Mandate Limit’’).
(iii) For the purposes of calculating the Scheme Mandate Limit under paragraph (c)(ii), Shares which are the subject matter of any options that have already lapsed in accordance with the terms of the relevant Existing Scheme(s) shall not be counted.
(iv) The Scheme Mandate Limit may be refreshed by ordinary resolution of the Shareholders in general meeting, provided that:
. the Scheme Mandate Limit so refreshed shall not exceed 10% of the total number of issued Shares as of the date of Shareholders’ approval of the refreshment of the Scheme Mandate Limit;
. options previously granted under any Existing Schemes (including options outstanding, canceled, or lapsed in accordance with the relevant scheme rules or exercised options) shall not be counted for the purpose of calculating the limit as refreshed; and
. a circular regarding the proposed refreshment of the Scheme Mandate Limit has been dispatched to the Shareholders in a manner complying with, and containing the matters specified in, the relevant provisions of Chapter 17 of the Listing Rules.
– IV-25 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(v) Our Company may seek separate approval from the Shareholders in the general meeting for granting options which will result in the Scheme Mandate Limit being exceeded, provided that:
. the grant is to Eligible Persons specifically identified by our Company before the approval is sought; and
. a circular regarding the grant has been dispatched to the Shareholders in a manner complying with, and containing the matters specified in, the relevant provisions of Chapter 17 of the Listing Rules and other applicable laws and rules,
in accordance with the terms of the Share Option Scheme.
(d) Maximum number of options to any one individual
No option shall be granted to any Eligible Person (the ‘‘Relevant Eligible Person’’) if, at the relevant time of grant, the number of Shares issued and to be issued upon exercise of all Options (granted and proposed to be granted, whether exercised, canceled or outstanding) to the Relevant Eligible Person in the 12-month period expiring on the date on which an offer of the grant of an option under the Share Option Scheme is made to the Relevant Eligible Person would exceed 1% of the total number of Shares in issue at such time, unless:
. such grant has been duly approved, in the manner prescribed by the relevant provisions of Chapter 17 of the Listing Rules, by ordinary resolution of the Shareholders in general meeting, at which the Relevant Eligible Person and his associates abstained from voting;
. a circular regarding the grant has been dispatched to the Shareholders in a manner complying with, and containing the information specified in, the relevant provisions of Chapter 17 of the Listing Rules; and
. the number and terms (including the Subscription Price) of such options are fixed before the general meeting of our Company at which the same are approved.
(e) Price of Shares
The subscription price for a Share in respect of any particular option granted under the Share Option Scheme (which shall be payable upon exercise of the option) shall be a pricesolelydeterminedbytheBoardandnotifiedtoallEligiblePersonandshallbeat least the highest of (i) the closing price of the Shares as stated in the Stock Exchange’s daily quotations sheet on the date of offer to grant option, which must be a business day; (ii) the average of the closing prices of the Shares as stated in the Stock Exchange’sdaily quotations sheet for the five business days immediately preceding the date of offer to
– IV-26 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
grant option (the ‘‘Offer Date’’) (provided that the new issue price shall be used as the closing price for any business day falling within the period before the listing Shares where our Company has been listed for less than five business days as of the Offer Date); and (iii) the nominal value of the Share. A consideration of RMB1 is payable on acceptance of the offer of an option or options.
(f) Granting options to connected persons
Any grant of options to a Director, chief executive or Substantial Shareholder of our Company or any of their respective associates is required to be approved by the independent non-executive Directors (excluding any independent non-executive Director who is a proposed grantee of the options). If our Company proposes to grant options to a Substantial Shareholder or an independent non-executive Director of our Company or their respective associates which will result in the number and value of Shares issued and to be issued upon exercise of all options granted and to be granted (including options exercised, canceled and outstanding) to such person in the 12-month period up to and including the date of the offer of such grant in aggregate exceeding: (i) 0.1% of the Shares in issue at the relevant time of grant; and (ii) HK$5 million, based on the closing price of the Shares as stated in the daily quotations sheets issued by the Stock Exchange at the date of each grant, such grant shall not be valid unless: (A) a circular containing the details of the grant has been dispatched to the Shareholders in a manner complying with, and containing the matters specified in, the relevant provisions of Chapter 17 of the Listing Rules (including in particular, a recommendation from the independent non- executive Directors (excluding the independent non-executive Director who is the prospective grantee) to the independent Shareholders as to voting); and (B) the grant has been approved by the Shareholders in general meeting (taken on a poll), at which all Connected Persons abstained from voting in favor at such meeting.
