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VIOT Viomi Technology

Filed: 25 Sep 18, 8:00pm

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TABLE OF CONTENTS
INDEX TO THE CONSOLIDATED STATEMENTS

Table of Contents

Filed Pursuant to Rule 424b(4)
Registration No. 333-227063

11,400,000 American Depositary Shares

LOGO

Viomi Technology Co., Ltd

Representing 34,200,000 Class A Ordinary Shares



Viomi Technology Co., Ltd is offering 11,400,000 American depositary shares, or ADSs. This is our initial public offering and no public market currently exists for our ADSs or Class A ordinary shares. Each ADS represents three of our Class A ordinary shares, par value US$0.00001 per share.



Our ADSs have been approved for listing on the Nasdaq Stock Market under the symbol "VIOT."

We are an "emerging growth company" under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

Upon the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares, and different voting powers will be assigned to those shares. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten votes and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Our founder, Mr. Xiaoping Chen, certain of our employees and Xiaomi, will beneficially own all of our issued Class B ordinary shares. These Class B ordinary shares and the Class B ordinary shares beneficially owned by Mr. Xiaoping Chen will constitute approximately 56.6% and 40.3%, respectively, of our total issued and outstanding share capital immediately after the completion of this offering and 92.9% and 66.2%, respectively, of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering, assuming the underwriters do not exercise their over-allotment option. See "Principal Shareholders."

Investing in our ADSs involves risks. See "Risk Factors" beginning on page 16.



PRICEUS$9.00AN ADS



 
 
Price to
Public
 
Underwriting
Discounts and
Commissions(1)
 
Proceeds to us

Per ADS

 US$9.00 US$0.64575 US$8.35425

Total

 US$102,600,000 US$7,361,550 US$95,238,450

(1)
See "Underwriting" beginning on page 195 of this prospectus for additional information regarding underwriting commission.

We have granted the underwriters the right to purchase up to an additional 1,710,000 ADSs to cover over-allotments at the initial public offering price, less underwriting discounts and commissions.

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs to purchasers on September 27, 2018.

MORGAN STANLEY

 CICC

NEEDHAM & COMPANY

   

September 24, 2018.


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Prospectus Summary

  1 

Risk Factors

  16 

Special Note Regarding Forward-Looking Statements

  58 

Use of Proceeds

  59 

Dividend Policy

  60 

Capitalization

  61 

Dilution

  62 

Exchange Rate Information

  64 

Enforceability of Civil Liabilities

  65 

Corporate History and Structure

  67 

Selected Consolidated Financial and Operating Data

  73 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  77 

Industry

  104 

Business

  108 

Regulations

  137 

Management

  150 

Principal Shareholders

  157 

Related Party Transactions

  159 

Description of Share Capital

  162 

Description of American Depositary Shares

  173 

Shares Eligible for Future Sale

  184 

Taxation

  186 

Underwriting

  193 

Expenses Related to this Offering

  204 

Legal Matters

  205 

Experts

  206 

Where You Can Find Additional Information

  207 

Index to the Consolidated Financial Statements

  F-1 



        You should rely only on the information contained in this prospectus or in any related free writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free writing prospectus. We are offering to sell, and seeking offers to buy the ADSs, only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs.

        We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus outside the United States.

        Until October 19, 2018 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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PROSPECTUS SUMMARY

        The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under "Risk Factors," before deciding whether to invest in our ADSs. This prospectus contains information from an industry report commissioned by us and prepared by iResearch, an independent research firm, to provide information regarding our industry and our market position in China. We refer to this report as the "iResearch Report."

Our Mission

        IoT @ Home: Redefining the future home.

Overview

        We have developed a unique IoT @ Home platform, consisting of an ecosystem of innovative IoT-enabled smart home products, or IoT products, together with a suite of complementary consumable products and value-added businesses. This platform provides an attractive entry point into the consumer home, enabling consumers to intelligently interact with a broad portfolio of IoT products in an intuitive and human-like manner to make daily life more convenient, efficient and enjoyable, while allowing us to grow our household user base and capture various additional scenario-driven consumption events in the home environment. As of June 30, 2018, our IoT @ Home platform had over 1.2 million household users.

        Powered by advanced artificial intelligence, or AI, proprietary software and data analytics systems, our IoT @ Home platform generates extensive and deep consumer behavior data and insights, enabling us to continue to enhance our products and offer additional bespoke value-added businesses over time.

        Xiaomi is our strategic partner, shareholder and customer. Our strategic partnership with Xiaomi gives us access to Xiaomi's ecosystem users, market and data resources and related support. Meanwhile, our strong research and development capabilities and innovative products and services also enrich Xiaomi's suite of offerings, resulting in a mutually beneficial relationship between Xiaomi and us.

Market Opportunity and Key Industry Trends

        Our addressable market consists of China's broader home appliances industry, which is large and relatively mature, though still growing at a steady pace. According to the iResearch Report, China's home appliances market reached approximately RMB800.5 billion (US$121.0 billion) in terms of retail sales in 2017, having grown at a CAGR of 6.2% from 2013 to 2017, and is estimated to grow at a CAGR of 7.8% from 2017 to 2022 to reach RMB1,167.9 billion (US$176.5 billion) by 2022. Enabled by the proliferation of mobile technology and advancements in AI, IoT-enabled smart home products are rapidly gaining popularity in China. According to the iResearch Report, the market for IoT-enabled smart home products in China, a subset of the broader home appliances market, reached RMB345.6 billion (US$52.2 billion) in terms of retail sales in 2017, having grown at a CAGR of 26.5% from 2013 to 2017. Despite this recent rapid growth, significant room for growth is expected in this market. According to the iResearch Report, this market is estimated to continue its robust growth at a CAGR of 20.1% from 2017 to 2022 to reach RMB865.2 billion by 2022 in terms of retail sales, with the household penetration rate for IoT-enabled smart home products, excluding other smart products, in China increasing from 35.8% in 2017 to 59.0% by 2022.

        There are powerful industry and consumer trends driving the increased adoption of IoT-enabled smart home products in China, including:

    increasing receptiveness towards and adoption of smart home AI and IoT technology;

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    product innovation and technological developments;

    aspiration-driven consumption upgrade; and

    busier lifestyles and demand for convenience.

Our Business Model and Value Propositions

        We operate a highly scalable business model based on three key pillars: (i) our IoT products; (ii) complementary consumable products and value-added businesses ecosystem; and (iii) a factory-to-consumer, or F2C, new retail sales strategy. Our solutions offer consumers the following value propositions:

    intuitive easy-to-use experience;

    multi-interfaced, connected platform;

    intelligent and dynamic system;

    essential daily use;

    scenario-driven consumption events; and

    accessible and affordable.

        We have experienced significant growth since our inception, largely driven by increasing brand recognition, new product launches, strong product sales, and increasing receptiveness towards and adoption of smart home AI and IoT technology in China. Our number of household users increased by close to 10 times from approximately 113 thousand as of March 31, 2016 to over 1.2 million as of June 30, 2018, with the number of IoT products shipped increasing by 212.3% from approximately 382 thousand units in 2016 to approximately 1.2 million units in 2017. Our net revenues increased by 179.4% from RMB312.6 million in 2016 to RMB873.2 million (US$132.0 million) in 2017. Our net revenues increased by 284.4% from RMB270.6 million for the six months ended June 30, 2017 to RMB1,040.2 million (US$157.2 million) for the same period of 2018. For the years ended December 31, 2016 and 2017 and the six months ended June 30, 2018, revenues generated from our sales to Xiaomi were RMB299.8 million, RMB739.5 million (US$111.8 million) and RMB651.5 million (US$98.5 million), primarily consisting of sales of Xiaomi-branded IoT-enabled smart water purification systems as well as other complementary products such as water purifier filters, kettles and water quality meters, representing 95.9%, 84.7% and 62.6% of our total net revenues during such periods, respectively. In recent years, we have made significant efforts to ramp-up sales of Viomi-branded products, especially IoT products, through new product development and the introduction of new product categories. For the years ended December 31, 2016 and 2017 and the six months ended June 30, 2018, revenues generated from sales of Viomi-branded products and others were RMB32.1 million, RMB218.3 million (US$33.0 million) and RMB475.7 million (US$71.9 million), representing 10.3%, 25.0% and 45.7% of our total net revenues during such periods, respectively. Our net income increased by 473.5% from RMB16.3 million in 2016 to RMB93.2 million (US$14.1 million) in 2017. Our net income increased by 271.5% from RMB18.9 million for the six months ended June 30, 2017 to RMB70.3 million (US$10.6 million) for the same period of 2018.

Our Strengths

        We believe the following competitive strengths contribute to our success and differ us from our competitors:

    multi-interfaced, connected and synergistic IoT @ Home platform;

    aspirational brand with a rapidly growing household user base;

    unique and highly scalable business model;

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    powerful data analytics capabilities;

    proven research and development capabilities with commitment to innovation; and

    visionary and professional management team.

Our Strategies

        We intend to achieve our mission and strengthen our market position through successful execution of the key elements of our growth strategies, which include:

    continue to introduce new and innovative products;

    enhance our technology, software and data insights;

    strengthen our brand recognition and expand our user base;

    enrich our value-added businesses ecosystem;

    expand and enhance our sales channels; and

    invest along our product value chain.

Our Challenges

        Our business and the successful execution of our strategies are subject to various challenges, risks and uncertainties, including those related to our ability to:

    compete effectively;

    effectively manage our growth and the increased complexity of our business;

    continue to maintain our cooperation with, and sales to, Xiaomi;

    enhance brand recognition;

    develop and commercialize new products, services and technologies;

    grow and retain our users;

    adapt to technological changes and implement technological enhancements to our products and services;

    efficiently manage our contract manufacturers and suppliers;

    effectively manage our inventory; and

    protect our intellectual property and proprietary rights.

Corporate History and Structure

        We commenced our operations in May 2014 through Foshan Yunmi Electric Appliances Technology Co., Ltd, or Foshan Viomi, a PRC domestic company, to develop, manufacture and sell IoT products including smart water purification systems.

        In January 2015, we incorporated Viomi Technology Co., Ltd as our offshore holding company in order to facilitate foreign investment in our company. Subsequently, we established Viomi HK Technology Co., Limited, or Viomi HK, as our intermediate holding company, which in turn established a wholly-owned PRC subsidiary, Lequan Technology (Beijing) Co., Ltd., or Lequan Technology or our WFOE, in April 2015.

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        In January 2015, we formed a PRC domestic company, Beijing Yunmi Technology Co., Ltd, or Beijing Viomi, to develop and manage our big data, software and product design. In July 2015, we obtained control over Foshan Viomi and Beijing Viomi by entering into a series of contractual arrangements with them and their respective shareholders. In September 2018, we entered into a series of contractual arrangements in substantially the same forms with Foshan Viomi and its current shareholder to reflect reduction in its registered capital and change in shareholding structure. We collectively refer to Foshan Viomi and Beijing Viomi as our VIEs in this prospectus. We use contractual arrangements with VIEs due to PRC restrictions or prohibitions on foreign ownership of internet and other related businesses in China. Although our provision of e-commerce services falls within the permitted category according to the Negative List (as defined elsewhere in this prospectus) that took effect on July 28, 2018, foreign investments in this business are still restricted by other qualifications and requirements under related regulations in China. In 2016 and 2017, we derived virtually all of our revenues from our VIEs. We rely on dividends and other distributions paid to us by our WFOE, which in turn depends on the service fees that our VIEs pay to our WFOE. Our WFOE has the sole discretion to receive from each of our VIEs an annual service fee at an amount up to 100% of the respective VIE's annual net income. In addition, our WFOE is entitled to receive certain fees for other technical services at the amount mutually agreed upon by our WFOE and the respective VIE. Our WFOE did not collect any service fees from our VIEs in the last two fiscal years, and will make discretionary determinations on the amount of fees to collect based on the performance of our VIEs and our business needs going forward. We do not have unfettered access to our WFOE and VIEs' revenues due to PRC legal restrictions on the payment of dividends by PRC companies, foreign exchange control restrictions, and the restrictions on foreign investment, among others. For more details and risks related to our variable interest entity structure, please see "Corporate History and Structure—Contractual Arrangements with Our VIEs and Their Shareholders" and "Risk Factors—Risks Related to Our Corporate Structure."

        As a result of our direct ownership in our WFOE and the contractual arrangements with the VIEs, we are regarded as the primary beneficiary of our VIEs, and we treat them as our consolidated affiliated entities under U.S. GAAP. We have consolidated the financial results of our VIEs in our consolidated financial statements in accordance with U.S. GAAP.

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        The following diagram illustrates our corporate structure, including our significant subsidiaries and VIEs as of the date of this prospectus:

GRAPHIC


Notes:

(1)
Mr. Xiaoping Chen, our founder, chairman of our board of directors, chief executive officer and a beneficial owner of the shares of our company, holds 100% equity interests in Foshan Viomi.

(2)
Mr. Chen holds 60% equity interests in Beijing Viomi. Two employees of our shareholders, Red Better Limited and Shunwei Talent Limited, each hold 20% equity interests in Beijing Viomi.

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        The following diagram illustrates our anticipated corporate structure with voting power percentages shown in brackets next to each shareholder's shareholding percentages, including our significant subsidiaries and VIEs, upon the completion of this offering:

GRAPHIC


    Notes:

*
Demonstrates the percentage of the ordinary shares beneficially owned by each person or entity to our total outstanding ordinary shares immediately after this offering.

(1)
Represents the shares Mr. Xiaoping Chen holds through his wholly-owned company, Viomi Limited, as well as the shares held by certain employees of which Mr. Chen can direct the disposition and voting power. Please see the section titled "Principal Shareholders" for more information on Mr. Xiaoping Chen's beneficial ownership in our company immediately after this offering.

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(2)
Represents the shares held by Xiaomi through Red Better Limited. Please see the section titled "Principal Shareholders" for more information on Red Better Limited's beneficial ownership in our Company immediately after this offering.

(3)
Mr. Xiaoping Chen, our founder, chairman of our board of directors, chief executive officer and a beneficial owner of the shares of our Company, holds 100% equity interests in Foshan Viomi.

(4)
Mr. Xiaoping Chen, our founder, chairman of our board of directors, chief executive officer and a beneficial owner of the shares of our Company, holds 60% equity interests in Beijing Viomi. Each of De Liu and Liping Cao, who are respectively employees of our shareholders: Red Better Limited and Shunwei Talent Limited, holds 20% equity interests in Beijing Viomi.

Implication of Being an Emerging Growth Company

        As a company with less than US$1.07 billion in revenues for fiscal year 2017, we qualify as an "emerging growth company" pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company's internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

        We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a "large accelerated filer" under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Corporate Information

        Our principal executive offices are located at Wansheng Square, Rm 1302 Tower C, Xingang East Road, Haizhu District, Guangzhou, Guangdong, 510220, People's Republic of China. Our telephone number at this address is +86 20 8930 9496. Our registered office in the Cayman Islands is located at offices of Maples Corporate Services Limited at PO Box 309 Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

        Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website iswww.viomi.com.cn. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, 13th Floor, New York, New York 10011.

Conventions that Apply to this Prospectus

        Unless otherwise indicated or the context otherwise requires, references in this prospectus to:

    "ADSs" are to our American depositary shares, each of which represents three Class A ordinary shares;

    "ADRs" are to the American depositary receipts that evidence our ADSs;

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    "China" or the "PRC" are to the People's Republic of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan;

    "Class A ordinary shares" refers to our Class A ordinary shares of par value US$0.00001 per share;

    "Class B ordinary shares" refers to our Class B ordinary shares of par value US$0.00001 per share;

    "household users" as of a specified date are to households where at least one of our IoT products was connected to the internet;

    "IoT" are to the Internet of Things, an interconnected network of devices, or "things," that can communicate with one another through the internet;

    our "IoT @ Home platform" are to our ecosystem of innovative IoT-enabled smart home products, together with a suite of complementary consumable products and value-added businesses, powered by advanced AI, proprietary software and data analytics systems;

    our "IoT-enabled smart home products" and our "IoT products" are to our portfolio of smart home products with internet or Bluetooth interconnectivity and communication capabilities, including our smart water purification systems, smart kitchen products and other smart products (such as smart water kettles);

    "ordinary shares" are to our ordinary shares, par value US$0.00001 per share, and upon and after the completion of this offering, are to our Class A and Class B ordinary shares, par value US$0.00001 per share;

    "our VIEs" are to Foshan Yunmi Electric Appliances Technology Co., Ltd, or Foshan Viomi, and Beijing Yunmi Technology Co., Ltd, or Beijing Viomi;

    "Viomi," "we," "us," "our Company" and "our" are to Viomi Technology Co., Ltd, our Cayman Islands holding company and its subsidiaries, its consolidated variable interest entities and the subsidiaries of the consolidated variable interest entities;

    "our WFOE" are to Lequan Technology (Beijing) Co., Ltd, or Lequan Technology;

    "RMB" and "Renminbi" are to the legal currency of China;

    "US$," "U.S. dollars," "$," and "dollars" are to the legal currency of the United States; and

    "Xiaomi" are to Xiaomi Corporation, an internet company and a 19.5% shareholder of our Company as of the date of this prospectus, and/or any of its affiliates.

        Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.

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The Offering

Offering price

 US$9.00 per ADS.

ADSs offered by us

 

11,400,000 ADSs (or 13,110,000 ADSs if the underwriters exercise their over-allotment option in full).

ADSs outstanding immediately after this offering

 

11,400,000 ADSs (or 13,110,000 ADSs if the underwriters exercise their over-allotment option in full)

Ordinary shares outstanding immediately after this offering

 

90,200,000 Class A ordinary shares and 117,600,000 Class B ordinary shares (or 95,330,000 Class A ordinary shares and 117,600,000 Class B ordinary shares if the underwriters exercise their over-allotment option in full).

The ADSs

 

Each ADS represents three Class A ordinary shares, par value US$0.00001 per share.

 

The depositary will hold Class A ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our Class A ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

You may surrender your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.

 

We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.

 

To better understand the terms of the ADSs, you should carefully read the "Description of American Depositary Shares" section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

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Ordinary Shares

 

Immediately prior to this offering, our ordinary shares will comprise 56,000,000 Class A ordinary shares and 117,600,000 Class B ordinary shares. In respect of all matters subject to a shareholder vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to ten (10) votes, voting together as one class. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder to any person or entity other than holders of Class B ordinary shares or their affiliates, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of Class A ordinary shares. See "Description of Share Capital" for more information.

Over-allotment option

 

We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of 1,710,000 additional ADSs at the initial public offering price, less underwriting discounts and commissions.

Use of proceeds

 

We expect that we will receive net proceeds of approximately US$91.4 million from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering for (i) research and development of products, services and technologies, (ii) selling and marketing initiatives, (iii) potential strategic investments and acquisitions along our product value chain, and (iv) general corporate purposes. See "Use of Proceeds" for more information.

Lock-up

 

We, our directors, executive officers, and all of our existing shareholders have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus, subject to certain exceptions. In addition, we have agreed to instruct the depositary not to accept any shares for deposit for the issuance of ADSs for 180 days after the date of this prospectus (other than in connection with this offering), without prior written consent from the representatives of the underwriters. See "Shares Eligible for Future Sale" and "Underwriting."

Directed ADS Program

 

At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of 570,000 ADSs offered in this offering to some of our directors, officers, employees, business associates and related persons through a directed ADS program.

Listing

 

Our ADSs have been approved for listing on the Nasdaq Stock Market ("Nasdaq") under the symbol "VIOT." Our ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

Payment and settlement

 

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depositary Trust Company on September 27, 2018.

Depositary

 

Deutsche Bank Trust Company Americas

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Summary Consolidated Financial and Operating Data

        The following summary consolidated financial data for the years ended December 31, 2016 and 2017 and as of December 31, 2016 and 2017 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated financial data for the six months ended June 30, 2017, and 2018 and as of June 30, 2018 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Summary Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.