(g) Restrictions on the time of grant of options
No offer to grant option shall be made after a price-sensitive event has occurred or a price sensitive matter has been the subject of a decision until such price-sensitive information has been announced pursuant to the requirements of the Listing Rules. In particular,nooptionsmaybeofferedtobegrantedduringtheperiodcommencingone month immediately preceding the earlier of (i) the date of the Board meeting (as such dateisfirstnotifiedbyourCompanytotheStockExchangeinaccordancewiththe Listing Rules) for the approval of our Company’s results for any year, half-year, quarterly or any other interim period (whether or not required under the Listing Rules); and (ii) the deadline for our Company to publish an announcement of its results for any year or half year under the Listing Rules, or quarterly or any other interim period (whether or not required under the Listing Rules) and ending on the date of actual publication of the results announcement. The period which no option may be granted will cover any period of delay in the publication of results announcement.
– IV-27 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(h) Rights are personal to grantee
An option is personal to the grantee and shall not be assignable nor transferable, and no grantee shall in any way sell, transfer, charge, mortgage, encumber or create any interest (legal or beneficial) in favor of any third party over or in relation to any option.
(i) Time of exercise of option
Subject to the provisions of the Listing Rules and other applicable laws and regulations, the Board may in its absolute discretion when offering the grant of an option impose any conditions, restrictions or limitations in relation thereto in addition to those set forth in the Share Option Scheme as the Board may think fit (to be stated in the offer Letter) including (without prejudice to the generality of the foregoing) qualifying and/or continuing eligibility criteria, conditions, restrictions or limitations relating to the achievement of performance, operating or financial targets by our Company and/or the grantee, the satisfactory performance or maintenance by the grantee of certain conditions or obligations or the time or period before the right to exercise the option in respect of all or any of the Shares shall vest provided that such terms or conditions shall not be inconsistent with any other terms or conditions of the Share Option Scheme. For the avoidance of doubt, subject to such terms and conditions as the Board may determine as aforesaid (including such terms and conditionsinrelationtotheirvesting,exerciseor otherwise) there is no minimum period for which an option must be held before it can be exercised and no performance target which need to be achieved by the grantee before the option can be exercised.
The date of grant of any particular option is the date on which the offer relating to such option is duly accepted by the grantee in accordance with the Share Option Scheme. An option may be exercised according to the terms of the Share Option Scheme and the offer in whole or in part by the grantee (or his personal representatives) before its expiry by giving notice in writing to our Company stating that the option is to be exercised and the number of Shares in respect of which it is exercised provided that the number of Shares shall be equal to the size of a board lot for dealing in Shares on the Stock Exchange or an integral multiple thereof. Such notice must be accompanied by a remittance for the full amount of the subscription price for the Shares in respect of which the notice is given. The period during which an option may be exercised will be determined by the Board at its absolute discretion, save that no option may be exercised more than 10 years from the date of grant. No option may be granted more than 10 years after the date of approval of the Share Option Scheme. Subject to earlier termination by our Company in general meeting, the Share Option Scheme shall be valid and effective for a period of 10 years from the date of adoption of the Share Option Scheme by Shareholders by resolution at a general meeting.
– IV-28 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(j) Performance target
The Board may from time to time require a particular grantee to achieve certain performance targets specified at the time of grant before any option granted under the Share Option Scheme can be exercised. There are no specific performance targets stipulated under the terms of the Share Option Scheme and the Board is currently unable to determine such restriction on the exercise of the options granted under the Share Option Scheme.
(k) Rights on ceasing to be an Eligible Person
In the event of the grantee ceasing to be an Eligible Person for any reason other than ceasing (1) by reason of summary dismissal for misconduct or other breach of the terms of his employment or other contract constituting him an Eligible Person, or appears either to be unable to pay or to have no reasonable prospect of being able to pay his debts or has become insolvent or has made any arrangements or composition with his creditors generally or on which he has been convicted of any criminal offense involving his integrity or honesty or (2) by death or permanent disability the option may be exercised within one month after the date of such cessation, which date shall be (i) if he is an employee or director of our Company or any subsidiary, his last actual working day with our Company or any subsidiary whether salary is paid in lieu of notice or not; or (ii) if he is not an employee of our Company or any subsidiary, the date on which the relationship constituting him an Eligible Person ceases.
(l) Rights on death or permanent disability
In the event that the grantee of an outstanding option dies or becomes permanently disabled before exercising the option in full or at all, the option may be exercised up to the entitlement of such grantee or, if appropriate, in the circumstances described in paragraphs (n), (o) and (q), an election made by his personal representatives within twelve months after the date of his death or permanent disability.
(m) Lapse of option on misconduct, bankruptcy or dismissal etc.
If a grantee ceases to be an Eligible Person by reason of summary dismissal for misconduct or other breach of the terms of his employment or other contract constituting him an Eligible Person, or appears either to be unable to pay or to have no reasonable prospect of being able to pay his debts or has become insolvent or has made any arrangements or composition with his creditors generally or on which he has been convicted of any criminal offense involving his integrity or honesty, the right to exercise the option (to the extent not already exercised) shall terminate immediately.
– IV-29 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(n) Rights on a general offer by way of a take-over
If a general offer by way of a take-over is made to all the Shareholders (or all such Shareholders other than the offeror and/or any person controlled by the offeror and/or any person acting in association or concert with the offeror) and such offer becomes or is declared unconditional, our Company shall forthwith notify all the grantees and any grantee (or his personal representatives) may by notice in writing to our Company within 21 days after such offer becoming or being declared unconditional exercise the option to its full extent or to the extent specified in such notice.
(o) Rights on a general offer by way of a scheme of arrangement
If a general offer by way of a scheme of arrangement is made to all the Shareholders and the scheme has been approved by the necessary number of Shareholders at the requisite meetings, our Company shall forthwith notify the grantees and any grantee (or his personal representatives) may thereafter (but before such time as shall be notified by our Company) by notice in writing to our Company exercise the option to its full extent or to the extent specified in such notice.
(p) Rights on a compromise or arrangement
If a compromise or arrangement between our Company and its Shareholders or creditors is proposed for the purposes of or in connection with a scheme for the reconstruction of our Company or its amalgamation with any other company or companies, our Company shall give notice thereof to the grantee (together with a notice of the existence of the provisions of this paragraph) on the same date or soon after it dispatches the notice to each member or creditor of our Company summoning the meeting to consider such a compromise or arrangement, and thereupon the grantee (or his personal representatives) may forthwith and until the expiry of the period commencing with such date and ending with the earlier of 2 months thereafter and the date on which such compromise or arrangement is sanctioned by the court of competent jurisdiction, exercise any of his options whether in full or in part, but the exercise of an option as aforesaid shall be conditional upon such compromise or arrangement being sanctioned by the court of competent jurisdiction and becoming effective. Upon such compromise or arrangement become effective, all options shall lapse except insofar as previously exercised under the Share Option Scheme. Our Company may require the grantee (or his personal representatives) to transfer or otherwise deal with the Shares issued as a result of the exercise of options in these circumstances so as to place the grantee in the same position as nearly as would have been the case had such Shares been subject to such compromise or arrangement.
– IV-30 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(q) Rights on winding-up
In the event a notice is given by our Company to its Shareholders to convene a general meeting for the purposes of considering, and if thought fit, approving a resolution to voluntarily wind-up our Company other than for the purpose of a reconstruction, amalgamation or scheme of arrangement, our Company shall on the same date as or soon after it dispatches such notice to each member of our Company give notice thereof to all grantees (together with a notice of the existence of the provisions of this paragraph) and thereupon, each grantee (or his personal representatives) shall be entitled to exercise all or any of his options at any time not later than four business days prior to the proposed general meeting of our Company by giving notice in writing to our Company, accompanied by a remittance for the full amount of the aggregate subscription price for the Shares in respect of which the notice is given whereupon our Company shall as soon as possible and, in any event, no later than one business day immediately prior to the date of the proposed general meeting referred to above, allot the relevant Shares to the grantee credited as fully paid.