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        The following table presents our summary consolidated statements of comprehensive (loss) income data for the years ended December 31, 2016 and 2017 and the six months ended June 30, 2017 and 2018.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB RMB US$ RMB RMB US$ 
 
 (in thousands, except for share and per share data)
 

Summary Consolidated Statements of Comprehensive (Loss) Income Data:

                   

Net revenues(1)

  312,574  873,219  131,964  270,625  1,040,179  157,196 

Cost of revenues

  (232,544) (598,036) (90,377) (190,461) (750,630) (113,438)

Gross profit

  80,030  275,183  41,587  80,164  289,549  43,758 

Operating expenses(2):

                   

Research and development expenses(2)

  (29,926) (60,749) (9,181) (22,177) (49,047) (7,412)

Selling and marketing expenses(2)

  (20,929) (95,296) (14,401) (32,422) (146,589) (22,153)

General and administrative expenses(2)

  (14,386) (15,818) (2,390) (5,869) (14,837) (2,242)

Total operating expenses

  (65,241) (171,863) (25,972) (60,468) (210,473) (31,807)

Other (expenses) income

  (481) 2,236  338  1,866  148  22 

Income from operations

  14,308  105,556  15,953  21,562  79,224  11,973 

Interest (expenses) income

  (296) 2,402  363  926  2,659  402 

Income before income tax benefit (expenses)

  14,012  107,958  16,316  22,488  81,883  12,375 

Income tax benefit (expenses)

  2,247  (14,718) (2,224) (3,569) (11,592) (1,753)

Net income

  16,259  93,240  14,092  18,919  70,291  10,622 

Net income attributable to Viomi Technology Co., Ltd (the "Company")

  16,259  93,240  14,092  18,919  70,291  10,622 

Net (loss) income attributable to ordinary shareholders of the Company

  (3,453) 8,033  1,214  776  2,830  428 

Net (loss) income per share attributable to ordinary shareholders of the Company:

                   

Net (loss) income per ordinary share—basic

  (0.28) 0.39  0.06  0.05  0.11  0.02 

Net (loss) income per ordinary share—diluted

  (0.28) 0.31  0.05  0.04  0.09  0.01 

Weighted average number of ordinary shares used in computing net (loss) income per share:

                   

Ordinary shares—basic

  12,230,136  20,684,681  20,684,681  16,909,090  24,919,286  24,919,286 

Ordinary shares—diluted

  12,230,136  25,579,806  25,579,806  21,557,912  31,434,510  31,434,510 

Notes:

(1)
Includes RMB299.8 million and RMB739.5 million (US$111.8 million) from sales to Xiaomi for the years ended December 31, 2016 and 2017, respectively, and RMB243.2 million and RMB651.5 million (US$98.5 million) from sales to Xiaomi for the six months ended June 30, 2017 and 2018, respectively.

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(2)
Share-based compensation expenses were allocated as follows:
 
 For the year ended
December 31,
 For the six months
ended June 30,
 
 
 2016 2017 2017 2018 
 
 RMB RMB US$ RMB RMB US$ 
 
 (in thousands)
 

General and administrative expenses

  6,863  3,303  499  2,244  986  149 

Research and development expenses

  3,464  1,903  288  1,492  4,228  639 

Selling and marketing expenses

  251  615  93  333  2,560  387 

        The following table presents our summary consolidated balance sheet data as of December 31, 2016 and 2017 and June 30, 2018.

 
 As of December 31, As of June 30, 
 
 2016 2017 2018 
 
 RMB RMB US$ RMB US$ 
 
 (in thousands)
 

Summary Consolidated Balance Sheet Data:

                

Current assets:

                

Cash and cash equivalents

  156,930  279,952  42,307  256,952  38,832 

Amounts receivable from a related party, net

  45,021  249,548  37,713  333,731  50,435 

Total current assets

  276,166  665,431  100,563  1,002,885  151,560 

Total assets

  281,945  671,565  101,490  1,016,855  153,671 

Total current liabilities

  136,886  432,385  65,345  697,287  105,376 

Total liabilities

  136,886  432,845  65,415  697,463  105,403 

Total mezzanine equity

  423,999  407,928  61,647  417,556  63,103 

Total shareholders' deficit

  (278,940) (169,208) (25,572) (98,164) (14,835)

        The following table presents our summary consolidated cash flow data for the years ended December 31, 2016 and 2017 and the six months ended June 30, 2017 and 2018.

 
 For the year ended
December 31,
 For the six months ended
June 30,
 
 
 2016 2017 2017 2018 
 
 RMB RMB US$ RMB RMB US$ 
 
 (in thousands)
 

Summary Consolidated Cash Flow Data:

                   

Net cash provided by (used in) operating activities

  15,499  123,906  18,725  7,737  (17,880) (2,700)

Net cash (used in) provided by investing activities

  (1,609) (1,234) (186) (245) 25,336  3,828 

Net cash provided by (used in) financing activities

  12,999  2,671  404    (34,195) (5,168)

Effect of exchange rate changes on cash and cash equivalents

  2,913  (2,321) (351) (947) 3,739  565 

Net increase (decrease) in cash and cash equivalents

  29,802  123,022  18,592  6,545  (23,000) (3,475)

Cash and cash equivalents at beginning of the year/period

  127,128  156,930  23,715  156,930  279,952  42,307 

Cash and cash equivalents at end of the year/period

  156,930  279,952  42,307  163,475  256,952  38,832 

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        The following table sets forth the breakdown of our net revenues by business line both as an absolute amount and as a proportion of total net revenues for the periods indicated.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands, except for percentages)
 

Net revenues:

                               

IoT-enabled smart home products

  273,282  87.4  712,317  107,648  81.6  232,687  86.0  828,212  125,163  79.6 

Smart water purification systems

  250,442  80.1  570,784  86,259  65.4  194,005  71.7  432,443  65,353  41.6 

Smart kitchen products

      50,656  7,655  5.8  3,299  1.2  285,595  43,160  27.4 

Other smart products

  22,840  7.3  90,877  13,734  10.4  35,383  13.1  110,174  16,650  10.6 

Consumable products

  19,376  6.2  87,500  13,223  10.0  26,944  10.0  87,610  13,240  8.4 

Value-added businesses(1)

  19,916  6.4  73,402  11,093  8.4  10,994  4.0  124,357  18,793  12.0 

Total

  312,574  100.0  873,219  131,964  100.0  270,625  100.0  1,040,179  157,196  100.0 

    Note:

(1)
Including sales of other products and rendering of services. See footnote (9) to the Consolidated Financial Statements and footnote (8) to the Unaudited Interim Condensed Consolidated Financial Statements for more details.

        The following table presents our gross profit and gross profit margin by business line for the years ended December 31, 2016 and 2017 and the six months ended June 30, 2017 and 2018.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands, except for percentages)
 

Gross profit and gross profit margin:

                               

IoT-enabled smart home products

  66,603  24.4  212,578  32,126  29.8  66,457  28.6  221,389  33,457  26.7 

Smart water purification systems

  58,594  23.4  170,996  25,842  30.0  55,561  28.6  143,500  21,686  33.2 

Smart kitchen products

      15,669  2,368  30.9  595  18.0  48,633  7,350  17.0 

Other smart products

  8,009  35.1  25,913  3,916  28.5  10,301  29.1  29,256  4,421  26.6 

Consumable products

  8,732  45.1  39,377  5,951  45.0  12,727  47.2  43,773  6.615  50.0 

Value-added businesses

  4,695  23.6  23,228  3,510  31.6  980  8.9  24,387  3,686  19.6 

Total

  80,030  25.6  275,183  41,587  31.5  80,164  29.6  289,549  43,758  27.8 

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        The following table presents certain of our operating data as of the dates or for the periods indicated.

 
 As of December 31, As of
June 30,
 
 
 2016 2017 2018 

Selected Operating Data:

          

Household users(1)

  348,084  894,078  1,222,336 


 
 For the year
ended
December 31,
 For the
six
months
ended
June 30,
 
 
 2016 2017 2018 

IoT products shipped(2)

  382,479  1,194,659  1,245,564 

Notes:

(1)
Represents the number of households where at least one of our IoT products was connected to the internet as of the respective dates, which can be used to evaluate the growth of our user base and forms a key part of our data analytics, brand building and monetization strategies. The more household users that we have, the more opportunities we will have to conduct data analytics, generate greater brand awareness and create monetization opportunities through the sale of additional complementary products and services.

(2)
Represents the volume of IoT products sold within the respective time periods. Sales of IoT products represents the sales volume of our products, which we believe is reflective of end-consumer demand, which in turn is a key driver in the growth in our scale and results of operations.

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RISK FACTORS

        An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

We operate in highly competitive markets, and the scale and resources of some of our competitors may allow them to compete more effectively than we can, which could result in a loss of our market share and a decrease in our net revenues and profitability.

        We have developed an IoT @ Home platform consisting of an ecosystem of IoT-enabled smart home products, complementary consumable products and value-added businesses. We face intense competition from other smart home solution providers, internet companies, and traditional home appliances companies. We also face regional competition from local brands in the various geographies where our products are sold. We compete in various aspects, including brand recognition, value for money, user experience, breadth of product and service offerings, product functionality and quality, sales and distribution, supply chain management, customer loyalty, and talents, among others. Intensified competition may result in pricing pressures and reduced profitability and may impede our ability to achieve sustainable growth in our revenues or cause us to lose market share. Our competitors may also engage in aggressive and negative marketing or public relations strategies which may harm our reputation and increase our marketing expenses. Any of these results could substantially harm our results of operations.

        Some of our existing and potential competitors enjoy substantial competitive advantages, including: longer operating history, the capability to leverage their sales efforts and marketing expenditures across a broader portfolio of products, more established relationships with a larger number of suppliers, contract manufacturers and channel partners, access to larger and broader user bases, greater brand recognition, greater financial, research and development, marketing, distribution and other resources, more resources to make investments and acquisitions, larger intellectual property portfolios, and the ability to bundle competitive offerings with other products and services. We cannot assure you that we will compete with them successfully.

As we continue to grow, we may not be able to effectively manage our growth and the increased complexity of our business, which could negatively impact our brand and financial performance.

        Since our founding in May 2014, we have experienced rapid growth. Continued growth of our business and household user base requires us to expand our product portfolio, strengthen our brand recognition, expand and enhance our sales channels, better manage our supply chain, upgrade our information systems and technologies, secure more space for our expanding workforce, and devote other resources to our business expansions, among others. As we continue to grow, managing our business will become more complicated as we develop a wider product and service mix, some of which we may have less experience in. In addition, as we increase our product and service offerings, we will need to work with a larger number of business partners and maintain and expand mutually beneficial relationships with our existing and new business partners.

        We cannot assure you that we will be able to effectively manage our growth, that our current personnel, infrastructure, systems, procedures and controls or any measures to enhance them will be adequate and successful to support our expanding operations or that our strategies and new business initiatives will be executed successfully. If we are not able to manage our growth or execute our strategies effectively, our expansion may not be successful and our business and prospects may be materially and adversely affected.

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        We have experienced certain operating difficulties in the past in ramping up certain of our contract manufacturers' production in a timely manner to meet the increasing demand and purchase orders from our customers. As we continue to expand, we may experience similar difficulties if we are unable to manage our growth, which may adversely affect our reputation and results of operations.

We have a limited operating history, which makes it difficult to evaluate our future prospects.

        We were established in May 2014 and launched our first product in 2015. As we only have a limited history of operating our business at its current scale, it is difficult to evaluate our future prospects, including our ability to plan for our future growth. Our limited operating experience, substantial uncertainty concerning how the IoT-enabled smart home market in China may develop, and other economic factors beyond our control, may reduce our ability to accurately forecast demand for our products and accordingly, our quarterly or annual revenues. As such, any predictions about our future revenues and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more developed and predictable market.

Xiaomi is our strategic partner and our most important customer. Any deterioration of our relationship with Xiaomi could have a material adverse effect on our operating results.

        Xiaomi is our strategic partner and our most important customer. We sell a wide range of products to Xiaomi, including Xiaomi-branded water purification systems, water purifier filters, as well as other complementary products such as kettles and water quality meters. We may discuss with Xiaomi to expand the product categories that we collaborate with Xiaomi on, which may lead to increase of revenues from Xiaomi, but there is no assurance that such discussion and expansion of cooperation will materialize. Historically, we recorded RMB299.8 million, RMB739.5 million (US$111.8 million) and RMB651.5 million (US$98.5 million) in net revenues from sales to Xiaomi in 2016, 2017 and the six months ended June 30, 2018, respectively, which represented 95.9%, 84.7% and 62.6% of our total net revenues during such periods respectively. We recover all our production costs when we sell our products to Xiaomi, and are additionally entitled to a portion of the respective gross profit when Xiaomi sells these products to end-users. Various reasons may lead to Xiaomi's failure to sell these products, many of which are not within our control, including those related to Xiaomi but unrelated to the products we produced and risks that we could not preempt or prevent with commercially reasonable efforts.

        The sales of our products to Xiaomi are governed by a business cooperation agreement, which will be automatically renewed upon the expiration of the current term in August 2019, unless objected by a party at least 30 days prior to the expiration date. We also sell our own Viomi-branded products through Xiaomi's e-commerce platform,Youpin.mi.com, directly to consumers, pursuant to a commission sales agreement with Xiaomi, which will expire on December 31, 2018 with no automatic renewal provision. We will initiate good faith negotiations with Xiaomi to renew the agreement near the end of the term. In the past, we successfully replaced a commission sales agreement with Xiaomi for sales through the predecessor ofYoupin.mi.com that expired on December 31, 2017 with the current Youpin commission sales agreement. However, we cannot assure you that we will be able to renew the business cooperation agreement or the commission sales agreement, or on the same or more favorable terms. In addition, both agreements are subject to early termination by Xiaomi under certain circumstances. For more details of the agreements with Xiaomi, including conditions for early termination, please see the section titled "Related Party Transactions—Our Relationship with Xiaomi." If, for any reason, we cannot maintain our cooperation relationship with Xiaomi or Xiaomi significantly reduces or ceases purchases from us, our business and results of operations may be materially and adversely affected.

        Furthermore, Xiaomi sells a broad spectrum of electronic products, including our Xiaomi-branded and our self-branded products, as well as products unrelated to us through its various sales channels. We cannot assure you that our products can always receive the same level of attention and promotion efforts from Xiaomi thus far. If Xiaomi dedicates less resources to promoting and selling our products or

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introduces products that compete with ours, our net revenues may decrease as well. Negative publicity related to Xiaomi, including products offered by Xiaomi unrelated to us, the celebrities Xiaomi are associated with, or even the labor policies or environmental issues of any of Xiaomi's suppliers or manufacturers, may also have a material adverse effect on the sales of our products and public recognition of our brand.

        Xiaomi is also a shareholder of our Company. Xiaomi is a public company listed on the Stock Exchange of Hong Kong. When exercising its rights as our shareholder, Xiaomi may take into account not only the interests of our Company and our other shareholders but also its own interests, the interests of its public shareholders and the interests of its other affiliates. The interests of our Company and our other shareholders may at times conflict with the interests of Xiaomi and its public shareholders and other affiliates. Such conflicts may result in losing business opportunities for us, including opportunities to enter into lines of business that may overlap with those pursued by Xiaomi or the companies within its ecosystem. Currently, we do not have any formal processes to address such conflicts.

Our future success depends on our ability to promote our brand and protect our reputation. Our failure to establish and promote our brand and any damage to our reputation will hinder our growth.

        We utilize a number of marketing initiatives to promote our brand. For example, we have engaged a popular Chinese celebrity (Ms. Mi Yang) as our brand ambassador. We have sponsored popular TV shows in China such asNegotiator,Who's the Detective, andCome Sing With Me, to help display and demonstrate our IoT products. We also actively participate in a variety of online and offline marketing events, such as the "Singles' Day" and "Double Twelve" shopping festivals. We believe our strategy to enhance our brand recognition is crucial to our future success. We have invested, and will need to continue to dedicate, significant time, efforts and resources to advertising and market promotion initiatives. Our sales and marketing expenses were RMB146.6 million (US$22.2 million) for the six months ended June 30, 2018, representing 14.1% of our net revenues, a substantial increase from the same period of 2017. We may need to devote an even greater portion of our resources to continue to strengthen our brand recognition and build our user base, which may impact our profitability. We cannot guarantee that our marketing efforts will ultimately be successful, as it is affected by numerous factors, including the effectiveness of our marketing campaigns, our ability to provide consistent, high quality products and services, consumers' satisfaction with our products, as well as supports and services we provide, among others.

        In addition, any negative publicity related to our brand, products, contract manufacturers, suppliers, distribution partners, strategic partners, such as Xiaomi, third-party ecosystem partners, or celebrities we are associated with could have an adverse impact on our brand, which may negatively affect our business and results of operations.

If we fail to successfully develop and commercialize new products, services and technologies that are well received by consumers in a timely manner, our operating results may be materially and adversely affected.

        Our ability to compete successfully depends in large part on our ability to continue to introduce new and innovative products, services and technologies that are well received by consumers and in a timely manner, and in turn, grow our household user base.

        Our ability to roll out new and innovative products and services depends on a number of factors, including significant investments in research and development, quality control of our products and services and effective management of our supply chain. The execution of such initiatives can be complex and costly. As such, we could experience delays in completing the development and introduction of new products, services and technologies in the future. We may need to devote an even greater portion of our resources to the research and development of new or enhanced products, services and technologies, which may adversely affect our profitability. In addition, our research and development efforts may not yield the benefits we expect to achieve in a timely manner, or at all. To the extent we are unable to execute our strategy of continuously introducing new and innovative products, diversifying our product portfolio and

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satisfying consumers' changing preferences, we may not be able to grow our household user base and our competitive position and results of operations may be adversely affected.

Our expansion into new product categories and scenarios, and substantial increases in product lines may expose us to new challenges and more risks.

        We strive to continue to expand and diversify our IoT-enabled smart home product offerings to cover additional scenarios in the home environment. Expanding into new product categories and scenarios and substantially increasing our product lines involve new risks and challenges. Our potential lack of familiarity with new products and scenarios and the lack of relevant customer data relating to these products may make it more difficult for us to anticipate user demand and preferences. We may misjudge market demand, resulting in inventory buildup and possible inventory write-downs. We may not be able to effectively control our costs and expenses in rolling out these new product categories and scenarios. We may have certain quality issues and experience higher return rates on new products, receive more customer complaints and face costly product liability claims, such as injury allegedly or actually caused by our products, which would harm our brand and reputation as well as our financial performance.

        Furthermore, we may need to price our new products more aggressively to penetrate new markets, and gain market share or remain competitive. 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 operate in the emerging and evolving IoT-enabled smart home products market in China, which may develop more slowly or differently than we expect. If the IoT-enabled smart home products market does not grow as we expect, or if we cannot expand our products and services to meet consumer demands, our results of operations may be materially and adversely affected.

        The IoT-enabled smart home products market in China has experienced rapid growth in recent years. However, the growth rate may decrease due to uncertainties with respect to China's macro-economy, disposable income growth, the acceptance of IoT technology and products, and pace of development of technologies and other factors. Furthermore, the IoT-enabled smart home products market is constantly evolving, and it is uncertain whether our products and services will achieve and sustain high levels of demand and market acceptance. Our ability to expand the sales of our IoT products to a broader consumer base depends on several factors, including Chinese consumers' receptiveness towards and adoption of smart home AI and IoT technology, the market awareness of our brand, the timely introduction and market acceptance of our products and services, the network effects of our products and services, our ability to attract, retain and effectively train sales and marketing personnel, the effectiveness of our marketing programs, our ability to develop effective relationships with distribution partners and expand our network of offline experience stores, the cost and functionality of our products and services and the success of our competitors. If we are unsuccessful in developing and marketing our IoT products to consumers, or if these consumers do not perceive or value the benefits of our holistic IoT @ Home approach, the market for our products 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 our user engagement ceases to grow or declines, our business and operating results may be materially and adversely affected.

        User engagement is important to our business model, as we utilize the data generated through users' interaction with our products to enhance algorithms and data analytics capabilities of our software so as to deliver a better user experience. In addition, our value-added businesses ecosystem and the virtuous cycle that we anticipate it to create depend heavily on the level of user engagement with the products and services provided by us.

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        Many factors may prevent users from continually engaging and habitually using our products, including:

    technical glitches may occur, which may prevent our products and services from operating in a smooth and reliable manner, and hence adversely affect user experience;

    we may be unable to identify and meet evolving user demands and preferences;

    we may not successfully develop functionalities that could further enhance user engagement and generate recurring revenues, or the new or updated products and services we introduce may not be favorably received by users;

    we may not be able to continue to successfully drive organic growth of users through word-of-mouth referrals, which may cause the growth of our user base to slow down or stall or require us to increase our promotion and advertising spending or devote additional resources to acquire users;

    we may be unable to prevent or combat inappropriate use of our products and services, which may lead to negative public perception of us and damage our brand or reputation;

    our competitors may launch or develop similar or disruptive products and services with better user experience, which may result in a loss of existing users or declines in new user growth;

    we may fail to address user concerns related to privacy and communication, data safety or security, and as a result, users may be deferred from using our products and services in scenarios that we hope to capture; and

    we may be compelled to modify our products and services to address requirements imposed by legislation, regulations, government policies or requests from government authorities in manners that may compromise user experience or make our products less affordable.