(r) Lapse of the options
The right to exercise an option (to the extent not already exercised) shall terminate immediately upon the earliest of:
(i) the expiry of the option period;
(ii) the expiry of any of the periods referred to in paragraph (k), (l) or (n);
(iii) subject to the scheme of arrangement becoming effective, the expiry of the period referred to in paragraph (o);
(iv) subject to the compromise or arrangement referred to in paragraph (p);
(v) the date on which the grantee ceases to be an Eligible Person by reason of summary dismissal for misconduct or other breach of the terms of his employment or other contract constituting him an Eligible Person, or appears either to be unable to pay or to have no reasonable prospect of being able to pay his debts or has become insolvent or has made any arrangements or composition with his creditors generally or on which he has been convicted of any criminal offense involving his integrity or honesty;
(vi) subject to paragraph (q), the date of the commencement of the voluntary winding-up of our Company;
(vii) the date on which the grantee commits a breach of paragraph (h);
(viii) the date on which the option is canceled by the Board as provided in paragraph (v); or
– IV-31 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(ix) the non-fulfillment of any condition referred to in paragraph (x) on or before the date specified therein.
Our Company shall owe no liability to any grantee for the lapse of any option under this paragraph (r).
(s) Ranking of Shares
The Shares to be allotted and issued upon the exercise of an option shall be subject to our Company’s Memorandum and Articles of Association and the laws of the Cayman Island for the time being in force and shall rank pari passu in all respects with the fully- paid Shares in issue of our Company as of the date of allotment and will entitle the holders to participate in all dividends or other distributions paid or made on or after the date of allotment other than any dividend or other distribution previously declared or recommended or resolved to be paid or made if the record date therefore shall be on or before the date of allotment and issue.
(t) Effect of alterations to share capital
In the event of any alteration to the capital structure of our Company arising from capitalization of profits or reserves, rights issue, consolidation, redenomination, subdivision or reduction of the share capital of our Company in accordance with the legal requirements or requirements of the Stock Exchange other than any alteration in the capital structure of our Company as a result of an issue of Shares as consideration in a transaction to which our Company is a party. Adjustment (if any) shall be made to (a) the number or nominal amount of Shares subject to the option so far as unexercised; and/ or (b) the subscription price for the Shares subject to the option so far as unexercised; and/or (c) the Shares to which the option relates; or any combination thereof as the Auditors or the independent financial advisors to our Company (acting as expert not arbitrator) shall at the request of our Company certify in writing to the Board either generally or as regards any particular grantee that the adjustments are in compliance with Rule 17.03(13) of the Listing Rules and the notes thereto. Any such adjustments must give a grantee the same proportion of the equity capital of our Company as to which that grantee was previously entitled, and any adjustments so made shall be in compliance with the Listing Rules and such applicable guidance and/or interpretation of the Listing Rules from time to time issued by the Stock Exchange (including, without limitation, the ‘‘Supplemental Guidance on Main Board Listing Rule 17.03(13) and the Notice immediately after the Rule’’ attached to the letter of the Stock Exchange dated September 5, 2005 to all issuers relating to share option scheme) and any future guidance/interpretation of the Listing Rules issued by the Stock Exchange from time to time (but no such alterations shall be made the effect of which would be to enable a Share to be issued at less than its nominal value. The capacity of the Auditors or the independent financial advisors to our Company in this paragraph is that of experts and not of arbitrators and their certification shall, in the absence of manifest error, be final
– IV-32 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
and binding on our Company and the grantees. The costs of the Auditors or the independent financial advisors to our Company shall be borne by our Company. Notice of such adjustment shall be given to the grantees by our Company.