If we are unable to adapt to technological changes and implement technological enhancements to our products and services, our ability to remain competitive could be adversely affected.

        The IoT-enabled smart home products market is characterized by rapid technological changes, frequent introductions of new products and evolving industry standards. However, product development often requires significant lead-time and upfront investment. Our ability to attract new consumers and increase revenues from existing consumers will depend significantly on our ability to accurately anticipate changes in industry standards and to continue to appropriately fund development efforts to enhance our existing products and services or introduce new products and services in a timely manner to keep pace with technological developments. For example, voice- and gesture-control and facial- and image-recognition are important features of our IoT @ Home platform, and the technologies supporting them have been rapidly developing. If any of our competitors implement new technologies before us, those competitors may be able to provide products that are more effective or with more user-friendly features than ours, possibly at lower prices, which could adversely impact our sales and impact our market share. In addition, any delay or failure in our introduction of new or enhanced products and services could harm our business, results of operations and financial condition.

We are susceptible to supply shortages and interruptions, long lead times, and price fluctuations for raw materials and components, any of which could disrupt our supply chain and have a material adverse impact on our results of operations.

        Our product portfolio includes various product categories and product lines. Mass production of our products requires timely and adequate supply of various types of raw materials and components. All of the components and raw materials used to produce our products are sourced from third-party suppliers, and some of these components and raw materials are sourced from a limited number of suppliers or a single supplier. Therefore, we are subject to risks of shortages or discontinuation in supply, long lead times, cost increases and quality control issues with our suppliers. In addition, some of our suppliers may have more

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established relationships with our competitors, and as a result of these relationships, such suppliers may choose to limit or terminate their relationships with us or prioritize our competitors' orders in the case of supply shortages.

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

        Moreover, the market prices for certain raw materials have been volatile. For example, we have experienced significant increases in the market prices for certain material raw materials used in manufacturing refrigerators recently, and we may not be able to recover these costs through selling price increases to our customers, which would have a negative effect on our financial results.

We rely on certain contract manufacturers to produce a substantial majority of our products. If we encounter issues with them, our business and results of operations could be materially and adversely affected.

        We rely on certain contract manufacturers to produce a substantial majority of our products. We may experience operational difficulties with our contract manufacturers, including reductions in the availability of production capacity, failure to comply with product specifications, insufficient quality control, failure to meet production deadlines, increases in manufacturing costs and longer lead time. Our contract manufacturers may experience disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, component or material shortages, cost increases, violation of environmental, health or safety laws and regulations, or other problems. We may be unable to pass the cost increases to our customers. We may have disputes with our contract manufacturers, which may result in litigation expenses, divert our management's attention and cause supply shortages to us. In addition, we may not be able to renew contracts with our contract manufacturers for our existing products or identify contract manufacturers who are capable of producing new products we target to launch in the future.

        While we have constant access to each manufacturing facility of our contract manufacturers, and have quality control teams to continually monitor the manufacturing processes at our contract manufacturers' facilities, any failure of such partners to perform may have a material negative impact on our cost or supply of finished goods. In addition, if such failure affects our supplies to Xiaomi, our relationship with Xiaomi may be adversely affected.

        Furthermore, although our agreements with our contract manufacturers contain confidential obligations, and we have adopted security protocols to ensure knowhow and technologies for manufacturing our products could not be easily leaked or plagiarized, 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.

We may from time to time enter into contracts with some customers that provide certain favorable terms to such customers, which may, in certain situations, adversely affect our results of operations or profitability.

        We may from time to time enter into contracts with some customers that provide certain favorable terms to such customers to expand our sales channels and increase our market penetration, which may, in certain situations, adversely affect our results of operations or profitability. For example, our contract with a leading e-commerce platform provides, among others, return or discount clearance of certain slow-moving products and potential payment of various consideration to the platform including payment for gross margin guarantee on certain products, monthly compensation for promotion and marketing activities, and fees for advertising through such platform. For more details on the contract, please see

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"Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies, Judgments and Estimates."

Our business may be adversely impacted by product defects.

        Product defects can occur throughout the product development, design and manufacturing processes or as a result of our reliance on third parties for components, raw materials, and manufacturing. Any product defects or any other failure of our products or substandard product quality could harm our reputation and result in adverse publicity, lost revenues, delivery delays, product recalls, relationships with our network partners and other business partners, product liability claims, administrative penalties, harm to our brand and reputation, and significant warranty and other expenses, and could have a material adverse impact on our business, financial condition, operating results and prospects. While we maintain a reserve for product warranty costs based on certain estimates and our knowledge of current events and actions, our actual warranty costs may exceed our reserve, resulting in current period expenses and a need to increase our reserve for warranty costs.

        Moreover, since our products combine hardware and software, any glitches in the software may intervene and disrupt our efforts to integrate our products in consumers' lifestyles. We rely on the connectivity and network effects of our products and services to attract consumers to expand their collection of our products, which we believe will reinforce a positive smart home experience. Any failure or defects that a consumer experiences in one product, however, may prevent this connectivity or network effect from being realized. As a result, we may be prevented from providing holistic IoT @ Home solutions to our customers and our business prospectus, results of operations and financial condition could be adversely affected.

We are exposed to potential liabilities arising from the products we sell, and costs related to defective products could have a material adverse impact on us.

        Disputes over warranties of our products can arise in the ordinary course of our business. In extreme situations, we may be exposed to various liabilities relating to potential personal injuries as a result of misuse or quality defects of the products we sell. We may experience material product liability losses, and we may be unable to defend these claims at a contained level of cost or at all. Although we have product liability insurance, we cannot assure you that our insurance coverage will be sufficient or that we will be able to obtain sufficient coverage at an acceptable cost in the future. A successful claim brought against us in excess of our available insurance coverage may have a material adverse effect on our business, results of operations and financial condition. Although we historically had insignificant volumes of product replacements or product returns, the cost of product replacements or product returns in the future may be substantial, particularly given our increasing product categories and models, and we could incur substantial costs to implement modifications to fix defects in our products.

Our consumers may experience service failures or interruptions due to defects in the software, infrastructure, components or processes that compromise our products and services, or due to errors in product installation, any of which could harm our business.

        Our products and services may contain undetected defects in the software, infrastructure, components or processes. Sophisticated software and applications, such as those offered by us, often contain "bugs" that can unexpectedly interfere with the software and applications' intended operations. Our internet services may from time to time experience outages, service slowdowns or errors. Defects may also occur in components or processes used in our products or for our services. There can be no assurance that we will be able to detect and fix all defects in the hardware, software and services we offer. Failure to do so could result in decreases in sales of our products and services, lost revenues, significant warranty and other expenses, decreases in customer confidence and loyalty, lost market share to our competitors, and harm to our reputation.

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Our delivery, return and exchange policies may adversely affect our results of operations.

        We have adopted shipping policies that do not necessarily pass the full cost of shipping onto our customers. We also have adopted customer-friendly return and exchange policies that make it convenient and easy for customers to change their minds within seven days after completing direct online purchases from us. We may also be required by law to adopt new or amend existing return and exchange policies from time to time. These policies improve users' shopping experience and promote customer loyalty, which in turn help us acquire and retain users. However, these policies also subject us to additional costs and expenses which we may not recoup through increased revenues. If our delivery, return and exchange policies are misused by a significant number of customers, our costs may increase significantly and our results of operations may be materially and adversely affected. If we revise these policies to reduce our costs and expenses, our users may be dissatisfied, which may result in loss of existing users or failure to acquire new users at a desirable pace, which may materially and adversely affect our results of operations.

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

        To ensure adequate supply for our products, we must forecast consumer demand for our products, including Xiaomi's demand. Our ability to accurately forecast demand for our products could be affected by many factors, including changes in consumer perception of our products or our competitors', sales promotions by us or our competitors, our sales channel inventory levels, and unanticipated changes in general market and economic conditions, among others.

        We manage our inventory by constantly monitoring and tracking our current inventory levels, while keeping a small portion of reserve stock, based on our forecast customer demand. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale. For example, our inventory level could increase in the fourth quarter as we prepare for large online sales promotion events, and it would be difficult for us to forecast the sales that we may achieve in those events. Inventory levels in excess of customer demand may result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which may cause our gross margin to suffer and could impair the strength of our brand. On the other hand, in the case we experience shortage of products, we may be unable to meet the demand for our products, and our business and operating results could be adversely affected. We have experienced inventory shortage of popular products in the past. Such arrangement may lead to loss of consumer confidence and further uncertainty with respect to our inventory level.

        As market competition for products similar to ours intensifies, we expect that it will become more difficult to forecast demand. In addition, as we continue to introduce new product and services and expand our products portfolio, we may face increasing challenges managing the production plan and appropriate inventory levels for our product portfolio.

Our efforts to manage and expand our customer base and sales channels may not be successful.

        We sell our products via multiple online and offline sales channels, including sales to Xiaomi and other online sales channels and through online direct sales, together with a network of Viomi offline experience stores. Historically, we heavily relied on Xiaomi's platform to distribute certain of our products. In 2016 and 2017 and the six months ended June 30, 2018, we generated a substantial portion of our net revenues from sales to Xiaomi of Xiaomi-branded smart water purification systems.

        Although we have devoted significant resources to expanding and diversifying our customer base and sales channels, we can not assure you that such efforts would succeed. For example, we typically enter into one-year non-exclusive sales agreements with our third-party online sales partners, and we receive orders from them on a regular basis. Our current agreements with third-party online sales generally do not prohibit them from working with our competitors or from selling competing products. Our competitors

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may be more effective in providing incentives to our third-party online sales to favor our competitors' products and promote their sales. Pursuing, establishing and maintaining relationships with our online sales partners requires significant time and resources. We cannot assure you that we will be able to renew those agreements upon their expiry on commercially acceptable terms, or at all.

        In addition, we have been adding offline experience stores and cooperating with more network partners. With the increased scale of operations, we will be required to invest additional resources in managing our network partners, and hence we may not be able to expand as fast or as successfully as we expect. In addition, our sales network management systems may not be effective.

We face risks associated with our network partners and their personnel for our network of Viomi offline experience stores.

        We rely on third-party network partners to operate our network of Viomi offline experience stores. We rely on these network partners to directly interact with and serve end customers, but the interest of a network partner may not be entirely aligned with ours. We set standards of practice of our network partners and provide incentives and periodic evaluation. However, our control over the network partners may not be as effective as if we directly owned and operated these offline experience stores.

        Our network partners carry out a significant amount of direct interactions with end users of our products, and their performance directly affects our brand image. However, we do not directly supervise their interactions or services provided. Although we have established and distributed service standards across our network and provide extensive ongoing training to our third-party network partners, we may not be able to successfully monitor, maintain and improve the services they provide. We may experience service disruptions, customer complaints and reduced sales, and our reputation may be materially and adversely affected if end users of our products are unsatisfied with our network partners' performance.

        Our offline experience stores may not be successful due to factors beyond our control, such as underperformance of the stores or adverse market conditions. We may also have disputes with our network partners. Suspension or termination of a network partner's services in a particular area may cause interruption to or failure in our services in the corresponding area. We may not be able to promptly replace our network partners or find alternative ways to provide services in a timely, reliable and cost-effective manner, or at all. Any service disruptions associated with our network partners could result in our customer satisfaction, reputation, operations and financial performance being materially and adversely affected.

We may not be successful in monetizing our household user base.

        It is an important growth strategy for us to continue to grow our user base and enrich our value-added businesses ecosystem, key components of our IoT @ Home platform, which enable us to differentiate our offerings and create additional monetization opportunities for us, including the sale of complementary products and provision of value-added services. While we have successfully grown our household user base from approximately 113 thousand as of March 31, 2016 to over 1.2 million as of June 30, 2018, there is no assurance that we will be successful in monetizing this user base through such offerings, for example, if:

    we are not able to increase or maintain the amount of time our household users spend interacting with our IoT products;

    we are not able to incentivize our household users to engage in relevant consumption activities related to our IoT @ Home platform; or

    we are not able to maintain or attract ecosystem partners to supply products or services on our IoT @ Home platform that are attractive to our household users.

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If we fail to expand or maintain the pool of our ecosystem partners, our net revenues growth may be adversely affected and the number of application scenarios of our products may not grow as quickly as we expect, or at all, which may reduce the attractiveness of our products. Any underperformance of or negative publicity about our ecosystem partners may also adversely affect our operating results.

        Various of our IoT products allow users to directly purchase and order products from us and our ecosystem partners. We have been actively seeking ecosystem partners on this front to expand our offerings and potentially create additional revenues streams for us. If we fail to expand and maintain the pool of our ecosystem partners, the ecosystem that we strive to establish may not succeed, which in turn may affect the willingness of consumers to purchase our products, and in turn increase the difficulty for us to attract suitable ecosystem partners.

        In addition, as we associate ourselves with these ecosystem partners in providing services, any negative publicity on them may also have adverse impact on our own reputation and results of operations. Furthermore, although products that these ecosystem partners offer are not our products, customers may still associate us with any dissatisfaction with the products and services offered by our ecosystem partners. Moreover, we may be subject to litigation or potential sanctions under PRC law if we were to negligently participate or assist in infringement activities associated with counterfeit or defective goods.

We depend on third party service providers for logistics and aftersales services.

        We outsource all of our transportation and logistics services, as well as installation and after-sale services, for our products to third-party service providers. We rely on these outsourcing partners to bring our products to our customers and in some cases, install them for our customers, and provide after-sale services. While these arrangements allow us to focus on our main business, they also reduce our direct control over the logistics and aftersales services provided to our customers. Any failure of our logistics partners to perform may have a material negative impact on the timely delivery of our products and customer satisfaction. In addition, logistics in our primary locations or transit to final destinations may be disrupted for a variety of reasons including, natural and man-made disasters, information technology system failures, commercial disputes, military actions or economic, business, labor, environmental, public health, or political issues. We may also be unable to pass any increase in logistics costs to our customers. Errors that occur in product installation or product maintenance processes can compromise our products and services, adversely affect customer experience, and harm our business.

An economic downturn may adversely affect consumer discretionary spending and demand for our products and service.

        Our products and services may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions and other factors, such as consumer confidence in future economic conditions, consumer sentiment, the availability and cost of consumer credit, levels of unemployment, and tax rates. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products and services and consumer demand for our products and services may not grow as we expect. Our sensitivity to economic cycles and any related fluctuation in consumer demand for our products and services may have an adverse effect on our operating results and financial condition.

Any significant cybersecurity incident or disruption of our information technology systems or those of third-party partners could materially damage our user relationships and subject us to significant reputational, financial, legal and operational consequences.

        We depend on our information technology systems, as well as those of third parties, to develop new products and services, operate our platform, host and manage our services, store data, process transactions, respond to user inquiries, and manage inventory and our supply chain. Any material disruption or slowdown of our systems or those of third parties whom we depend upon, including a

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disruption or slowdown caused by our failure to successfully manage significant increases in user volume, could cause outages or delays in our services, which could harm our brand and adversely affect our operating results.

        We rely on cloud servers maintained by KSYUN and Alibaba Cloud Services to store our data. Problems with our cloud service providers or the telecommunications network providers with whom they contract could adversely affect the experience of our users. Our cloud service providers could decide to cease providing us with services without adequate prior notice. Any change in service levels at our cloud servers or any errors, defects, disruptions, or other performance problems with our platform could harm our brand and may damage the data of our users. If changes in technology cause our information systems, or those of third parties whom we depend upon, to become obsolete, or if our or their information systems are inadequate to handle our growth, we could lose users and our business and operating results could be adversely affected.

Due to the ever-changing cyber threat landscape, our products may be subject to potential vulnerabilities of IoT products, and our services may be subject to certain risks, including hacking or other unauthorized access to control or view systems and obtain private information.

        Companies that collect and retain sensitive and confidential information are under increasing attack by cyber-criminals around the world. IoT products, being connected to the internet, are particularly vulnerable to cyberattack. While we implement security measures within our products, services, operations and systems, those measures may not prevent cybersecurity breaches, the access, capture or alteration of information by criminals, the exposure or exploitation of potential security vulnerabilities, distributed denial of service attacks, the installation of malware or ransomware, acts of vandalism, computer viruses, misplaced data or data loss that could disrupt the function of our products or services, and be detrimental to our reputation, business, financial condition, and results of operations.

        Third parties, including distribution partners, ecosystem 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 compromise or breach the technology protecting the networks that access our products and services. A significant actual or perceived (whether or not valid) theft, loss, fraudulent use or misuse of customer, employee, or other data, whether by us, our business partners, or other third parties, or as a result of employee error or negligence or otherwise, non-compliance with applicable industry standards or our contractual or other legal obligations regarding such data, or a violation of our privacy and information security policies with respect to such data, could result in costs, fines, litigation, or regulatory actions against us. Such an event could additionally 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 revenues attrition.

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

        Exploring growth opportunities by expanding our user base is one of our key strategies. Due to the volume and sensitivity of the information and data of our users we collect and manage and the nature of our products, the security features of our website, Viomi Store mobile app, e-commerce platform, IoT @ Home platform, and information systems are critical to our success. We have adopted security policies and measures, including encryption technology, to protect our proprietary data and user information. However, our website, Viomi Store mobile app, e-commerce platform, IoT @ Home platform and information

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systems may be targets of attacks, such as viruses, malware or phishing attempts by cyber criminals or other wrongdoers seeking to steal our user data for financial gain or to harm our business operations or reputation. The loss, misuse or compromise of such information may result in costly investigations, remediation efforts and notification to affected users. If such content is accessed by unauthorized third parties or deleted inadvertently by us or third parties, our brand and reputation and our sales could be adversely affected. Cyber-attacks could also adversely affect our operating results, consume internal resources, and result in litigation or potential liability for us and otherwise harm our business.

        In addition, according to our business cooperation agreement with Xiaomi, both Xiaomi and us can collect and use user data of all products we develop and sell to Xiaomi. Consequently, any leak or abuse of user data by Xiaomi may be perceived by consumers as a result of the compromise of our information security system. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of sensitive information or other customer data, could cause our users to lose trust in us and could expose us to legal claims.

        A growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of data. Those breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another, which might become a particular concern as we accelerate our international expansion. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises user data. Any failure to comply with applicable regulations, whether by us, our business partners, or other third parties, or as a result of employee error or negligence or otherwise, could result in regulatory enforcement actions against us, harm to our reputation and even our business partners to cease cooperation with us.

Our intellectual property and proprietary rights may not adequately protect our products, and our business may suffer if third parties infringe our intellectual property and proprietary rights.

        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. As of June 30, 2018, we had over 680 patents registered with the State Intellectual Property Office of China and over 500 pending patent applications in China. Globally, we had over 30 patents registered and over 70 pending patent applications in various overseas countries and jurisdictions as of June 30, 2018. However, our existing and future patents may not be sufficient to protect our products, services, technologies or designs and/or may not prevent others from developing competing products, services, technologies or designs. We cannot predict the validity and enforceability of our patents and other intellectual property with certainty. Litigation may be necessary to enforce our intellectual property rights. Initiating infringement proceedings against third parties can be expensive and time-consuming, and divert management's attention from other business concerns. We may not prevail in litigation to enforce our intellectual property against unauthorized use.

        According to our business cooperation agreement with Xiaomi, Xiaomi and we have joint ownership over all technology properties (other than industrial designs) and related intellectual properties generated from the process of design, development, manufacturing and sales of Xiaomi-branded products and certain of our self-branded products we supply to Xiaomi. As of June 30, 2018, around 150 of our registered patents and around 50 pending patent applications were jointly owned by Xiaomi and us among our registered patents and pending patent registrations. We believe we have properly filed or registered those patents we jointly own with Xiaomi. Nevertheless, we may face claims from Xiaomi for joint ownership of more intellectual properties related to Xiaomi-branded products and certain of our self-branded products we supply to Xiaomi. ln addition, Xiaomi may use these intellectual properties and user data to develop and manufacture competing products on its own and although the business cooperation agreement forbids

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the parties to license any third party to use the jointly owned intellectual properties without prior consent of the other party, we cannot ensure the compliance of Xiaomi with such agreement.

        Under a license agreement effective from June 24, 2018, we have obtained an exclusive and royalty-free right to use 11 patents owned by our founder and CEO Mr. Xiaoping Chen. If, for any reason, we are no longer able to use such patents or are charged significant fees for the use, our business and results of operations could be adversely affected.

We may encounter claims alleging our infringment of third-party intellectual properties from time to time.

        We may encounter claims from time to time relating to our use of intellectual properties of third parties, and we may not prevail in those disputes. We have adopted policies and procedures to prohibit our contract manufacturers from infringing third-party copyright or other intellectual property rights. However, we cannot ensure that they will strictly comply with our policy. In addition, any misconduct of our employees could also result in us infringing third-party intellectual property rights. Therefore liabilities and expenses may be incurred in respect of the unauthorized use of third parties' intellectual properties or defending against relevant claims. We have been involved in claims against us alleging our infringement of third-party intellectual property rights and we may be subject to further claims in the future. Any such intellectual property infringement claim could result in costly litigation and divert our management attention and resources. If we are found to have infringed intellectual property rights of third parties, we may be subject to monetary damages and may be required to cease production and sales of the relevant products. For example, in May 2018, a Chinese household electronic appliance producer brought some claims against us and certain other parties alleging that a type of our dishwashers infringed their utility model and industrial design patents, and required us to compensate their economic losses, litigation related expenses and litigation fees, and to cease selling this product. While we do not expect the outcome of this litigation to have a material adverse impact on our reputation or results of operations, other similar lawsuits that may be brought against us in the future could have a negative impact on us.

We rely on technology that we license from third parties, including artificial intelligence, that is integrated with our internally developed algorithms, software, or products.

        We rely on technology that we license from third parties. For example, for our voice recognition technologies, we have incorporated speech synthesis engine and Q&A components provided by iFLYTEK. We cannot be certain that our licensors are not infringing the intellectual property rights of third parties or that our licensors have sufficient rights to the licensed intellectual property in all jurisdictions in which we may sell our products. If we are unable to continue to license those technologies on commercially reasonable terms, we will face delays in releases of new products or functions or we will be required to delete this functionality from our products until equivalent, non-infringing technology can be licensed or developed and integrated into our current products. This effort could take significant time (during which we would be unable to continue to offer our affected products or services) and expenses and may ultimately not be successful.

Our use of open source software could negatively affect our ability to sell our products and subject us to possible litigation.

        A portion of the technologies we use incorporates open source software, and we may incorporate open source software in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. These licenses may subject us to certain unfavorable conditions, including requirements that we offer our products and services that incorporate the open source software for no cost, that we make publicly available source code for modifications or derivative works we create based upon, incorporating, or using the open source software, or that we license such modifications or derivative works under the terms of the particular open source license.

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        Additionally, if a third-party software provider has incorporated open source software into software that we license from such provider, we could be required to disclose or provide at no cost any of our source code that incorporates or is a modification of such licensed software. If an author or any third party that distributes open source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we may need to incur significant legal expenses defending against such allegations and could be subject to significant damages and enjoined from the sale of our products and services that contained the open source software. Any of the foregoing could disrupt the distribution and sale of our products and services and harm our business.

We may need additional capital, and financing may not be available on terms acceptable to us, or at all.

        We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs for the next 12 months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any changes in our pricing policy, marketing initiatives or investments we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to obtain a credit facility or sell additional equity or debt securities. The sale of additional equity securities could result in dilution of our existing shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. It is uncertain whether financing will be available in amounts or on terms acceptable to us, if at all.

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

        As part of our business strategy, we may acquire or make investments in other companies, products, or technologies along our product value chain to complement our business, enhance the features and functionality of our products, and accelerate the expansion of our platform and network of strategic partners. We may not be able to find suitable acquisition or investment candidates and we may not be able to complete acquisition and investment on favorable terms, if at all. If we do complete acquisition and investment as we expect, we may not ultimately strengthen our competitive position or achieve our goals; and any acquisition and investment we complete could be viewed negatively by users or investors. In addition, if we fail to successfully integrate such acquisitions, or the technologies associated with such acquisitions, into our company, the revenues and operating results of the combined company could be adversely affected. Acquisitions and investments are inherently risky and may not be successful, and they may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to greater-than-expected liabilities and our expenses, and adversely impact our business, financial condition, operating results, and cash flows.

Our results of operations may be subject to seasonality.

        Our operating results may vary significantly from period to period due to many factors, including seasonal factors that may have an effect on the demand for our IoT products. While seasonality has not been particularly prevalent in our historical results of operations due to the rapid growth of our business, we generally expect to experience higher sales in the second and fourth quarters, primarily attributable to the major shopping festivals across online e-commerce platforms such as "618," "Singles' Day" and "Double Twelve," which are highly popular among Chinese consumers. Given the impact of this seasonality, our quarterly results of operation and financial position at the end of a particular quarter may not necessarily be representative of the results we expect at year end or in other quarters of a year. Our operating results could also suffer if we do not achieve revenues consistent with our expectations for this seasonal demand because many of our expenses are based on anticipated levels of annual revenues.

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Higher labor costs and increasing raw material prices may adversely affect our business and our profitability.

        Labor costs in China have risen in recent years as a result of the enactment of new labor laws and social development. Given that substantially all of our contract manufacturers are currently located in China, rising labor costs in China will increase our personnel expenses. In addition, we have witnessed growing inflation rates in many areas of the world, and particularly in China, where we procure most of our raw materials, which adversely affects our costs of raw materials. We may not be able to pass on rising costs as a result of higher labor costs and increasing raw material prices to end consumers in the form of higher retail sale prices. Accordingly, our profitability may be adversely affected if labor costs and raw material prices continue to rise in the future.

Certain of our directors may have conflicts of interest.

        One of our directors, Mr. De Liu, is also a director of Xiaomi. This association may give rise to potential conflicts of interest, especially with regard to our business cooperation with Xiaomi. Directors of our Company are required by law to act honestly and in good faith with a view to the best of our interests and to disclose any interest that they may have in any of our projects or opportunities. In addition, we have adopted a code of ethics and an audit committee charter. Our code of ethics provides that an interested director needs to refrain from participating in any discussion among senior officers of our company relating to an interested business and may not be involved in any proposed transaction with such interested business. Furthermore, our audit committee charter provides that most related party transactions must be pre-approved by the audit committee, a majority of which consist of independent directors. Our audit committee charter, however, exempts the pre-approval requirement for related party transactions that are immaterial to us or not unusual by nature. In the event of such transactions with Xiaomi, Mr. Liu will still be entitled to vote in our board meeting, and we cannot assure you that Mr. Liu's decision will not be impacted by any potential conflict of interest arising from his relationship with Xiaomi.

In connection with the audit of our consolidated financial statements included in this prospectus, we and our independent registered public accounting firm identified three material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

        Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. In connection with the audit of our consolidated financial statements included in this prospectus, we and our independent registered public accounting firm identified three material weaknesses in our internal control over financial reporting as well as other control deficiencies. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a "material weakness" is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

        The material weaknesses identified related to (i) our lack of sufficient resources regarding financial reporting and accounting personnel with understanding of U.S. GAAP, in particular, to address complex U.S. GAAP technical accounting issues, related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC, (ii) lack of comprehensive U.S. GAAP accounting policies and financial reporting procedures and (iii) lack of an effective control procedure to track and estimate warranty provision relating to our products sold to ensure accuracy.

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        Following the identification of the material weaknesses, we have taken measures and plan to continue to take measures to remedy the material weaknesses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting." However, the implementation of these measures may not fully address the material weaknesses in our internal control over financial reporting, and we cannot conclude that they have been fully remedied. Our failure to correct the material weaknesses or our failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.

        We are now subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, requires that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2019. In addition, once we cease to be an "emerging growth company" as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

        During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements for prior periods.

We have granted, and may continue to grant, options and other types of awards under our share incentive plan, which may result in increased share-based compensation expense and have dilutive impact to you.

        Our shareholders and board of directors have adopted two share incentive plans. Pursuant to these two plans, a total of 30,400,000 ordinary shares underlying the awards may be issued. As of the date of this prospectus, there are 13,390,000 ordinary shares issuable upon exercise of outstanding share options under these two plans at a weighted average price of $0.42 per share. Competition for highly skilled personnel is often intense, and we may incur significant costs or be not successful in attracting, integrating, or retaining qualified personnel to fulfil our current or future needs. We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results

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of operations. In addition, the granting, vesting and exercise of the awards under these share incentive plans will have dilutive effect on your shareholding in our Company.

Our future success depends, in part, on our ability to continue to attract, motivate and retain highly skilled personnel. In particular, the growth of our ecosystem may require us to hire experienced personnel with a wide range of skills.

        We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. The loss of any key personnel, especially our founder, chairman, and chief executive officer Mr. Xiaoping Chen, could be disruptive to our operations and research and development activities, reduce our employee retention and revenues, and impair our ability to compete. In addition, if any of our senior management or key personnel joins a competitor or forms a competing company, we may lose know-how, trade secrets, business partners and key personnel. Furthermore, perspective candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. Thus, our ability to attract or retain highly skilled employees may be adversely affected by declines in the perceived value of our equity or equity awards. Furthermore, there are no assurances that the number of shares reserved for issuance under our share incentive plans will be sufficient to grant equity awards adequate to recruit new employees and to compensate existing employees.

We have limited insurance coverage, which could expose us to significant costs and business disruption.

        Although we maintain property insurance, product liability insurance and public liability insurance, we cannot assure you that our insurance coverage is sufficient. In addition, we do not have business disruption insurance or insurance policies covering damages to our IT infrastructure or information technology systems. Any disruptions to our IT infrastructures or systems or other business disruption event could result in substantial cost to us and diversion of our resources.

We face risks related to natural disasters, health epidemics and other acts of god, which could significantly disrupt our operations.

        Our business could be adversely affected by the effects of epidemics and other acts of god. In recent years, there have been outbreaks of epidemics in China and globally. Our business operations could be disrupted if one of our employees is suspected of having H1N1 flu, avian flu or another epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that the outbreak harms the Chinese economy in general and the IoT-enabled smart home products industry in particular.

Risks Related to Our Corporate Structure

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

        Due to PRC restrictions or prohibitions on foreign ownership of internet and other related business in China, we operate our business in China through our consolidated affiliated entities, in which we have no ownership interest. Although our provision of e-commerce services falls within the permitted category according to the Negative List (as defined elsewhere in this prospectus) that took effect on July 28, 2018, foreign investments in this business are still restricted by other qualifications and requirements under related regulations in China. Our WFOE has entered into a series of contractual arrangements with our VIEs, and their respective shareholders, which enable us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits of our VIEs, and (iii) have an exclusive option to

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purchase all or part of the equity interests and assets in our VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIEs and hence consolidate their financial results into our consolidated financial statements under U.S. GAAP. See "Corporate History and Structure" for further details.

        In the opinion of our PRC legal counsel, Han Kun Law Offices, (i) the ownership structure of our VIEs in China and our WFOE, both currently and immediately after giving effect to this offering, are not in violation of applicable PRC laws and regulations currently in effect; and (ii) the contractual arrangements between our WFOE, our VIEs and their shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of applicable PRC laws. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or our VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:

    levying fines or confiscating our income or the income of our PRC subsidiary or our VIEs, or imposing other requirements with which we or our VIEs may not be able to comply;

    revoking or suspending the business licenses or operating licenses of our PRC subsidiary or our VIEs;

    discontinuing or placing restrictions or onerous conditions on our operations through any transactions between our WFOE and our VIEs;

    requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEs and deregistering the equity pledges of our VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIEs;

    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China; and

    taking other regulatory or enforcement actions that could be harmful to our business.

        The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our VIEs in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of our VIEs or our right to receive substantially all the economic benefits and residual returns from our VIEs and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIEs in our consolidated financial statements. Either of these results, or any other significant penalties that might be imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.

We rely on contractual arrangements with our VIEs and their respective shareholders for substantially all of our business operation, which may not be as effective as direct ownership in providing operation control.

        We have relied and expect to continue to rely on contractual arrangements with our VIEs and their shareholders to conduct our business. These contractual arrangements may not be as effective as direct

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ownership in providing us with control over our VIEs. For example, our VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests.

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

Any failure by our VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.

        We refer to the shareholders of our VIEs as their nominee shareholders because although they remain the holders of equity interests on record in our VIEs, pursuant to the terms of the relevant shareholder voting proxy agreements, each such shareholder has irrevocably authorized any person designated by our WFOE to exercise the rights as a shareholder of the VIEs. However, if our VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For example, if the shareholders of our VIEs refuse to transfer their equity interest in our VIEs to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

        All of the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China (the arbitration provisions relate to the claims arising out of the contractual relationship created by the VIE agreements, rather than claims under the United States federal securities laws and do not prevent shareholders of our Company from pursuing claims under the United States federal securities laws). Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes arising from these contracts would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. See "—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us." Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, which means parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the

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event we are unable to enforce these contractual arrangements, or if we suffer significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIEs, and our ability to conduct our business may be negatively affected.

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

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

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

        Shareholders of our VIEs may have potential conflicts of interest with us. For instance, Mr. Xiaoping Chen, our founder, chairman of our board of directors, and chief executive officer, holds 60% of equity interests in both of our VIEs. The remaining 40% is held by affiliates or employees of certain of our principal shareholders, Red Better Limited and Shunwei Talent Limited. Conflicts of interests may arise between their roles in our Company or in our principal shareholders and their positions as nominal shareholders of our VIEs. These shareholders of our VIEs may breach, or cause our VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIEs, which would have a material and adverse effect on our ability to effectively control our VIEs and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise the shareholder will act in the best interests of our company or such conflicts will be resolved in our favor.

        Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the exclusive option agreements with these shareholders to request them to transfer all of their equity interests in the VIE to a PRC entity or individual designated by us, to the extent permitted by PRC law. Two nominee shareholders of our VIEs, namely Mr. Xiaoping Chen and Mr. De Liu, are also our directors. We rely on them to abide by the laws of the Cayman Islands, which provide that directors owe a fiduciary duty to the company that requires them to act in good faith and in what they believe to be the best interests of the company and not to use their position for personal gains. If we cannot resolve any conflict of interest or dispute between us and the shareholders of our VIEs, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

        The shareholders of our VIEs may be involved in personal disputes with third parties or other incidents that may have an adverse effect on their respective equity interests in our VIEs and the validity or enforceability of our contractual arrangements with our VIEs and their shareholders. For example, in the event that any of the shareholders of our VIEs divorces his or her spouse, the spouse may claim that the equity interest of our VIEs held by such shareholder is part of their community property and should be

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divided between such shareholder and his or her spouse. If such claim is supported by the court, the relevant equity interest may be obtained by the shareholder's spouse or any third party who is not subject to obligations under our contractual arrangements, which could result in a loss of our effective control over the VIEs. Similarly, if any of the equity interests of our VIEs is inherited by a third party on whom the current contractual arrangements are not binding, we could lose our control over the VIEs or have to maintain such control by incurring unpredictable costs, which could cause significant disruption to our business and operations and harm our financial condition and results of operations.

        Although under our current contractual arrangements, the spouse of Mr. Chen has executed spousal consent letters, under which she agrees that she will not take any actions or raise any claims to interfere with the performance by her spouse of the obligations under these contractual arrangements, including claiming community property ownership on the equity interest, and renounce any and all right and interest related to the equity interest that she may be entitled to under applicable laws. We cannot assure you that these undertakings and arrangements will be complied with or effectively enforced. In the event that any of them is breached or becomes unenforceable and leads to legal proceedings, it could disrupt our business, distract our management's attention and subject us to substantial uncertainties as to the outcome of any such legal proceedings.

We may rely on dividends paid by our PRC subsidiary to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.

        We are a holding company, and we may rely on dividends to be paid by our wholly-owned PRC subsidiary for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to the holders of the ADSs and our ordinary shares and service any debt we may incur. If our wholly owned PRC subsidiary incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

        Under PRC laws and regulations, wholly foreign-owned enterprises in the PRC, such as our WFOE, may pay dividends only out of its accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its after-tax profits each year, after making up previous years' accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At the discretion of the board of directors of the wholly foreign-owned enterprise, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of our wholly-owned PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

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

        Our VIEs and their subsidiaries hold substantially all of our assets, some of which are material to the operation of our business. If our VIEs go bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our VIEs may not, in any manner, sell, transfer, mortgage or dispose of any of their material assets outside the ordinary course of operation or equity interests in the business operation without our prior consent. If our VIEs undergo voluntary or involuntary liquidation proceedings, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

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If the chops of our PRC subsidiary and our VIEs are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

        In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC subsidiary and VIEs are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

Risks Related to Doing Business in China

Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us.

        We conduct our business primarily through our PRC subsidiary and consolidated VIEs in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiary is subject to laws and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. In addition, any new or changes in PRC laws and regulations related to foreign investment in China could affect the business environment and our ability to operate our business in China. For example, the MOFCOM published a discussion draft of the proposed Foreign Investment Law on January 19, 2015, aiming to, upon its enactment, replace the trio of existing laws regulating foreign investment in China, together with their implementation rules and ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. Substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects. Among other things, the draft Foreign Investment Law purports to introduce the principle of "actual control" in determining whether a company is considered a foreign invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established in China but "controlled" by foreign investors will be treated as FIEs, whereas an entity organized in a foreign jurisdiction but cleared by the MOFCOM as "controlled" by PRC entities and/or citizens, would nonetheless be treated as a PRC domestic entity.

        The VIE structure has been adopted by many PRC-based companies, including us, to conduct business in the industries that are currently subject to foreign investment restrictions in China. Under the draft Foreign Investment Law, a VIE that is controlled via contractual arrangements would also be deemed as an FIE, if it is ultimately "controlled" by foreign investors. If the business operation of such VIE falls within the industry catalogue of special management measures, or the Negative List, amended by the Ministry of Commerce and the National Development and Reform Commission in the future, the existing VIE structure may be scrutinized and subject to foreign investment restrictions and approval from the MOFCOM and other supervising authorities such as the MIIT.

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        However, there are significant uncertainties as to how the control status of our consolidated VIEs would be determined under the enacted version of the Foreign Investment Law. In addition, it is uncertain whether any of the businesses that we currently operate or plan to operate in the future through our consolidated VIEs would be on the Negative List and therefore be subject to any foreign investment restrictions or prohibitions.

        In addition, our corporate governance practice may be materially impacted and our compliance costs could increase if we were not considered as ultimately controlled by PRC domestic investors under the Foreign Investment Law, if enacted as currently proposed. For instance, the draft Foreign Investment Law as proposed purports to impose stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs.

        From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.

        Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business and impede our ability to continue our operations.

Changes in China's economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

        Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China's economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

        While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely

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affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results.

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.

        The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.

        The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, Cyberspace Administration of China (with the involvement of the State Council Information Office, the MIIT, and the Ministry of Public Security). The primary role of this agency is to facilitate the policy-making and legislative development in this field, to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry.

        The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management based on foreign laws.

        We are an exempted company incorporated under the laws of the Cayman Islands, we conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and all are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors, none of whom currently reside in the United States and whose assets are located outside the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.

        The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country

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

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

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

        We believe that we are not a PRC resident enterprise for PRC tax purposes. See "Regulations—Regulation on Tax—PRC enterprise income tax." However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term "de facto management body." If the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax, unless a reduced rate is available under an applicable tax treaty, from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% unless a reduced rate is available under an applicable tax treaty. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.

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

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

        On October 17, 2017, SAT issued a Public Notice of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, which, among others, repealed the Circular 698 on December 1, 2017. SAT Public Notice 37 further details and clarifies the tax withholding methods in respect of income of non-resident enterprises under Circular 698. And certain rules stipulated in SAT Public Notice 7 are replaced by SAT Public Notice 37. Where the non-resident enterprise fails to declare the tax payable pursuant to Article 39 of the Enterprise Income Tax Law, the tax authority may order it to pay the tax due within required time limits, and the non-resident enterprise shall declare and pay the tax payable within such time limits specified by the tax authority; however, if the non-resident enterprise voluntarily declares and pays the tax payable before the tax authority orders it to do so within required time limits, it shall be deemed that such enterprise has paid the tax in time.

        We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Public Notice 7 and SAT Public Notice 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiary may be requested to assist in the filing under SAT Public Notice 7 and SAT Public Notice 37. As a result, we may be required to expend valuable resources to comply with SAT Public Notice 7 and SAT Public Notice 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

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If our preferential tax treatments are revoked, become unavailable or if the calculation of our tax liability is successfully challenged by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions, and our results of operations could be materially and adversely affected.