(u) Alteration of Share Option Scheme
The Share Option Scheme may be altered in any respect by resolution of the Board except that the provisions of the Share Option Scheme as to:
(i) the definitions of ‘‘Eligible Person’’ and ‘‘grantee’’ in the Share Option Scheme; and
(ii) the provisions relating to the matters set out in Rule 17.03 of the Listing Rules
which shall not be altered to the advantage of grantees or prospective grantees except with the prior approval of the Shareholders in general meeting (with participants and their respective associates abstained from voting). No such alterations shall operate to affect adversely the terms of issue of any option granted or agreed to be granted prior to such alterations except withtheconsentorsanctioninwritingofsuchmajorityofthe grantees as would be required of the Shareholders under the bye-laws for the time being of our Company for a variation of the rights attached to the Shares. Any change to the authority of the Board in relation to any alterations to the terms of the Share Option Scheme must be approved by the Shareholders in general meeting. Any alterations to the provisions of the Share Option Scheme which are of a material nature or any change to the terms of options granted must be approved by the Shareholders in general meeting except where the alterations take effect automatically under the existing provisions of the Share Option Scheme. Any amended terms of the Scheme or the options must comply with Chapter 17 of the Listing Rules.
(v) Cancelation of options
The Board may cancel an option granted but not exercised with the approval of the grantee of such option. No options may be granted to an Eligible Person in place of his canceled options unless there are available unissued options (excluding the canceled options) within the limit set out in paragraph (c) above from time to time.
(w) Termination of the Share Option Scheme
Our Company, by resolution in general meeting, or the Board may at any time terminate the operation of the Share Option Scheme and in such event no further option will be offered but in all other respects the provisions of the Share Option Scheme shall remain in full force and effect and options granted prior to such termination shall continue to be valid and exercisable in accordance with the Share Option Scheme.
– IV-33 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(x) Conditions of the Share Option Scheme
The Share Option Scheme is conditional upon:
(i) the Listing Committee granting approval of the listing of, and permission to deal in, any Shares which may fall to be allotted and issued pursuant to the exercise of any such options;
(ii) the passing of the resolutions by the Shareholders to approve and adopt the Share Option Scheme and to authorize the Board to grant Options under the Share Option Scheme and to allot and issue Shares pursuant to the exercise of any options; and
(iii) the commencement of dealings in the Shares on the Stock Exchange.
(y) Disclosure in annual and interim reports
Our Company will disclose details of the Share Option Scheme in its annual and interim reports including the number of options, date of grant, exercise price, exercise period, vesting period and (if appropriate) a valuation of options granted during the financial year/period in the annual/interim reports in accordance with the Listing Rules in force from time to time.
3. Estate Duty, Tax and Other Indemnity
Indemnityonestatedutyandtaxation
Karis I LLC, Karis II LLC, Caerus BVI, Arceus BVI, Ms. Yang, Mr. Yang Yuzheng and Mr. Yang Hai (the ‘‘Indemnifiers’’) have pursuant to the Deed of Indemnity, given indemnities on a joint and several basis in favor of the Company (for itself and as trustee as its subsidiaries) in connection with, among others, any taxation which might be payable by any member of our Group in respect of any income, profits or gains earned, accrued or received or alleged to have been earned, accrued or received, including without limitation any tax liabilities incurred in relation to transfer pricing arrangements conducted on or before (the ‘‘Taxation Liabilities’’) the date on which the Global Offering becomes unconditional and dealings in Shares first commence on the Stock Exchange (the ‘‘Effective Date’’).