        The PRC government has provided various tax incentives to our VIE entity—Foshan Viomi in China. These incentives include reduced enterprise income tax rates. For example, under the Enterprise Income Tax Law and its implementation rules, the statutory enterprise income tax rate is 25%. However, enterprises which obtained a new software enterprise certification were entitled to an exemption of enterprise income tax for the first two years and a 50% reduction of enterprise income tax for the subsequent three years, commencing from the first profit-making year. In addition, the income tax of an enterprise that has been determined to be a high and new technology enterprise can be reduced to a preferential rate of 15%. Foshan Viomi has obtained High and New Technology Enterprise status since November 31, 2016 and is thus eligible to enjoy a preferential tax rate of 15% for the periods presented, to the extent it has taxable income under the PRC Enterprise Income Tax Law. Any increase in the enterprise income tax rate applicable to our PRC subsidiary or VIE in China, or any discontinuation or retroactive or future reduction of any of the preferential tax treatments currently enjoyed by our PRC subsidiary or VIE in China, could adversely affect our business, financial condition and results of operations. In addition, in the ordinary course of our business, we are subject to complex income tax and other tax regulations and significant judgment is required in the determination of a provision for income taxes. Although we believe our tax provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest and penalties in excess of our tax provisions, our financial condition and results of operations would be materially and adversely affected.

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

        Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended by Ministry of Commerce in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council in 2008, were triggered. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the NPC which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the MOFCOM before they can be completed. In addition, PRC national security review rules which became effective in September 2011 require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

The approval of the China Securities Regulatory Commission may be required in connection with this offering, and, if required, we cannot predict whether we will be able to obtain such approval.

        The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by the Ministry of Commerce requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading of such special purpose

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vehicle's securities on an overseas stock exchange. However, the application of the M&A Rules remains unclear. Currently, there is no consensus among leading PRC law firms regarding the scope and applicability of the CSRC approval requirement.

        Our PRC legal counsel has advised us based on their understanding of the current PRC laws, rules and regulations that the CSRC's approval may not be required for the listing and trading of our ADSs on Nasdaq in the context of this offering, given that: (i) our PRC subsidiary was incorporated as wholly foreign-owned enterprises by means of direct investment rather than by merger or acquisition of equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are our beneficial owners; and (ii) no provision in the M&A Rules clearly classifies contractual arrangements as a type of transaction subject to the M&A Rules.

        However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering. These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our China subsidiary, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary' ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

        In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents' Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities as well as foreign individuals that are deemed as PRC residents for foreign exchange administration purpose) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.

        Under SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose vehicles, or SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its

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profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiary in China. On February 13, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE.

        We have requested PRC residents who we know hold direct or indirect interest in our company to make the necessary applications, filings and registrations as required under SAFE Circular 37. However, we may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance that all these PRC residents will comply with SAFE Circular No. 37 or the subsequent implementation rules to complete the applicable registrations. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions, restrict our cross-border investment activities, limit the ability of our wholly foreign-owned subsidiary in China to distribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us, and we may also be prohibited from injecting additional capital into the subsidiary. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected.

        Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

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

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

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additional incentive plans for our directors, executive officers and employees under PRC law. See "Regulations—Regulation on Employee Share Incentive Plan of Overseas Publicly Listed Company."

Failure to make adequate contributions to various government-sponsored employee benefits plans as required by PRC regulations may subject us to penalties.

        Companies operating in China are required to participate in various government-sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of employees up to a maximum amount specified by the local government from time to time at locations where our employees are based. The requirements of employee benefit plans have not been implemented consistently by the local governments in China given the different levels of economic development in different locations. We did not pay, or were not able to pay, certain social insurance or housing fund contributions for all of our employees and the amount we paid was lower than the requirements of relevant PRC regulations. If we are determined by local authorities to fail to make adequate contributions to any employee benefits as required by relevant PRC regulations, we may face late fees or fines in relation to the underpaid employee benefits. In addition, our provision for these liabilities may not be adequate, particularly in light of the recent tightening regulations. As a result, our financial condition and results of operations may be materially and adversely affected.

We face certain risks relating to the real properties that we lease.

        We lease real properties from third parties primarily for our office use in China, and none of our eight lease agreements for these properties has been registered with the PRC governmental authorities as required by PRC law. Although the failure to do so does not in itself invalidate the leases, we may be ordered by the PRC government authorities to rectify such noncompliance and, if such noncompliance were not rectified within a given period of time, we may be subject to fines imposed by PRC government authorities ranging from RMB1,000 and RMB10,000 for each lease agreement that has not been registered with the relevant PRC governmental authorities.

        The ownership certificates or other similar proof of three of our leased properties have not been provided to us by the relevant lessors. Therefore, we cannot assure you that such lessors are entitled to lease the relevant real properties to us. If the lessors are not entitled to lease the real properties to us and the owners of such real properties decline to ratify the lease agreements between us and the respective lessors, we may not be able to enforce our rights to lease such properties under the respective lease agreements against the owners. As of the date of this prospectus, we are not aware of any claim or challenge brought by any third parties concerning the use of our leased properties without obtaining proper ownership proof. If our lease agreements are claimed as null and void by third parties who are the real owners of such leased real properties, we could be required to vacate the properties, in the event of which we could only initiate the claim against the lessors under relevant lease agreements for indemnities for their breach of the relevant leasing agreements. We cannot assure you that suitable alternative locations are readily available on commercially reasonable terms, or at all, and if we are unable to relocate our officers in a timely manner, our operations may be interrupted.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

        We are an offshore holding company conducting our operations in China through our PRC subsidiary and VIEs. We may make loans to our PRC subsidiary and VIEs subject to the approval or registration from governmental authorities and limitation of amount, or we may make additional capital contributions to our wholly foreign-owned subsidiary in China. Any loans to our wholly foreign-owned subsidiary in

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China, which are treated as foreign-invested enterprises under PRC law, are subject to foreign exchange loan registrations. In addition, a foreign-invested enterprise, or FIE, shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of an FIE shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments other than banks' principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).

        In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or VIEs or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds from this offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

        The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China's foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. Since October 1, 2016, Renminbi has joined the International Monetary Fund's basket of currencies that make up the Special Drawing Right (SDR) along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

        Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

        Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

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Governmental control of currency conversion may limit our ability to utilize our cash balance effectively and affect the value of your investment.

        The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our net revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiary in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiary and VIE to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Proceedings instituted by the SEC against Chinese affiliates of the "big four" accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

        Starting in 2011 the Chinese affiliates of the "big four" accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

        In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC's internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm's performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. If additional remedial measures are imposed on the Chinese affiliates of the "big four" accounting firms, including our independent registered public accounting firm, in

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administrative proceedings brought by the SEC alleging the firms' failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

        In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our common stock may be adversely affected.

        If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from Nasdaq or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

        Our independent registered public accounting firm that issues the audit reports included in our prospectus filed with the U.S. Securities and Exchange Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the Peoples' Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. On May 24, 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC, and the Ministry of Finance which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

        Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor's audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

        The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor's audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

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Risks Related to the ADSs and this Offering

An active trading market for our shares or the ADSs may not develop and the trading price for the ADSs may fluctuate significantly.

        Our ADSs have been approved for listing on the Nasdaq. We have no current intention to seek a listing for our ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for our ADSs or our ordinary shares, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs was determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

The trading price of the ADSs is likely to be volatile, which could result in substantial losses to investors.

        The trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

    variations in our net revenues, earnings and cash flow;

    announcements of new investments, acquisitions, strategic partnerships, or joint ventures by us or our competitors;

    announcements of new products and services and expansions by us or our competitors;

    changes in financial estimates by securities analysts;

    failure on our part to realize monetization opportunities as expected;

    changes in revenues generated from our significant business partners;

    additions or departures of key personnel;

    release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;

    detrimental negative publicity about us, our management, our competitors or our industry;

    regulatory developments affecting us or our industry; and

    potential litigation or regulatory investigations.

        Any of these factors may result in large and sudden changes in the trading volume and price of the ADSs.

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

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Our dual-class share structure with different voting rights will limit your ability to influence corporate matters (and in certain situations, give certain holders of Class B ordinary shares control over the outcome of matters put to a vote of shareholders) and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

        Immediately prior to the completion of this offering, we will create a dual-class share structure such that our ordinary shares shall consist of Class A ordinary shares and Class B ordinary shares. One of our key strengths is our visionary and professional management team led by the founder and CEO Mr. Xiaoping Chen and supported by our strategic partner Xiaomi. The dual-class share structure ensures that the vision of the management team and the proven strategies can be consistently implemented, especially during the phase of our rapid growth. Furthermore, the dual-class structure enables us to better focus on long-term strategies by serving as effective defense against corporate actions which might not be in our long-term interest. In respect of matters requiring the votes of shareholders, holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to ten votes per share based on our dual-class share structure. We will sell Class A ordinary shares represented by our ADSs in this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Holders of Class B ordinary shares are required to convert their shares to Class A ordinary shares upon any sale, transfer, assignment or disposition of any Class B ordinary share (excluding, in the case of Mr. Xiaoping Chen, transfers to his affiliates). Conversion of Class B ordinary shares to Class A ordinary shares will increase the voting power of holders of Class A ordinary shares and ADSs, while at the same time increasing the relative voting power of individual Class B ordinary shareholders who retain their shares.

        As a result of the dual-class share structure and the concentration of ownership, Mr. Xiaoping Chen, certain of our employees and Xiaomi will beneficially own all of our issued Class B ordinary shares, and they will have considerable influence (and in certain situations, complete control) over matters such as decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. Such holders may take actions that are not in the best interest of us or our other shareholders. Due to the disproportionate voting powers associated with our two classes of ordinary shares, we anticipate that the holders of our Class B ordinary shares and our founder, Mr. Xiaoping Chen, will beneficially own 92.9% and 66.2%, respectively, of the aggregate voting power of our Company immediately after the completion of this offering, assuming no exercise of the underwriters' over-allotment option to purchase additional ADSs. Assuming that the Class B shareholders hold Class B ordinary shares only, the Class B shareholders must keep 9.1% of the outstanding shares to continue to control the outcome of matters submitted to shareholders for approval through ordinary resolutions. Immediately upon completion of this offering, we are authorized to issue 32,400,000 additional Class B ordinary shares pursuant to our post-IPO memorandum and articles of association. If all 32,400,000 additional Class B ordinary shares were to be issued, the voting power of holders of Class A ordinary shares and ADSs would be reduced to 5.7% from 7.1%, assuming no exercise of the underwriters' over-allotment option to purchase additional ADSs. The concentration of ownership may discourage, delay or prevent a change in control of our Company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

The dual-class structure of our ordinary shares may adversely affect the trading market for our ADSs.

        S&P Dow Jones and FTSE Russell have recently announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total

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voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of our ADSs representing Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our ADSs.

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

        We are an "emerging growth company," as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

        The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

If securities or industry analysts cease to publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.

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

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

        Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 11,400,000 ADSs (equivalent to 34,200,000 Class A ordinary shares) outstanding immediately after this offering, or 13,110,000 ADSs (equivalent to 39,330,000 Class A ordinary shares) if the underwriters exercise their over-allotment option in full. In connection with this offering, we, our directors and executive officers and our existing shareholders have agreed not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. In addition, we have agreed to instruct the depositary not to accept any shares for deposit for the issuance of ADSs for 180 days after the date of this prospectus (other than in connection with this offering), without prior written consent from the representatives of the underwriters. However, the underwriters may release these securities from these restrictions at any time, subject to applicable

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regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See "Underwriting" and "Shares Eligible for Future Sale" for a more detailed description of the restrictions on selling our securities after this offering.

Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

        We have adopted amended and restated memorandum and articles of association that will become effective immediately prior to this offering. Our new memorandum and articles of association contain provisions to limit the ability of others to acquire control of our Company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our proposed dual-class voting structure gives disproportionate voting power to the holders of our Class A and Class B ordinary shares. Our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree, and such use may not produce income or increase our ADS price.

        We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of operations or increase our ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote the underlying your Class A ordinary shares represented by your ADSs.

        Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying Class A ordinary shares represented by your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares, and become the registered holder of such shares prior to the record date for the

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general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the Class A ordinary shares represented by your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our post-offering memorandum and articles of association that will become effective immediately prior to this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying Class A ordinary shares represented by your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least 30 days' prior notice of shareholder meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the underlying Class A ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying Class A ordinary shares represented by your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders' meeting.

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

        We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

        Pursuant to our post-offering amended and restated memorandum and articles of association, our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend either out of profits or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as it falls due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.

        The depositary of the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or

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impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act of 1933 but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.

You may experience dilution of your holdings due to the inability to participate in rights offerings.

        We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

        Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems it expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an "emerging growth company."

        We are now a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and Nasdaq, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an "emerging growth company" pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company's internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies.

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        We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an "emerging growth company," we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

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

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

        We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2018 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties owed to us by our directors under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties owed to us by our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

        Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for our shareholders to obtain the information needed to establish any facts necessary for them to motion or to solicit proxies from other shareholders in connection with a proxy contest.

        As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of our board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a

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discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see "Description of Share Capital—Differences in Corporate Law."

Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement.

        The deposit agreement governing the ADSs representing our ordinary shares provides that, subject to the depositary's right to require a claim to be submitted to arbitration, the federal or state courts in the City of New York have exclusive jurisdiction to hear and determine claims arising under the deposit agreement and in that regard, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

        If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable U.S. state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the U.S. federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

        If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under U.S. federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

        Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

        In addition, the depositary may, in its sole discretion, require that any dispute or difference arising from the relationship created by the deposit agreement be referred to and finally settled by an arbitration conducted under the terms described in the deposit agreement, although the arbitration provisions do not preclude you from pursuing claims under U.S. federal securities laws in federal courts.

Certain judgments obtained against us by our shareholders may not be enforceable.

        We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, all of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or

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otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see "Enforceability of Civil Liabilities."

As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq corporate governance listing standards.

        As a Cayman Islands company listed on the Nasdaq Stock Market, we are subject to the Nasdaq corporate governance listing standards. However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq corporate governance listing standards. Currently, we do not plan to rely on home country practice with respect to our corporate governance after we complete this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq governance listing standards applicable to U.S. domestic issuers.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary shares.

        A non-U.S. corporation will be a passive foreign investment company, or PFIC, for any taxable year if either (i) at least 75% of its gross income for such year consists of certain types of "passive" income; or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce passive income or are held for the production of passive income. Based on our current and expected income and assets (taking into account the expected cash proceeds and our anticipated market capitalization following this offering), we do not presently expect to be a PFIC for the current taxable year or the foreseeable future. However, no assurance can be given in this regard because the determination of whether we are or will become a PFIC is a fact-intensive inquiry made on an annual basis that depends, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose of the asset test may be determined by reference to the market price of our ADSs. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering.

        If we were to be or become a PFIC for any taxable year during which a U.S. Holder (as defined in "Taxation—United States Federal Income Tax Considerations") holds our ADSs or ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See "Taxation—United States Federal Income Tax Considerations—Passive foreign investment company considerations."

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward looking statements are contained principally in the sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Known and unknown risks, uncertainties and other factors, including those listed under "Risk Factors," may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

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

    our mission and strategies;

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

    the expected growth of the IoT-enabled smart home products market and the home appliances market in China;

    The expected growing application of AI technology in smart home devices;

    our expectations regarding our relationships with our ecosystem partners;

    our expectations regarding demand for and market acceptance of our F2C new retail model;

    competition in our industry; and

    relevant government policies and regulations relating to our industry.

        These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in "Prospectus Summary—Our Challenges," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Regulations" and other sections in this prospectus. You should read thoroughly this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

        This prospectus contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The IoT-enabled smart home products market and the application of big data technology in China may not grow at the rate projected by market data, or at all. Failure to grow at the projected rate may have a material and adverse effect on our business and the market price of our ADSs. In addition, the rapidly evolving nature of IoT products and AI technology results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

        The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

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USE OF PROCEEDS

        We estimate that we will receive net proceeds from this offering of approximately US$91.4 million, or approximately US$105.7 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

        The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, and obtain additional capital to fund our growth strategy. We plan to use the net proceeds of this offering as follows:

    approximately US$30.7 million for research and development of products, services and technologies;

    approximately US$30.7 million for selling and marketing initiatives;

    approximately US$25.5 million for potential strategic investments and acquisitions along our product value chain, although we have not identified any specific investments or acquisition opportunities at this time; and

    approximately US$4.5 million for general corporate purposes.

        The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See "Risk Factors—Risks Related to the ADSs and this Offering—We have not determined a specific use for a portion of the net proceeds from this offering, and we may use these proceeds in ways with which you may not agree, and such use may not produce income or increase our ADS price."

        Pending any use described above, we plan to invest the net proceeds in short-term, interest-bearing, debt instruments or demand deposits.

        In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our PRC subsidiary only through loans or capital contributions and to our VIEs only through loans, subject to satisfaction of applicable government registration and approval requirements. Currently, there is no statutory limit to the amount of funding that we can provide to our PRC subsidiary through capital contribution, and we can provide loans to our PRC subsidiary, VIEs and their subsidiaries as long as the loan amount does not exceed the statutory limit, which is currently twice the amount of the relevant entities' respective net assets, calculated in accordance with accounting standards in China. As of June 30, 2018, the maximum amount of loan of our PRC subsidiary, Foshan Viomi and Beijing Viomi was approximately RMB170,000 (US$25,691), RMB328.1 million (US$49.6 million) and RMB34,000 (US$5,138), respectively. It would generally take us approximately thirty days to obtain approvals or complete registration necessary to provide funds to our PRC subsidiary, VIEs and their subsidiaries through capital contributions or loans, subject to the specific timeline implemented by local authorities. Furthermore, we expect the IPO proceeds to be used in China in the form of RMB and, therefore, our PRC subsidiary, VIEs and their subsidiaries will need to convert any capital contributions or loans from U.S. dollars to RMB. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See "Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business."

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DIVIDEND POLICY

        Our board of directors has discretion on whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

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

        We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See "Regulations—Regulation on Dividend Distributions."

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

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CAPITALIZATION

        The following table sets forth our capitalization as of June 30, 2018:

    on an actual basis;

    on a pro forma basis to reflect (i) the automatic conversion of 33,818,182 redeemable convertible class B ordinary shares and 18,181,818 series A preferred shares into Class A ordinary shares on a one-for-one basis immediately prior to this offering, (ii) the automatic conversion of 16,145,454 existing class A ordinary shares into Class B ordinary shares on a one-for-one basis immediately prior to this offering, and (iii) the automatic conversion of 101,454,546 redeemable convertible class B ordinary shares into Class B ordinary shares on a one-for-one basis immediately prior to this offering; and

    on a pro forma as adjusted basis to reflect (i) the automatic conversion of 33,818,182 redeemable convertible class B ordinary shares and 18,181,818 series A preferred shares into Class A ordinary shares on a one-for-one basis immediately prior to this offering, (ii) the automatic conversion of 16,145,454 class A ordinary shares into Class B ordinary shares on a one-for-one basis immediately prior to this offering, (iii) the automatic conversion of 101,454,546 redeemable convertible class B ordinary shares into Class B ordinary shares on a one-for-one basis immediately prior to this offering, (iv) the issuance of 4,000,000 existing class A ordinary shares to Viomi Limited in August 2018, and (v) the sale of 34,200,000 Class A ordinary shares in the form of ADSs by us in this offering at an initial public offering price of US$9.00 per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 
 As of June 30, 2018 
 
 Actual
(Unaudited)
 Pro Forma
(Unaudited)
 Pro Forma As
Adjusted
(Unaudited)
 
 
 RMB US$ RMB US$ RMB US$ 
 
 (in thousands, except for share data)
 

Mezzanine equity

                   

Class B redeemable convertible ordinary shares (135,272,728 shares issued on an actual basis; and none (unaudited) outstanding on a pro forma and pro forma as adjusted basis)

  260,123  39,311         

Series A redeemable convertible preferred shares (18,181,818 shares issued on an actual basis; and none (unaudited) outstanding on a pro forma and pro forma as adjusted basis)

  157,433  23,792         

Total mezzanine equity

  417,556  63,103         

Shareholders' (deficit) equity

                   

Ordinary shares (16,145,454 existing class A ordinary shares issued on an actual basis; 52,000,000 Class A ordinary shares and 117,600,000 Class B ordinary shares outstanding on a pro forma basis; 90,200,000 Class A ordinary shares and 117,600,000 Class B ordinary shares outstanding on a pro forma as adjusted basis)

  1    10  1  12  2 

Additional paid-in capital

  13,453  2,033  436,297  65,936  1,128,360  170,522 

Accumulated deficit

  (90,594) (13,691) (90,594) (13,691) (177,866) (26,880)

Accumulated other comprehensive loss

  (21,024) (3,177) (21,024) (3,177) (21,024) (3,177)

Total shareholders' (deficit) equity

  (98,164) (14,835) 324,689  49,069  929,482  140,467 
��

Total capitalization(1)

  319,392  48,268  324,689  49,069  929,482  140,467 

Note:

(1)
Equals the sum of total mezzanine equity and total shareholders' (deficit) equity.

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DILUTION

        If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

        Our net tangible book value as of June 30, 2018 was approximately US$48.3 million, or US$3.55 per class A ordinary share and US$10.65 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering, from the initial public offering price of US$3.00 per ordinary share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all issued and outstanding ordinary shares, including Class A ordinary shares and Class B ordinary shares.

        Without taking into account any other changes in net tangible book value after June 30, 2018, other than to give effect to our sale of the ADSs offered in this offering at the initial public offering price of US$9.00 per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2018 would have been US$140.5 million, or US$0.68 per ordinary share and US$2.04 per ADS. This represents an immediate increase in net tangible book value of US$0.40 per ordinary share and US$1.20 per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$2.32 per ordinary share and US$6.96 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 
 Per
ordinary
share
 Per ADS 

Assumed initial public offering price

 US$3.00 US$9.00 

Net tangible book value as of June 30, 2018

 US$3.55 US$10.65 

Pro forma net tangible book value after giving effect to the assumption that (i) 18,181,818 series A preferred shares and 33,818,182 redeemable convertible class B ordinary shares have been converted into Class A ordinary shares, (ii) 16,145,454 existing class A ordinary shares have been converted into Class B ordinary shares, and (iii)  101,454,546 redeemable convertible class B ordinary shares have been converted to Class B ordinary shares

 US$0.29 US$0.87 

Pro forma as adjusted net tangible book value after giving effect to the aforesaid assumptions considered in pro forma net tangible book value, 4,000,000 existing class A ordinary shares have been issued to Viomi Limited in August 2018, and this offering

 US$0.68 US$2.04 

Amount of dilution in net tangible book value to new investors in this offering

 US$2.32 US$6.96 

        The following table summarizes, on a pro forma as adjusted basis as of June 30, 2018, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The total number of ordinary shares does not include ordinary

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shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 
 Ordinary shares
Purchased
  
  
  
  
 
 
 Total Consideration Average
Price Per
Ordinary
share
  
 
 
 Average
Price Per
ADS
 
 
 Number Percent Amount Percent 

Existing shareholders

  174,260,000  83.9%US$24,024,160  19.3%US$0.14 US$0.42 

New investors

  33,540,000  16.1%US$100,620,000  80.7%US$3.00 US$9.00 

Total

  207,800,000  100.0%US$124,644,160  100.0%      

        The discussion and tables above assume no exercise of any outstanding share options outstanding as of the date of this prospectus. As of the date of this prospectus, there are 13,390,000 ordinary shares issuable upon exercise of outstanding share options at a weighted average exercise price of US$0.42 per share, and there are in total up to 17,010,000 additional ordinary shares available for future issuance upon the exercise of yet to-be-issued share options under our 2015 and 2018 Share Incentive Plans. To the extent that any of these options are exercised, there will be further dilution to new investors.

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EXCHANGE RATE INFORMATION

        Our reporting currency is the Renminbi because our business is mainly conducted in China and substantially all of our net revenues are denominated in Renminbi. The conversion of Renminbi into U.S. dollars in this prospectus is based on the exchange rate set forth in the H.10 Statistical release of the Board of Governors of the Federal Reserve System. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB6.6171 to US$1.00, the exchange rate in effect as of June 29, 2018. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign currency and through restrictions on foreign trade. On September 21, 2018, the exchange rate was RMB6.8559 to US$1.00.

        The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you.

 
 Exchange Rate 
Period
 Period
End
 Average(1) Low High 
 
 (RMB per US$1.00)
 

2013

  6.0537  6.1412  6.2438  6.0537 

2014

  6.2046  6.1704  6.2591  6.0402 

2015

  6.4778  6.2869  6.4896  6.1870 

2016

  6.9430  6.6549  6.9580  6.4480 

2017

  6.5063  6.7350  6.9575  6.4773 

2018

             

April

  6.3325  6.2967  6.3340  6.2655 

May

  6.4096  6.3701  6.4175  6.3325 

June

  6.6171  6.4651  6.6235  6.3850 

July

  6.8038  6.7164  6.8102  6.6123 

August

  6.8300  6.8453  6.9330  6.8018 

September (through September 21)

  6.8559  6.8497  6.8704  6.8270 

Source: Federal Reserve Statistical Release

Note:

(1)
Annual averages are calculated by using the average of the exchange rates on the last day of each month during the relevant year. Monthly averages are calculated by using the average of the daily rates during the relevant month.

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ENFORCEABILITY OF CIVIL LIABILITIES

        We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

    political and economic stability;

    an effective judicial system;

    a favorable tax system;

    the absence of exchange control or currency restrictions; and

    the availability of professional and support services.

        However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include but are not limited to:

    the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors as compared to the United States; and

    Cayman Islands companies may not have standing to sue before the federal courts of the United States.

        Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

        Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and most of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these individuals, or to bring an action against us or these individuals in the United States, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

        We have appointed CT Corporation System, located at 111 Eighth Avenue, 13th Floor, New York, New York 10011, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

        We have been informed by Maples and Calder (Hong Kong) LLP, our Cayman Islands legal counsel, that the United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of U.S. courts in civil and commercial matters and that a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, would not be automatically enforceable in the Cayman Islands. We have also been advised by Maples and Calder (Hong Kong) LLP that a judgment obtained in any federal or state court in the United States will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final, (iv) is not in respect of taxes, a fine or a penalty, and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

        There is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil

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liability provisions of the securities laws of the United States or any state in the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the securities laws of the United States or any state in the United States. Such uncertainty relates to whether a judgment obtained from the United States courts under the civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company or its directors and officers. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands.

        Han Kun Law Offices, our counsel as to PRC law, has advised us that there is uncertainty as to whether the courts of China would:

    recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

    entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

        Han Kun Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in China for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a specific defendant, a concrete claim, a factual basis and a cause for the suit.

        It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding our ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

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CORPORATE HISTORY AND STRUCTURE

        We commenced our operation in May 2014 through Foshan Yunmi Electric Appliances Technology Co., Ltd, or Foshan Viomi, a PRC domestic company, to develop, manufacture and sell IoT products, including smart water purification systems. Foshan Viomi was established by Mr. Xiaoping Chen and Tianjin Jinxing Investment Co., Ltd., or Tianjin Jinxing, a subsidiary of Xiaomi. Certain equity interests in Foshan Viomi under Mr. Chen's name were held by Mr. Chen on behalf of our management.

        In January 2015, we incorporated Viomi Technology Co., Ltd as our offshore holding company in order to facilitate foreign investment in our company. Subsequently, we established Viomi HK Technology Co., Limited, or Viomi HK, as our intermediate holding company, which in turn established a wholly-owned PRC subsidiary, Lequan Technology (Beijing) Co., Ltd., or Lequan Technology or our WFOE, in April 2015.

        In January 2015, we formed a PRC domestic company, Beijing Yunmi Technology Co., Ltd, or Beijing Viomi, to develop and manage our big data, software and product design. In July 2015, we issued class A ordinary shares of Viomi Technology Co., Ltd. in exchange for the equity interests in Foshan Viomi held by Mr. Chen on behalf of the management, class B ordinary shares in exchange for the equity interests in Foshan Viomi owned by Mr. Chen, and class B ordinary shares to Red Better Limited and Shunwei Talent Limited in exchange for the equity interests in Foshan Viomi held by Tianjin Jinxing. Concurrently, we obtained control over Foshan Viomi and Beijing Viomi by entering into a series of contractual arrangements with them and their respective shareholders. In September 2018, Foshan Viomi reduced its registered capital and changed its shareholders from Mr. Xiaoping Chen and Tianjin Jinxing Investment Company, an affiliate of our principal shareholder, Red Better Limited, to Mr. Xiaoping Chen alone. Concurrently, we entered into a series of contractual arrangements in substantially the same forms with Foshan Viomi and Mr. Xiaoping Chen. We collectively refer to Foshan Viomi and Beijing Viomi as our VIEs in this prospectus. We use contractual arrangements with VIEs due to PRC restrictions or prohibitions on foreign ownership of internet and other related businesses in China. Although our provision of e-commerce services falls within the permitted category according to the Negative List (as defined elsewhere in this prospectus) that took effect on July 28, 2018, foreign investments in this business are still restricted by other qualifications and requirements under related regulations in China. In 2016 and 2017, we derived virtually all of our revenues from our VIEs. We rely on dividends and other distributions paid to us by our WFOE, which in turn depends on the service fees that our VIEs pay to our WFOE. Our WFOE has the sole discretion to receive from each of our VIEs an annual service fee at an amount up to 100% of the respective VIE's annual net income. In addition, our WFOE is entitled to receive certain fees for other technical services at the amount mutually agreed upon by our WFOE and the respective VIE. Our WFOE did not collect any service fees from our VIEs in the last two fiscal years, and will make discretionary determinations on the amount of fees to collect based on the performance of our VIEs and our business needs going forward. We do not have unfettered access to our WFOE's and VIEs' revenues due to PRC legal restrictions on the payment of dividends by PRC companies, foreign exchange control restrictions, and the restrictions on foreign investment, among others. For more details and risks related to our variable interest entity structure, please see "Corporate History and Structure—Contractual Arrangements with Our VIEs and Their Shareholders" and "Risk Factors—Risks Related to Our Corporate Structure." In addition, we issued series A redeemable convertible preferred shares to a group of investors for cash or in the form of conversion of the outstanding bridge loans previously provided by the same investors.

        As a result of our direct ownership in our WFOE and the contractual arrangements with the VIEs, we are regarded as the primary beneficiary of our VIEs, and we treat them as our consolidated affiliated entities under U.S. GAAP. We have consolidated the financial results of our VIEs in our consolidated financial statements in accordance with U.S. GAAP.

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        The following diagram illustrates our corporate structure, including our significant subsidiaries and VIEs as of the date of this prospectus:

GRAPHIC


    Notes:

(1)
Mr. Xiaoping Chen, our founder, chairman of our board of directors, chief executive officer and a beneficial owner of the shares of our company, holds 100% equity interests in Foshan Viomi.

(2)
Mr. Chen holds 60% equity interests in Beijing Viomi. Two employees of our shareholders, Red Better Limited and Shunwei Talent Limited, each hold 20% equity interests in Beijing Viomi.

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        The following diagram illustrates our anticipated corporate structure with voting power percentages shown in brackets next to each shareholder's shareholding percentages, including our significant subsidiaries and VIEs, upon the completion of this offering:

GRAPHIC


    Notes:

*
Demonstrates the percentage of the ordinary shares beneficially owned by each person or entity to our total outstanding ordinary shares immediately after this offering.

(1)
Represents the shares Mr. Xiaoping Chen holds through his wholly-owned company, Viomi Limited, as well as the shares held by certain employees of which Mr. Chen can direct the disposition and voting power. Please see the section titled "Principal Shareholders" for more information on Mr. Xiaoping Chen's beneficial ownership in our Company immediately after this offering.

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(2)
Represents the shares held by Xiaomi through Red Better Limited. Please see the section titled "Principal Shareholders" for more information on Red Better Limited's beneficial ownership in our Company immediately after this offering.

(3)
Mr. Xiaoping Chen, our founder, chairman of our board of directors, chief executive officer and a beneficial owner of the shares of our Company, holds 100% equity interests in Foshan Viomi.

(4)
Mr. Xiaoping Chen, our founder, chairman of our board of directors, chief executive officer and a beneficial owner of the shares of our Company, holds 60% equity interests in Beijing Viomi. Each of De Liu and Liping Cao, who are respectively employees of our shareholders: Red Better Limited and Shunwei Talent Limited, holds 20% equity interests in Beijing Viomi.

Contractual Arrangements with Our VIEs and Their Shareholders

Agreements that provide us with effective control over our VIEs

        Shareholder Voting Proxy Agreement.    Pursuant to the Shareholder Voting Proxy Agreement, dated September 5, 2018, by and among our company, our WFOE and the shareholder of Foshan Viomi. The shareholder of Foshan Viomi has irrevocably authorized any person designated by our WFOE to act as his attorney-in-fact to exercise all of his rights as a shareholder of Foshan Viomi, including, but not limited to, the right to convene and attend shareholders' meetings, vote on any resolution that requires a shareholder vote, such as the appointment and election of directors, and other senior management personnel who shall be appointed or removed by the shareholders as well as the sale or transfer of all or part of the equity interests owned by such shareholder. Such shareholder voting proxy agreements will remain effective, unless otherwise terminated in advance pursuant to agreement in writing from all parties.

        On July 21, 2015, our WFOE, Beijing Viomi and each of the shareholders of Beijing Viomi entered into a Shareholder Voting Proxy Agreement, which contain terms substantially similar to the Shareholder Voting Proxy Agreement executed by the shareholders of Foshan Viomi described above.

        Equity Pledge Agreements.    Pursuant to the Equity Pledge Agreement, dated September 5, 2018, among our WFOE, Foshan Viomi and the shareholder of Foshan Viomi, the shareholder of Foshan Viomi has pledged 100% equity interests in Foshan Viomi to our WFOE to guarantee the performance by the shareholder of his obligations under the Exclusive Option Agreement, the Shareholder Voting Proxy Agreement and the Equity Pledge Agreement, as well as the performance by Foshan Viomi of its obligations under the Exclusive Option Agreement, the Shareholder Voting Proxy Agreement, the Exclusive Consultation and Service Agreement and the Equity Pledge Agreement. In the event of a breach by Foshan Viomi or any shareholder of contractual obligations under the Equity Pledge Agreement, our WFOE, as pledgee, will have the right to dispose of the pledged equity interests in Foshan Viomi and will have priority in receiving the proceeds from such disposal. The shareholder of Foshan Viomi also undertakes that, without the prior written consent of our WFOE, the shareholder will not dispose of, create or allow any encumbrance on the pledged equity interests. Foshan Viomi undertakes that, without the prior written consent of our WFOE, they will not assist or allow any encumbrance to be created on the pledged equity interests.

        On July 21, 2015, our WFOE, Beijing Viomi and each of the shareholders of Beijing Viomi entered into an Equity Pledge Agreement, which contains terms substantially similar to the Equity Pledge Agreement described above.

        We have completed the registration of the equity pledge with the competent office of the State Administration for Industry and Commerce in accordance with the PRC Property Rights Law.

Agreements that allow us to receive economic benefits from our VIEs

        Exclusive Consultation and Service Agreements.    Pursuant to the Exclusive Consultation Service Agreement, dated July 21, 2015, between our WFOE and Foshan Viomi, our WFOE has the exclusive right to provide Foshan Viomi with the software technology development, technology consulting and technical services required by Foshan Viomi' business. Without our WFOE's prior written consent, Foshan

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Viomi may not accept any same or similar services subject to this agreement from any third party. Foshan Viomi agrees to pay our WFOE an annual service fee at an amount that is equal to 100% of its annual net income or the amount which is adjusted in accordance with our WFOE's sole discretion for the relevant year as well as the mutually agreed amount for certain other technical services, both of which should be paid within three months after the end of the relevant calendar year. Our WFOE has the exclusive ownership of all the intellectual property rights created as a result of the performance of the Exclusive Consultation and Service Agreement, to the extent permitted by applicable PRC laws. To guarantee Foshan Viomi's performance of its obligations thereunder, the shareholder has pledged his equity interests in Foshan Viomi to our WFOE pursuant to the Equity Pledge Agreement. The Exclusive Consultation and Service Agreement will remain effective for an indefinite term, unless otherwise terminated pursuant to mutual agreement in writing or applicable PRC laws.

        On July 21, 2015, our WFOE, Beijing Viomi and each of the shareholders of Beijing Viomi entered into an Exclusive Consultation and Service Agreement, which contains terms substantially similar to the Exclusive Consultation and Service Agreement described above.

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

        Exclusive Option Agreements.    Pursuant to the Exclusive Option Agreement, dated September 5, 2018, among our WFOE, Foshan Viomi and the shareholder of Foshan Viomi, the shareholder of Foshan Viomi has irrevocably granted our WFOE an exclusive option to purchase all or part of the shareholder's equity interests in Foshan Viomi, and Foshan Viomi has irrevocably granted our WFOE an exclusive option to purchase all or part of its assets. Our WFOE or its designated person may exercise such options to purchase equity at their respective paid-in registered capital in Foshan Viomi, or the lowest price permitted under applicable PRC laws, whichever lower. Our WFOE or its designated person may exercise such options to purchase assets at the lowest price permitted under applicable PRC laws. The shareholder of Foshan Viomi undertakes that, without our WFOE's prior written consent, the shareholder will not, among other things, (i) transfer or otherwise dispose of the shareholder's equity interests in Foshan Viomi, (ii) create any pledge or encumbrance on the shareholder's equity interests in Foshan Viomi, (iii) change Foshan Viomi's registered capital, (iv) merge Foshan Viomi with any other entity, (v) dispose of Foshan Viomi's material assets (except in the ordinary course of business), or (vi) amend Foshan Viomi's articles of association. In addition, Foshan Viomi undertakes that, without our WFOE's prior written consent, it will not, among other things, create any pledge or encumbrance on any of its assets, or transfer or otherwise dispose of its material assets (except in the ordinary course of business). The Exclusive Option Agreement will remain effective until the entire equity interests in and all the assets of Foshan Viomi have been transferred to our WFOE or its designated person.

        On July 21, 2015, our WFOE, Beijing Viomi and each of the shareholders of Beijing Viomi entered into an Exclusive Option Agreement, which contains terms substantially similar to the Exclusive Option Agreement described above.

        In the opinion of Han Kun Law Offices, our PRC legal counsel:

    the ownership structures of our VIEs in China and our WFOE, both currently and immediately after giving effect to this offering, are not in violation of applicable PRC laws and regulations currently in effect; and

    the contractual arrangements between our company, our WFOE, our VIEs and their respective shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of applicable PRC laws.

        However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is

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uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or our VIE are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See "Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating some of our business operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties, or be forced to relinquish our interest in those operations" and "Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us."

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

        The following selected consolidated financial data for the years ended December 31, 2016 and 2017 and as of December 31, 2016 and 2017 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated financial data for the six months ended June 30, 2017 and 2018 and as of June 30, 2018 are derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results do not necessarily indicate results expected for any future periods. You should read this Selected Consolidated Financial and Operating Data section together with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.

        The following table presents our selected consolidated statements of comprehensive (loss) income data for the years ended December 31, 2016 and 2017 and the six months ended June 30, 2017 and 2018.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB RMB US$ RMB RMB US$ 
 
 (in thousands, except for share and per share data)
 

Selected Consolidated Statements of Comprehensive (Loss) Income Data:

                   

Net revenues(1)

  312,574  873,219  131,964  270,625  1,040,179  157,196 

Cost of revenues

  (232,544) (598,036) (90,377) (190,461) (750,630) (113,438)

Gross profit

  80,030  275,183  41,587  80,164  289,549  43,758 

Operating expenses(2):

  
 
  
 
  
 
  
 
  
 
  
 
 

Research and development expenses(2)

  (29,926) (60,749) (9,181) (22,177) (49,047) (7,412)

Selling and marketing expenses(2)

  (20,929) (95,296) (14,401) (32,422) (146,589) (22,153)

General and administrative expenses(2)

  (14,386) (15,818) (2,390) (5,869) (14,837) (2,242)

Total operating expenses

  (65,241) (171,863) (25,972) (60,468) (210,473) (31,807)

Other (expenses) income

  (481) 2,236  338  1,866  148  22 

Income from operations

  14,308  105,556  15,953  21,562  79,224  11,973 

Interest (expenses) income

  (296) 2,402  363  926  2,659  402 

Income before income tax benefit (expenses)

  14,012  107,958  16,316  22,488  81,883  12,375 

Income tax benefit (expenses)

  2,247  (14,718) (2,224) (3,569) (11,592) (1,753)

Net income

  16,259  93,240  14,092  18,919  70,291  10,622 

Net income attributable to the Company

  16,259  93,240  14,092  18,919  70,291  10,622 

Net (loss) income attributable to ordinary shareholders of the Company

  (3,453) 8,033  1,214  776  2,830  428 

Net (loss) income per share attributable to ordinary shareholders of the Company:

                   

Net (loss) income per ordinary share—basic

  (0.28) 0.39  0.06  0.05  0.11  0.02 

Net (loss) income per ordinary share—diluted

  (0.28) 0.31  0.05  0.04  0.09  0.01 

Weighted average number of ordinary shares used in computing net (loss) income per share:

                   

Ordinary shares—basic

  12,230,136  20,684,681  20,684,681  16,909,090  24,919,286  24,919,286 

Ordinary shares—diluted

  12,230,136  25,579,806  25,579,806  21,557,912  31,434,510  31,434,510 

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Notes:

(1)
Includes RMB299.8 million and RMB739.5 million (US$111.8 million) from sales to Xiaomi for the years ended December 31, 2016 and 2017, respectively, and RMB243.2 million and RMB651.5 million (US$98.5 million) from sales to Xiaomi for the six months ended June 30, 2017 and 2018, respectively.