The Indemnifiers will however, not be liable under the Deed of Indemnity for taxation where:
(a) to the extent that provision or reserve has been made for such Taxation in the audited accounts of any member of our Group for the Track Record Period as set out in Appendix I to this prospectus (the ‘‘Accounts’’);
– IV-34 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(b) to the extent that such Taxation Liabilities falling on any of the members of our Group in respect of any accounting period commencing on or after July 1, 2020 and ending on the Listing Date would not have arisen but for some act or omission of, or transaction voluntarily entered into by, any of the members of our Group (whether alone or in conjunction with some other act, omission or transaction, whenever occurring) without the prior written consent or agreement of the Indemnifiers, other than any such act, omission or transaction:
(i) carried out or effected in the ordinary course of business or in the ordinary course of acquiring and disposing of capital assets after July 1, 2020, or
(ii) carried out, made or entered into pursuant to a legally binding commitment created on or before June 30, 2020 or pursuant to any statement of intention made in this prospectus; or
(c) to the extent of any provision or reserve made for the Taxation Liabilities in the Accounts which is finally established to be an over-provision or an excessive reserve, in which case the Indemnifiers’ liability (if any) in respect of the Taxation Liabilities shall be reduced by an amount not exceeding such provision or reserve, provided that the amount of any such provision or reserve applied pursuant to this paragraph to reduce the Indemnifiers’ liability in respect of the Taxation Liabilities shall not be available in respect of any such liability arising thereafter; or
(d) to the extent that any Taxation Liabilities and claims arises or is incurred as a result of the imposition of taxation as a consequence of any retrospective change in the law, rules and regulations or the interpretation or practice thereof by the Hong Kong Inland Revenue Department or the taxation authority of the PRC, the United States or any other relevant authority (whether in Hong Kong, the BVI, the United States, the PRC or any other part of the world) coming into force after the date of the Deed of Indemnity or to the extent such claim arises or is increased by an increase in rates of taxation or claim after the date of the Deed of Indemnity with retrospective effect.
Our Directors have been advised that no material liability for estate duty is likely to fall on the Company or any of its subsidiaries under the laws of the Cayman Islands, the BVI, Hong Kong, the United States, the PRC, Netherlands, Germany, Macau or Japan, being jurisdictions in which one or more of the companies comprising our Group are incorporated.
– IV-35 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
Other indemnity
Under the Deed of Indemnity, the Indemnifiers have also given indemnities on a joint and several basis in favor of the Company (for itself and as trustee as its subsidiaries) on demand from and against all penalties, claims, actions, demands, proceedings, litigations (without limitation to any legal costs), judgements, losses, liabilities, damages, costs, administrative or other charges, fees, expenses and fines of whatevernaturewhichmaybeimposedonorincurredorsufferedbyourGroupasa result of directly or indirectly or in connectionwith(a)anynon-compliancewiththe applicable laws, rules or regulations, by our Company and/or any members of our Group in their respective place of incorporation or operation; and (b) any infringement of intellectual property rights including but not limited to the use of software without license by our Company and/or any members of our Group, which has occurred at any time on or before the Effective Date.
4. Litigation
Saved as disclosed in ‘‘Business—Legal Proceedings and Compliance—Legal Proceedings’’, as of the Latest Practicable Date, no member of our Group is engaged in any litigation or arbitration of material importance and no litigation or claim of material importance is known to the Directors to be pending or threatened against any member of our Group, that would have a material adverse effect on the results of operations or financial condition of the Group.
5. Joint Sponsors
The Joint Sponsors have made an application on behalf of our Company to the Stock Exchange for listing of, and permission to deal in, the Shares in issue and Shares to be issued as mentioned herein (including any Shares falling to be issued pursuant to the exercise of the Over-allotment Option and pursuant to the exercise of any options which may be granted under the Share Option Scheme). Each of the Joint Sponsors is independent from our Company pursuant to Rule 3A.07 of the Listing Rules. The total amount of fees payable to the Joint Sponsors by our Company for sponsoring the listing of the Shares on the Stock Exchange is HK$13.4 million.
6. Preliminary expenses
The preliminary expenses incurred by our Company in relation to the incorporation of our Company were approximately US$8,900, among which, US$5,600 were paid and US$3,300 are payable by us.
7. Promoters
Our Company has no promoter for the purpose of the Listing Rules.
– IV-36 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
8. Qualifications of Experts
The following are the qualifications of the experts who have given opinion or advice whicharecontainedinthisprospectus:
Name Qualification
BNP Paribas Securities (Asia) licensed for Type 1 (dealing in securities), Type 2 (dealing Limited...... in future contracts), Type 4 (advising on securities) and Type 6 (advising on corporate finance) regulated activities under the SFO
InnovaxCapitalLimited..... licensedfor Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO
Ernst&Young...... Certified public accountants under the Professional Accountants Ordinance (Chapter 50 of the Laws of Hong Kong) and Registered Public Interest Entity Auditor under the Financial Reporting Council Ordinance (Chapter 588 of the Laws of Hong Kong)
Conyers Dill & Pearman. . . . . Cayman Islands attorneys-at-law
Jingtian&Gongcheng...... PRClegaladviserstotheCompany
NixonPeabodyLLP...... LegaladviserstotheCompanyastoUnitedStateslaws
Gleiss Lutz Hootz Hirsch Legal advisers to the Company as to German laws PartmbB Rechtsanwälte, Steuerberater......
Rutgers Posch Visée Endedijk Legal advisers to the Company as to Netherlands laws N.V......
Mori Hamada & Matsumoto . . Legal advisers to the Company as to Japan laws
Rato, Ling, Lei & Cortés — Legal advisers to the Company as to Macau laws Advogados ......
Gowling WLG (Canada) LLP . Legal advisers to the Company as to Canada laws
Frost & Sullivan (Beijing) Inc., Industry consultant Shanghai Branch Co......
Mr. Dixon Tse Siu Chung. . . . Hong Kong barrister-at-law
Ernst & Young (China) Transfer pricing consultant AdvisoryLimited......
– IV-37 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
9. Consents of Experts
Each of the experts named in paragraph 8 above has given and has not withdrawn its consent to the issue of this document with the inclusion of its report and/or letter and/or summary of valuations and/or opinion and/or data (as the case may be) and references to its name included in the form and context in which it respectively appears.
None of the experts named in paragraph 8 above has any shareholding interests in the Group or any right or option (whether legally enforceable or not) to subscribe for, or to nominate persons to subscribe for, securities in any member of our Group.
10. Binding Effect
This prospectus shall have the effect, if an application is made in pursuance hereof, of rendering all persons concerned bound by all of the provisions (other than the penal provisions) of sections 44A and 44B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance so far as applicable.
11. Agency fees or commission received
The Underwriters will receive an underwriting commission, and the Joint Sponsors will receive a sponsorship fee, as referred to under the section headed ‘‘Underwriting— Underwriting Arrangements and Expenses—Commissions and Expenses’’ in this prospectus.
12. Miscellaneous
(a) Save as disclosed in this prospectus, within the two years immediately preceding the date of this prospectus:
(i) no share or loan capital of our Company or any of its subsidiaries has been issued or agreed to be issued fully or partly paid either for cash or for a consideration other than cash;
(ii) no share or loan capital of our Company or any of its subsidiaries is under option or is agreed conditionally or unconditionally to be put under option;
(iii) no commissions, discounts, brokerages or other special terms have been granted or agreed to be granted in connection with the issue or sale of any share or loan capital of our Company or any of its subsidiaries;
(iv) no founders, management or deferred shares of our Company or any of its subsidiaries have been issued or agreed to be issued; and
– IV-38 – APPENDIX IV STATUTORY AND GENERAL INFORMATION
(v) no commission has been paid or is payable for subscription, agreeing to subscribe, procuring subscription or agreeing to procure subscription of any share in our Company or any of its subsidiaries.
(b) Since December 31, 2019, being the date of our latest audited consolidated financial results as set out in ‘‘Accountants’ Report’’ in Appendix I to this prospectus, there has been no material adverse change in the financial or trading position or prospects of our Group.
(c) There has not been any interruption in the business of our Group which may have or has had a significant effect on the financial position of our Group in the 12 months preceding the date of this prospectus.
(d) Subject to the provisions of the Cayman Companies Law, the register of members of the Company will be maintained in the Cayman Islands by Conyers Trust Company (Cayman) Limited and a branch register of members of the Company will be maintained in Hong Kong by Hong Kong Share Registrar. Unless the Directors otherwise agree, all transfer and other documents of title of Shares must be lodged for registration with and registered by our Hong Kong Share Registrar in Hong Kong and may not be lodged in the Cayman Islands. All necessary arrangements have been made to enable the Shares to be admitted into CCASS for clearing and settlement.
(e) No Company within our Group is presently listed on any stock exchange or traded on any trading system.
(f) There are no arrangements in existence under which future dividends are to be or agreed to be waived.
(g) Our Directors have been advised that, under the Cayman Companies Law, the use of a Chinese name by the Company does not contravene the Cayman Companies Law.
13. Bilingual Prospectus
The English language and Chinese language versions of this prospectus are being published separately in reliance upon the exemption provided under Section 4 of the Companies (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice (Chapter 32L of the Laws of Hong Kong).