(2)
Share-based compensation expenses were allocated as follows:
 
 For the year ended
December 31,
 For the six months
ended June 30,
 
 
 2016 2017 2017 2018 
 
 RMB RMB US$ RMB RMB US$ 
 
 (in thousands)
 

General and administrative expenses

  6,863  3,303  499  2,244  986  149 

Research and development expenses

  3,464  1,903  288  1,492  4,228  639 

Selling and marketing expenses

  251  615  93  333  2,560  387 

Total

  10,578  5,821  880  4,069  7,774  1,175 

        The following table presents our selected consolidated balance sheet data as of December 31, 2016 and 2017 and June 30, 2018.

 
 As of December 31, As of June 30, 
 
 2016 2017 2018 
 
 RMB RMB US$ RMB US$ 
 
 (in thousands)
 

Selected Consolidated Balance Sheet Data:

                

Current assets:

                

Cash and cash equivalents

  156,930  279,952  42,307  256,952  38,832 

Amounts receivable from a related party, net

  45,021  249,548  37,713  333,731  50,435 

Total current assets

  276,166  665,431  100,563  1,002,885  151,560 

Total assets

  281,945  671,565  101,490  1,016,855  153,671 

Total current liabilities

  136,886  432,385  65,345  697,287  105,376 

Total liabilities

  136,886  432,845  65,415  697,463  105,403 

Total mezzanine equity

  423,999  407,928  61,647  417,556  63,103 

Total shareholders' deficit

  (278,940) (169,208) (25,572) (98,164) (14,835)

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        The following table presents our selected consolidated cash flow data for the years ended December 31, 2016 and 2017 and the six months ended June 30, 2017 and 2018.

 
 For the year ended
December 31,
 For the six months
ended June 30,
 
 
 2016 2017 2017 2018 
 
 RMB RMB US$ RMB RMB US$ 
 
 (in thousands)
 

Selected Consolidated Cash Flow Data:

                   

Net cash provided by (used in) operating activities

  15,499  123,906  18,725  7,737  (17,880) (2,700)

Net cash (used in) provided by investing activities

  (1,609) (1,234) (186) (245) 25,336  3,828 

Net cash provided by (used in) financing activities

  12,999  2,671  404    (34,195) (5,168)

Effect of exchange rate changes on cash and cash equivalents

  2,913  (2,321) (351) (947) 3,739  565 

Net increase (decrease) in cash and cash equivalents

  29,802  123,022  18,592  6,545  (23,000) (3,475)

Cash and cash equivalents at beginning of the year/period

  127,128  156,930  23,715  156,930  279,952  42,307 

Cash and cash equivalents at end of the year/period

  156,930  279,952  42,307  163,475  256,952  38,832 

        The following table sets forth the breakdown of our net revenues by business line both as an absolute amount and as a proportion of total net revenues for the periods indicated.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands, except for percentages)
 

Net revenues:

                               

IoT-enabled smart home products

  273,282  87.4  712,317  107,648  81.6  232,687  86.0  828,212  125,163  79.6 

Smart water purification systems

  250,442  80.1  570,784  86,259  65.4  194,005  71.7  432,443  65,353  41.6 

Smart kitchen products

      50,656  7,655  5.8  3,299  1.2  285,595  43,160  27.4 

Other smart products

  22,840  7.3  90,877  13,734  10.4  35,383  13.1  110,174  16,650  10.6 

Consumable products

  19,376  6.2  87,500  13,223  10.0  26,944  10.0  87,610  13,240  8.4 

Value-added businesses(1)

  19,916  6.4  73,402  11,093  8.4  10,994  4.0  124,357  18,793  12.0 

Total

  312,574  100.0  873,219  131,964  100.0  270,625  100.0  1,040,179  157,196  100.0 

    Note:

(1)
Including sales of other products and rendering of services. See footnote (9) to the Consolidated Financial Statements and footnote (8) to the Unaudited Interim Condensed Consolidated Financial Statements for more details.

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        The following table presents our gross profit and gross profit margin by business line for the years ended December 31, 2016 and 2017 and the six months ended June 30, 2017 and 2018.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands except percentages)
 

Gross profit and gross profit margin:

                               

IoT-enabled smart home products

  66,603  24.4  212,578  32,126  29.8  66,457  28.6  221,389  33,457  26.7 

Smart water purification systems

  58,594  23.4  170,996  25,842  30.0  55,561  28.6  143,500  21,686  33.2 

Smart kitchen products

      15,669  2,368  30.9  595  18.0  48,633  7,350  17.0 

Other smart products

  8,009  35.1  25,913  3,916  28.5  10,301  29.1  29,256  4,421  26.6 

Consumable products

  8,732  45.1  39,377  5,951  45.0  12,727  47.2  43,773  6.615  50.0 

Value-added businesses

  4,695  23.6  23,228  3,510  31.6  980  8.9  24,387  3,686  19.6 

Total

  80,030  25.6  275,183  41,587  31.5  80,164  29.6  289,549  43,758  27.8 

        The following table presents certain of our operating data as of the dates or for the periods indicated.

 
 As of December 31, As of
June 30,
 
 
 2016 2017 2018 

Selected Operating Data:

          

Household users(1)

  348,084  894,078  1,222,336 


 
 For the Year
Ended
December 31,
 For the
Six
Months
Ended
June 30,
 
 
 2016 2017 2018 

IoT products shipped(2)

  382,479  1,194,659  1,245,564 

    Notes:

(1)
Represents the number of households where at least one of our IoT products was connected to the internet as of the respective date, which can be used to evaluate the growth of our user base and forms a key part of our data analytics, brand building and monetization strategies. The more household users the we have, the more opportunities we will have to conduct data analytics, generate greater brand awareness and create monetization opportunities through the sale of additional complementary products and services.

(2)
Represents the volume of IoT products sold within the respective time periods. Sales of IoT products represents the sales volume of our products, which we believe is reflective of end-consumer demand, which in turn is a key driver in the growth in our scale and results of operations.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under "Risk Factors" and elsewhere in this prospectus. See "Special Note Regarding Forward-Looking Statements."

Overview

        We have developed a unique IoT @ Home platform consisting of an ecosystem of innovative IoT products, together with a suite of complementary consumable products and value-added businesses. This platform provides an attractive entry point into the consumer home, enabling users to intelligently interact with a broad portfolio of IoT products in an intuitive and human-like manner to make daily life more convenient, efficient and enjoyable, while allowing us to grow our household user base and capture various scenario-driven consumption events in the home environment. As of June 30, 2018, our IoT @ Home platform had over 1.2 million household users.

        We are a strategic partner of Xiaomi. Our strategic partnership with Xiaomi gives us access to Xiaomi's ecosystem users, market and data resources and related support. Meanwhile, our strong research and development capabilities and innovative products and services also enrich Xiaomi's suite of offerings, resulting in a mutually beneficial relationship between Xiaomi and us.

        We generate revenues mainly from sales of our IoT products and consumable products and from our value-added businesses.

        We have grown rapidly since our inception. Our net revenues were RMB873.2 million (US$132.0 million) in 2017, representing an increase of 179.4% from RMB312.6 million in 2016. Our net revenues increased by 284.4% from RMB270.6 million for the six months ended June 30, 2017 to RMB1,040.2 million (US$157.2 million) for the same period of 2018. Our net income increased by 473.5% from RMB16.3 million in 2016 to RMB93.2 million (US$14.1 million) in 2017. Our net income increased by 271.5% from RMB18.9 million for the six months ended June 30, 2017 to RMB70.3 million (US$10.6 million) for the same period of 2018.

Key Factors Affecting Our Results of Operations

        Key factors affecting our results of operations include the following:

Consumption upgrade and greater adoption of IoT-enabled smart home technology in China

        Our business and operating results are affected by general factors influencing China's broader consumer products and home appliances industries, including overall macroeconomic growth and increase in disposable income, overall consumption upgrade trends as well as public knowledge, acceptance and adoption of new and innovative technology such as IoT-enabled smart home technology.

        In line with sustained economic growth and increases in disposable income in recent years, China has seen a clear consumption upgrade trend and expectations for higher living standards. Chinese consumers now have greater purchasing power and an increasing preference for high quality and aspirational products with innovative features and functionalities, according to the iResearch Report. In addition, Chinese consumers, particularly the young, modern, "new middle class" population, who are our key target demographic, are becoming increasingly receptive to next-generation products that incorporate AI and IoT technologies to create a modern living experience. New technologies such as voice- and motion-activated controls have also gained increasing prominence as these technologies become more mainstream and consumers become more educated about their applications. These macroeconomic and industry trends

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have played and will continue to play a significant role in driving demand for our products and our results of operations. Unfavorable changes in any of these general industry conditions could negatively affect demand for our products and materially adversely affect our results of operations.

Increasing brand recognition and expanding user base

        The uniqueness and effectiveness of our products and related benefits, together with our strategic partnership with Xiaomi, have enabled us to enjoy strong word-of-mouth and extensive media coverage, which have provided us with strong momentum in increasing our brand recognition and the expansion of our user base, which have been key contributors to the growth of our business. Our number of household users increased by close to 10 times from approximately 113 thousand as of March 31, 2016 to over 1.2 million as of June 30, 2018. As we continue to gain scale and invest in our brand, we expect our brand to gain even greater recognition among consumers, which will facilitate increasing demand for our products as well as further growth in our user base, creating additional monetization opportunities and in turn, driving further growth in our results of operations.

New product launches

        Our introduction and sales of new products that are well received by consumers, both self-branded and Xiaomi-branded, is an important contributor to our sustainable growth. We successfully introduced 17 and 18 new product lines in 2016 and 2017, respectively, and in 2018, we have introduced additional new products such as our 21Face smart refrigerator and the Viomi dishwasher and will be launching new products such as our Eyebot smart range hood, VioV smart speaker, and smart mirror, which we expect to drive continued strong growth in our results of operations.

        As we continue to grow our business and introduce additional new products, both self-branded and Xiaomi-branded, to improve connectivity and synergies across our IoT @ Home platform and further promote the IoT @ Home lifestyle experience, we expect to deliver additional growth through repeat customer purchases, bundled sales, as well as additional monetization of our consumable products and value-added businesses.

Expansion and performance of our network of experience stores

        At the heart of our factory-to-consumer, or F2C, new retail sales strategy is a network of approximately 700 Viomi offline experience stores across China, the majority of which were stand-alone stores, as of June 30, 2018. Please see "Business—Omnichannel F2C New Retail Platform—Offline" for more details. The rollout of these stores over the past several years has been an important positive driver on our results of operations by strengthening our brand awareness, increasing our overall market presence and supporting the attractive pricing of our products by eliminating unnecessary layers of middlemen as part of our F2C sales model.

        Going forward and working together with our network partners, we intend to continue to roll out additional experience stores across the country and continue to invest in in-store training and enhance our in-store experience to drive the continued growth in our revenues and results of operations. We do not expect the expansion of our Viomi offline experience store network to have a material impact on our overall margins.

Product and business mix

        We generate a significant portion of our revenues through the sales of our IoT products and we are continuing to introduce new products to the market. For the years ended December 31, 2016 and 2017 and the six months ended June 30, 2018, sales of our IoT products accounted for 87.4%, 81.6% and 79.6% of our net revenues, respectively. Different product categories may have different attributable gross margins due to various factors, including our pricing strategy, target customer demographics as well as raw material

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and production costs, among others. We may price certain flagship products, such as our smart refrigerators, at competitive prices to facilitate initial household user acquisition and entry in the family home, which may negatively affect our gross margins in the near term.

        In addition, the proportionate contributions of our various business lines to our net revenues may change over time as we continue to grow our business and increase the number of our household users. As such, our combined gross margin may be affected both by any change in revenues attributable to, and any change in the gross margin of, each business line.

Investment in R&D, marketing and brand promotion

        Our success is significantly dependent on our ability to continually bring to market products and services that are popular among consumers, particularly relative to those offered by our competitors. Accordingly, we dedicate significant resources towards research and development. For the years ended December 31, 2016 and 2017 and the six months ended June 30, 2018, research and development expenses were RMB29.9 million, RMB60.7 million (US$9.2 million) and RMB49.0 million (US$7.4 million), accounting for 9.6%, 7.0% and 4.7% of our net revenues, respectively. Going forward, we will further invest in our research and development efforts as we continue to introduce new and innovative products to create a unique and holistic IoT @ Home lifestyle experience for the benefit of consumers.

        Similarly, attracting new users and growing the number of our household users by continuing to strengthen our brand awareness as well as educating consumers about the benefits of our IoT @ Home platform and the IoT @ Home lifestyle experience are our key growth strategies. For the years ended December 31, 2016 and 2017 and the six months ended June 30, 2018, our selling and marketing expenses were RMB20.9 million, RMB95.3 million (US$14.4 million) and RMB146.6 million (US$22.2 million), accounting for 6.7%, 10.9% and 14.1% of our revenues, respectively. Going forward, we intend to continue investing significant resources in our marketing, advertising and brand promotion efforts.

Relationship with Xiaomi

        Historically, we derived a substantial majority of our revenues from our sales to Xiaomi, our strategic partner, shareholder and related party. For the years ended December 31, 2016 and 2017, revenues generated from our sales to Xiaomi represented 95.9% and 84.7% of our net revenues, respectively. For the six months ended June 30, 2017 and 2018, revenues generated from our sales to Xiaomi represented 89.9% and 62.6% of our net revenues, respectively. Xiaomi is an important customer of ours, and our strategic partnership with Xiaomi gives us access to Xiaomi's ecosystem users, market and data resources and related support. Therefore, while we expect the proportion of our revenues generated from our sales to Xiaomi to gradually decrease going forward, maintaining a mutually beneficial relationship with Xiaomi will continue to be important to our operations and future growth.

Seasonality

        While seasonality has not been particularly prevalent in our historical results of operations due to the rapid growth of our business, we generally expect to experience higher sales in the second and fourth quarters, primarily attributable to the major shopping festivals across e-commerce platforms such as "618," "Singles' Day" and "Double Twelve." Given the impact of this seasonality, timely and effective forecasting and product supply and introductions for the peak seasons are critical to our operations.

Key Components of Our Results of Operations

Net revenues

        We derive our revenues from three key business lines, (i) IoT-enabled smart home products, (ii) consumable products, and (iii) value-added businesses. Our IoT-enabled smart home products include

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our flagship smart water purification systems, smart kitchen products and other smart products. Consumable products include products complementary to our IoT products, such as water filters. Our value-added businesses include the sales of other related household products such as water quality meters, water filter pitchers, and stainless steel insulated water bottles, among others, as well as rendering of various services.

        The following table sets forth the breakdown of our net revenues by business lines both as an absolute amount and as a proportion of net revenues for the periods indicated.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands, except for percentages)
 

Net revenues:

                               

IoT-enabled smart home products

  273,282  87.4  712,317  107,648  81.6  232,687  86.0  828,212  125,163  79.6 

Smart water purification systems

  250,442  80.1  570,784  86,259  65.4  194,005  71.7  432,443  65,353  41.6 

Smart kitchen products

      50,656  7,655  5.8  3,299  1.2  285,595  43,160  27.4 

Other smart products

  22,840  7.3  90,877  13,734  10.4  35,383  13.1  110,174  16,650  10.6 

Consumable products

  19,376  6.2  87,500  13,223  10.0  26,944  10.0  87,610  13,240  8.4 

Value-added businesses(1)

  19,916  6.4  73,402  11,093  8.4  10,994  4.0  124,357  18,793  12.0 

Total

  312,574  100.0  873,219  131,964  100.0  270,625  100.0  1,040,179  157,196  100.0 

Note:

(1)
Including sales of other products and rendering of services. See footnote (9) to the Consolidated Financial Statements and footnote (8) to the Unaudited Interim Condensed Consolidated Financial Statements for more details.

        The following table sets forth the breakdown of our net revenues by brand and sales channel in both absolute amount and as a proportion of our net revenues, for the periods presented.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands, except for percentages)
 

Net revenues:

                               

Xiaomi-branded products

  280,501  89.7  654,950  98,978  75.0  221,739  82.0  564,501  85,310  54.3 

Viomi-branded products and others

                               

to Xiaomi(1)

  19,326  6.2  84,514  12,772  9.7  21,430  7.9  87,037  13,153  8.3 

via our own and other sales channels(2)

  12,747  4.1  133,755  20,214  15.3  27,456  10.1  388,641  58,733  37.4 

Total

  312,574  100.0  873,219  131,964  100.0  270,625  100.0  1,040,179  157,196  100.0 

    Notes:

(1)
Including mainly water purifier filters used in Xiaomi-branded water purification systems.

(2)
Including our online stores, various online platforms, and offline experience stores.

    Smart water purification systems

        Our smart water purification systems were the first product category we launched and sales of them have contributed a large portion of our historical revenues. While we expect the sales of smart water purification systems to continue to grow in absolute terms, as we continue to roll out new IoT products in

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other categories over time and generate additional revenues from our consumable products and value-added businesses, we expect our sources of revenues to continue to diversify both in terms of product as well as business mix. As a result, we expect the proportion of revenues attributable to the sales of smart water purification systems to decrease.

    Smart kitchen products

        With the goal of providing a truly holistic IoT @ Home lifestyle experience, we have continued to diversify and expand our product offerings, including our range of smart kitchen products. Smart kitchen products refer to our range of IoT products that cater to the kitchen scenario in the home environment, including refrigerators, oven steamers, dishwashers, range hoods and gas stoves. As the sales of these product categories continue to ramp up and we continue to introduce additional new products, we expect the proportion of revenues attributable to the sales of smart kitchen products to increase.

    Other smart products

        In addition to our smart water purification systems and smart kitchen products, we also offer a diverse array of other IoT products as part of our IoT @ Home platform. In the historical periods, we derived revenues under this product line from sales of our smart water kettles. In 2018, we began to introduce a portfolio of other smart appliances, including washing machines, water heaters, among others. As the sales of these categories continue to ramp up and we continue to introduce additional new products, we expect the percentage of net revenues attributable to the sales of other smart products to increase.

    Consumable products

        We also generate revenues through sales of a range of consumable products complementary to our IoT products, such as water purifier filters. Sales of these consumables generate additional, recurring and ongoing revenues streams across the life cycle of the IoT products with minimal customer acquisition costs. The growth of our consumable products business will depend on the size of our IoT products' household user base.

    Value-added businesses

        Revenues from the value-added businesses include revenues from the sales of other related household products such as water quality meters, water filter pitchers, and stainless steel insulated water bottles, among others, as well as service fees from rendering various services. Historically, revenues from the value-added businesses have predominantly comprised of related household product sales. As we ramp up our value-added businesses together with our ecosystem partners, we expect to generate additional revenues from, for example, service fees related to e-commerce transactions conducted through integrated platforms embedded within our IoT products.

    Brands

        In terms of brand, we historically derived a large portion of our revenues from Xiaomi-branded products, in particular, Xiaomi-branded smart water purification systems. We sell Xiaomi-branded products directly to Xiaomi, who then sells these products through its retail channels to consumers. In recent years, we have made significant efforts to ramp-up sales of Viomi-branded products through new product development and the introduction of new product categories. We sell Viomi-branded products via a number of sales channels, including Xiaomi channels, our omnichannel retail network, as well as third-party online platforms.