– IV-39 – APPENDIX V DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION
DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG
The documents attached to the copy of this prospectus and delivered to the Registrar of CompaniesinHongKongforregistrationwere:
(a) copiesofeachoftheWHITE, YELLOW and GREEN Application Forms;
(b) copies of each of the material contracts referred to in the section headed ‘‘Statutory and General Information—B. Further Information about our Business—1. Summary of Material Contracts’’ in Appendix IV to this prospectus; and
(c) the written consents referredtointhesectionheaded‘‘Statutory and General Information—D. Other information—9. Consents of Experts’’ in Appendix IV to this prospectus.
DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the offices of Jingtian & Gongcheng LLP at Suites 3203–3207, 32/F, Edinburgh Tower, The Landmark, 15 Queen’sRoad Central, Hong Kong, during normal business hours up to and including the date which is 14 days from the date of this prospectus:
(a) the Memorandum of Association and Articles of Association of the Company;
(b) the Accountants’ Report for the three years ended December 31, 2017, 2018 and 2019 and six months ended June 30, 2020 from Ernst & Young, the text of which is set out in Appendix I to this prospectus;
(c) the report prepared by Ernst & Young in respect of the unaudited pro forma financial information, the text of which is set out in Appendix II to this prospectus;
(d) the audited consolidated financial statements of our Group for the three years ended 31 December 2017, 2018, 2019 and the six months ended 30 June 2020;
(e) the PRC legal opinions issued by Jingtian & Gongcheng, our PRC legal advisers, in respect of certain aspects of the PRC law;
(f) the United States legal opinions issues by Nixon Peabody LLP, our United States legal advisers, in respect of certain aspects of the Unites States law;
(g) the German legal opinions issued by Gleiss Lutz Hootz Hirsch PartmbB Rechtsanwälte, Steuerberater, our German legal advisers, in respect of certain aspects of the German law;
– V-1 – APPENDIX V DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES IN HONG KONG AND AVAILABLE FOR INSPECTION
(h) the Netherlands legal opinions issued by Rutgers Posch Visée Endedijk N.V., our Dutch legal advisers, in respect of certain aspects of the Netherlands law;
(i) the Japan legal opinions issued by Mori Hamada & Matsumoto, our Japan legal advisers, in respect of certain aspects of Japan law;
(j) the Macau legal opinions issued by Rato, Ling, Lei & Cortés—Advogados, our Macau legal advisers, in respect of certain aspects of the Macau law;
(k) the Canada legal opinions issued by Gowling WLG (Canada) LLP, our Canada legal advisers, in respect of certain aspects of the Canada law;
(l) the letter of advice prepared by Conyers Dill & Pearman, our Cayman Islands legal advisers, summarizing certain aspects of Cayman Islands Companies Law referred to in Appendix III to this prospectus;
(m) the industry report prepared by Frost & Sullivan;
(n) the legal opinion prepared by Mr. Tse Siu Chung Dixon, Hong Kong barrister-at-law;
(o) the transfer pricing report issued by Ernst & Young (China) Advisory Limited in respect of the transfer pricing arrangement of the Group;
(p) the material contracts referred to in the section headed ‘‘Statutory and General Information—B. Further Information About Our Business—1. Summary of Material Contracts’’ in Appendix IV to this prospectus;
(q) the written consents referredtointhesectionheaded‘‘Statutory and General Information—D. Other Information—9. Consents of Experts’’ in Appendix IV to this prospectus;
(r) the rules of the pre-IPO share award scheme;
(s) the rules of the Share Option Scheme;
(t) the service contracts referred to in the section headed ‘‘Statutory and General Information—C. Further Information about our Directors, Management and Substantial Shareholders—3. Directors’ Service Contracts and Remuneration’’ in Appendix IV to this prospectus; and
(u) the Cayman Islands Companies Law.
– V-2 – VESYNC CO., LTD (Incorporated in the Cayman Islands with limited liability)
GLOBAL OFFERING STOCK CODE: 2148
Joint Sponsors, Joint Global Coordinators, Joint Bookrunners and Joint Lead Managers
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