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Cost of revenues

        Our cost of revenues primarily consists of material costs, estimated warranty costs, manufacturing and fulfillment costs, salaries and benefits for staff engaged in production activities and related expenses that are directly attributable to the production of products. We procure a variety of raw materials and components from third-party suppliers, and outsource our manufacturing and order fulfillment activities to third parties. Our product costs fluctuate with the costs of raw materials and underlying product components as well as the prices we are able to negotiate with our contract manufacturers and raw material and component suppliers.

        The following table sets forth our cost of revenues, in absolute amount and as a proportion of our total net revenues, for the periods presented.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands, except for percentages)
 

Cost of revenues

  232,544  74.4  598,036  90,377  68.5  190,461  70.4  750,630  113,438  72.2 

Gross profit and gross profit margin

        Our gross profit margin is affected by changes in our product and business mix as well as our cost of revenues. Please see "—Key Factors Affecting our Results of Operations—Product and business mix" for more details. The table below sets forth our gross profit in absolute amount and gross profit margins of products and services by category for the periods indicated.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands, except for percentages)
 

Gross profit and gross profit margin:

                               

IoT-enabled smart home products

  66,603  24.4  212,578  32,126  29.8  66,457  28.6  221,389  33,457  26.7 

Smart water purification systems

  58,594  23.4  170,996  25,842  30.0  55,561  28.6  143,500  21,686  33.2 

Smart kitchen products

      15,669  2,368  30.9  595  18.0  48,633  7,350  17.0 

Other smart products

  8,009  35.1  25,913  3,916  28.5  10,301  29.1  29,256  4,421  26.6 

Consumable products

  8,732  45.1  39,377  5,951  45.0  12,727  47.2  43,773  6.615  50.0 

Value-added businesses

  4,695  23.6  23,228  3,510  31.6  980  8.9  24,387  3,686  19.6 

Total

  80,030  25.6  275,183  41,587  31.5  80,164  29.6  289,549  43,758  27.8 

Operating Expenses

        Our operating expenses can be classified into three categories: general and administrative, research and development, and selling and marketing. The following table sets forth the components of our

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operating expenses, both in absolute amount and as a proportion of our net revenues, for the periods presented.

 
 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands, except for percentages)
 

Operating expenses:

                               

General and administrative

  14,386  4.6  15,818  2,390  1.8  5,869  2.2  14,837  2,242  1.4 

Research and development

  29,926  9.6  60,749  9,181  7.0  22,177  8.2  49,047  7,412  4.7 

Selling and marketing

  20,929  6.7  95,296  14,401  10.9  32,422  12.0  146,589  22,153  14.1 

Total

  65,241  20.9  171,863  25,972  19.7  60,468  22.4  210,473  31,807  20.2 

        General and administrative.    General and administrative expenses consist primarily of professional service fees in anticipation of this offering as well as salaries, welfare, and share-based compensation expenses for management and administrative personnel. Within the total general and administrative expenses incurred in 2016, 2017 and the six months ended June 30, 2018, RMB6.9 million, RMB3.3 million (US$0.5 million) and RMB0.99 million (US$0.15 million) were share-based compensation expenses, respectively, which were mainly due to the options we granted to certain of our employees.

        Research and development.    Our research and development expenses primarily consist of salaries and benefits and share-based compensation expenses for research and development personnel, materials, general expenses and depreciation expenses associated with research and development activities. We expect our research and development expenses to increase in absolute amount as we expand our team of technology and product development professionals and continue to invest in our technology infrastructure to enhance our big data analytics and smart home solutions.

        Selling and marketing.    Our selling and marketing expenses primarily consist of (i) advertising and market promotion expenses, (ii) shipping expenses and (iii) salaries and welfare for sales and marketing personnel. We bear the advertising and marketing expenses for our Viomi-branded products. We do not bear such expenses for Xiaomi-branded products. We have invested heavily in selling and marketing initiatives in recent periods to promote the Viomi brand and new product launches, and to attract more household users to our IoT @ Home platform, as reflected in the increase in our selling and marketing expenses in absolute amount and as a percentage of our net revenues. While we expect our selling and marketing expenses will continue to increase in absolute amount going forward as we continue to strengthen our brand recognition and expand our user base, we expect selling and marketing expenses as a percentage of our net revenues to gradually moderate and stabilize as the Viomi brand, our respective products and the benefits of our IoT @ Home platform become more widely known and adopted by consumers.

Other income

        Other income primarily consists of government grants received from local government authorities to encourage our technology development and innovation. These amounts are paid in the discretion of the relevant governmental authorities, and there is no assurance that we will receive such grants in future periods.

Results of Operations

        The following table sets forth a summary of our consolidated income for the periods presented, both in absolute amount and as a proportion of our net revenues for the periods presented. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus.

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 For the year ended December 31, For the six months ended June 30, 
 
 2016 2017 2017 2018 
 
 RMB % RMB US$ % RMB % RMB US$ % 
 
 (in thousands, except for percentages)
 

Net revenues(1)

  312,574  100.0  873,219  131,964  100.0  270,625  100.0  1,040,179  157,196  100.0 

Cost of revenues

  (232,544) (74.4) (598,036) (90,377) (68.5) (190,461) (70.4) (750,630) (113,438) (72.2)

Gross profit

  80,030  25.6  275,183  41,587  31.5  80,164  29.6  289,549  43,758  27.8 

Operating expenses(2):

  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 

Research and development expenses(2)

  (29,926) (9.6) (60,749) (9,181) (7.0) (22,177) (8.2) (49,047) (7,412) (4.7)

Selling and marketing expenses(2)

  (20,929) (6.7) (95,296) (14,401) (10.9) (32,422) (12.0) (146,589) (22,153) (14.1)

General and administrative expenses(2)

  (14,386) (4.6) (15,818) (2,390) (1.8) (5,869) (2.2) (14,837) (2,242) (1.4)

Total operating expenses

  (65,241) (20.9) (171,863) (25,972) (19.7) (60,468) (22.3) (210,473) (31,807) (20.2)

Other (expenses) income

  (481) (0.2) 2,236  338  0.3  1,866  0.7  148  22  0.0 

Income from operations

  14,308  4.6  105,556  15,953  12.1  21,562  8.0  79,224  11,973  7.6 

Interest (expenses) income

  (296) (0.1) 2,402  363  0.3  926  0.3  2,659  402  0.3 

Income before income tax benefit (expenses)

  14,012  4.5  107,958  16,316  12.4  22,488  8.3  81,883  12,375  7.9 

Income tax benefit (expenses)

  2,247  0.7  (14,718) (2,224) (1.7) (3,569) (1.3) (11,592) (1,753) (1.1)

Net income

  16,259  5.2  93,240  14,092  10.7  18,919  7.0  70,291  10,622  6.8 

Note:

(1)
Includes RMB299.8 million and RMB739.5 million (US$111.8 million) from sales to Xiaomi for the years ended December 31, 2016 and 2017, respectively, and RMB243.2 million and RMB651.5 million (US$98.5 million) from sales to Xiaomi for the six months ended June 30, 2017 and 2018, respectively.

(2)
Share-based compensation expenses were allocated as follows:
 
 For the Year ended
December 31,
 For the six months ended
June 30,
 
 
 2016 2017 2017 2018 
 
 RMB RMB US$ RMB RMB US$ 
 
 (in thousands)
 

General and administrative expenses

  6,863  3,303  499  2,244  986  149 

Research and development expenses

  3,464  1,903  288  1,492  4,228  639 

Selling and marketing expenses

  251  615  93  333  2,560  387 

Total

  10,578  5,821  880  4,069  7,774  1,175 

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

Net revenues

        Our net revenues increased by 284.4% from RMB270.6 million for the six months ended June 30, 2017 to RMB1,040.2 million (US$157.2 million) for the same period of 2018, driven by significant increases in demand across all our product categories, in particular our IoT products. We continued to experience robust growth in smart water purification systems, and saw rapid growth in our smart kitchen products category, which was successfully introduced in 2017 and for which we have since continued to roll out additional new product lines. Our growth has also been supported by the continued expansion and diversification of our distribution channels, including the opening of additional Viomi offline experience stores, as well as increased cooperation with and sales to a leading e-commerce platform.

        Sales of smart water purification systems continued to be the major contributor to our revenues. While sales of this product category still experienced robust growth of 122.9% from RMB194.0 million for the six months ended June 30, 2017 to RMB432.4 million (US$65.4 million) for the same period of 2018,

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its sales as a proportion of our total net revenues decreased from 71.7% for the six months ended June 30, 2017 to 41.6% for the same period of 2018, mainly as a result of the successful launch and roll-out of our smart kitchen products, together with increasing revenues from our other smart products, consumable products and other products in our value-added businesses, which all contributed to the continued diversification of our net revenues in terms of product, business as well as brand mix.

Cost of revenues

        Our cost of revenues increased by 294.1% from RMB190.5 million for the six months ended June 30, 2017 to RMB750.6 million (US$113.4 million) for the same period of 2018, in line with the growth of our net revenues.

Gross profit

        Our gross profit increased by 261.2% from RMB80.2 million for the six months ended June 30, 2017 to RMB289.5 million (US$ 43.8 million) for the same period of 2018. Our gross margin decreased from 29.6% to 27.8% for the same periods, primarily due to the shifts in our business and product mix.

        We have made concerted efforts to diversify our revenue streams and product mix. Different product categories may have different gross margins due to various factors, including our pricing strategy, target customer demographics as well as raw material and production costs, among others. From time to time, we may strategically introduce and price certain flagship products, such as our smart refrigerators in our smart kitchen products category, at competitive prices to facilitate initial customer acquisition and entry in the family home, which may negatively affect our gross margins in the near term. In addition, the proportionate contributions of our various business lines, which tend to have different gross margins, to our net revenues may change over time as we continue to grow our business and increase our number of household users. As such, our combined gross margin may be affected both by any change in revenues attributable to, and any change in the gross margin of, each business line. Please see "—Key Factors Affecting our Results of Operations—Product and business mix" for more details.

Operating Expenses

        Our operating expenses increased by 248.1% from RMB60.5 million for the six months ended June 30, 2017 to RMB210.5 million (US$31.8 million) for the same period of 2018, primarily due to the rapid growth of our business and the expansion of our user base.

        General and administrative.    General and administrative expenses increased by 152.8% from RMB5.9 million for the six months ended June 30, 2017 to RMB14.8 million (US$2.2 million) for the same period of 2018. This increase was primarily due to an increase of RMB5.7 million (US$0.9 million) in professional service fees in relation to the preparation of this offering as well as an increase of RMB1.2 million (US$0.2 million) in employment benefits, which was in turn due to headcount growth.

        Research and development.    Research and development expenses increased by 121.2% from RMB22.2 million for the six months ended June 30, 2017 to RMB49.0 million (US$7.4 million) for the same period of 2018, primarily due to a RMB14.0 million (US$2.1 million) increase in personnel-related costs, a RMB8.0 million (US$1.2 million) increase in expenses associated with development of new products, and a RMB2.7 million (US$0.4 million) increase in share-based compensation.

        Selling and marketing.    Selling and marketing expenses increased by 352.1% from RMB32.4 million for the six months ended June 30, 2017 to RMB146.6 million (US$22.2 million) for the same period of 2018. This increase was primarily due to a RMB52.6 million (US$8.0 million) increase in logistics expenses and a RMB29.9 million (US$4.5 million) increase in advertising, marketing and brand promotion expenses. The increase in logistics expenses was primarily due to the growth of our business, primarily the increased sales of our Viomi-branded products. The increase in advertising, marketing and brand

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promotion costs was due to our increased marketing activities to strengthen our brand recognition and expand our user base.

Income tax expenses

        Our income tax expenses increased from RMB3.6 million for the six months ended June 30, 2017 to RMB11.6 million (US$1.8 million) for the same period in 2018, in line with the growth of income.

Net income

        As a result of the foregoing, we recorded a net income of RMB70.3 million (US$10.6 million) for the six months ended June 30, 2018, which represented an increase of 271.5% as compared to a net income of RMB18.9 million for the same period of 2017.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Net revenues

        Our net revenues increased by 179.4% from RMB312.6 million in 2016 to RMB873.2 million (US$132.0 million) in 2017, primarily due to a significant increase in demand for our IoT products, including our smart water purification systems, as well as our consumable products and value-added businesses, together with the successful introduction of our smart kitchen products in 2017 which increased the number of product categories we offer, and expanded distribution channels, including the rollout of additional Viomi offline experience stores.

        Sales of smart water purification systems continued to be the major contributor to our revenues, representing 80.1% and 65.4% of our net revenues in 2016 and 2017, respectively, and recorded strong year-over-year revenues growth of 127.9% in 2017. However, the launch of our line of smart kitchen products in 2017, together with increasing revenues from our consumable products and value-added businesses as a result of the growth in our number of household users all contributed to the diversification of our revenues in terms of product, business, as well as brand mix.

Cost of revenues

        Our cost of revenues increased by 157.2% from RMB232.5 million in 2016 to RMB598.0 million (US$90.4 million) in 2017, largely as a result of our sales growth.

Gross profit

        Our gross profit increased by 243.8% from RMB80.0 million in 2016 to RMB275.2 million (US$41.6 million) in 2017, largely as a result of our sales growth.

        Our gross margin improved from 25.6% to 31.5% for the same periods, which was primarily due to greater economies of scale and improved operating efficiency, as well as increasing contribution from consumable products, which tend to have higher gross margins.

Operating Expenses

        Our operating expenses increased by 163.4% from RMB65.2 million in 2016 to RMB171.9 million (US$26.0 million) in 2017, primarily due to the rapid growth of our business and the expansion of our user base.

        General and administrative.    General and administrative expenses increased by 10.0% from RMB14.4 million in 2016 to RMB15.8 million (US$2.4 million) in 2017. This increase was primarily due to a RMB2.1 million (US$0.3 million) increase in employment benefits and training expenses and a RMB2.0 million (US$0.3 million) increase in renovation costs, which were in turn due to the growth of our headcount and business.

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        Research and development.    Research and development expenses increased by 103.0% from RMB29.9 million in 2016 to RMB60.7 million (US$9.2 million) in 2017, primarily due to a RMB15.4 million (US$2.4 million) increase in personnel-related costs and new product launch related expenses.

        Selling and marketing.    Selling and marketing expenses increased by 355.3% from RMB20.9 million in 2016 to RMB95.3 million (US$14.4 million) in 2017. This increase was primarily due to a RMB31.6 million (US$4.8 million) increase in advertising, marketing and brand promotion costs and a RMB17.4 million (US$2.6 million) increase in logistics expenses. The increase in advertising, marketing and brand promotion costs was due to our increased marketing activities to strengthen our brand recognition and expand our user base. The increase in logistics expenses costs was primarily due to the growth of our business.

Income tax benefits (expenses)

        We had an income tax benefits of RMB2.2 million in 2016, and income tax expenses of RMB14.7 million (US$2.2 million) in 2017. The tax benefit in 2016 was due to the change in valuation allowance for deferred tax assets. As of December 31, 2015, we provided full valuation allowance for the deferred tax assets because at that time we determined that it was more likely than not that the deferred tax assets would not be utilized in the near future. However, for the years ended December 31, 2016 and 2017, our VIE Foshan Viomi reported a profit, and a majority of the net operating loss of Foshan Viomi has been utilized in 2016. Therefore, the valuation allowance related to deferred tax assets of Foshan Viomi was released in 2016, which resulted in the income tax benefit.

Net income

        As a result of the foregoing, we recorded a net income of RMB93.2 million (US$14.1 million) in 2017, which increased substantially as compared to a net income of RMB16.3 million in 2016.

Selected Quarterly Results of Operations

        The following table sets forth our unaudited consolidated quarterly results of operations for each of the ten quarters from January 1, 2016 to June 30, 2018. You should read the following table in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. We have prepared this unaudited condensed consolidated quarterly financial data on the same basis as we have prepared our audited consolidated financial statements. The unaudited condensed consolidated financial data include all adjustments, consisting only of normal and recurring adjustments, that our management

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considered necessary for a fair statement of our financial position and results of operation for the quarters presented.

 
 For the three months ended 
 
 March 31,
2016
 June 30,
2016
 September 30,
2016
 December 31,
2016
 March 31,
2017
 June 30,
2017
 September 30,
2017
 December 31,
2017
 March 31,
2018
 June 30,
2018
 
 
 (Unaudited)
 
 
 (In RMB thousands)
 

Net revenues(1)

  54,472  76,480  62,414  119,208  133,919  136,706  208,667  393,927  330,849  709,330 

Cost of revenues:

                               

Purchase from a related party

  (517) (671) (117) (16)   (8) (251) (1,037) (1,285) (4,105)

Purchase from third parties

  (46,335) (52,807) (45,652) (86,429) (95,390) (95,063) (141,213) (265,074) (231,744) (513,496)

Total cost of revenues

  (46,852) (53,478) (45,769) (86,445) (95,390) (95,071) (141,464) (266,111) (233,029) (517,601)

Gross profit

  7,620  23,002  16,645  32,763  38,529  41,635  67,203  127,816  97,820  191,729 

Operating expenses(2)

                               

Research and development expenses

  (4,125) (8,722) (8,008) (9,071) (7,553) (14,624) (12,808) (25,764) (20,985) (28,062)

Selling and marketing expenses

  (95) (5,189) (4,081) (11,564) (18,005) (14,417) (20,786) (42,088) (39,853) (106,736)

General and administrative expenses

  (3,191) (4,255) (3,268) (3,672) (2,852) (3,017) (2,862) (7,087) (4,652) (10,185)

Total operating expenses

  (7,411) (18,166) (15,357) (24,307) (28,410) (32,058) (36,456) (74,939) (65,490) (144,983)

Other (expenses) income

  (121) (500) 137  3  550  1,316  249  121  156  (8)

Income from operations

  88  4,336  1,425  8,459  10,669  10,893  30,996  52,998  32,486  46,738 

Interest (expenses) income

  (182) (144) (62) 92  322  604  765  711  1,490  1,169 

(Loss) income before income tax benefit (expenses)

  (94) 4,192  1,363  8,551  10,991  11,497  31,761  53,709  33,976  47,907 

Income tax benefit (expenses)

    7,704  (1,064) (4,393) (1,868) (1,701) (4,439) (6,710) (4,552) (7,040)

Net (loss) income

  (94) 11,896  299  4,158  9,123  9,796  27,322  46,999  29,424  40,867 

Notes:

(1)
Includes RMB54.5 million, RMB76.2 million, RMB59.1 million, RMB110.1 million, RMB123.5 million, RMB119.6 million, RMB180.2 million, RMB316.1 million, RMB231.8 million, and RMB419.7 million from sales to Xiaomi for each of the ten quarters from January 1, 2016 to June 30, 2018.

(2)
Share-based compensation expenses were allocated as follows:
 
 For the three months ended 
 
 March 31,
2016
 June 30,
2016
 September 30,
2016
 December 31,
2016
 March 31,
2017
 June 30,
2017
 September 30,
2017
 December 31,
2017
 March 31,
2018
 June 30,
2018
 
 
 (Unaudited)
 
 
 (In RMB thousands)
 

Research and development expenses

  2,171  2,135  1,478  1,079  1,178  1,066  637  422  494  492 

Selling and marketing expenses

  881  864  1,475  244  928  564  356  55  1,066  3,162 

General and administrative expenses

      165  86  92  241  251  31  623  1,937 

Quarterly trends

        Our overall results of operations fluctuate from quarter to quarter as a result of a variety of factors, including seasonable factors and the launch of new products, among others.

        We generally experience higher sales volume and revenues in the second and fourth quarter of each year primarily due to the promotional events of popular e-commerce platforms in China. Our net revenues are also affected by our product strategy, particularly our product launch timeline, as well as the expansion of our sales channels. Our net revenues tend to increase as we continue to introduce new products and product categories to the market, as well as when we continue to diversify and strengthen our sales channels, including the rollout of our Viomi offline experience stores. We have invested heavily in selling

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and marketing expenses in recent periods to promote our Viomi brand and new product launches and to attract more household users to our IoT @ Home platform. While we expect selling and marketing expenses to continue to increase, we expect these expenses to gradually moderate and stabilize. Therefore, our performance in prior quarterly or annual periods may not be indicative of our future results of operations.

Taxation

Cayman Islands

        We are an exempted company incorporated in the Cayman Islands. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax. The Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.

Hong Kong

        Our subsidiary incorporated in Hong Kong is subject to Hong Kong profit tax. From the year of assessment 2018/2019 onwards, profits tax is imposed on corporations at the rate of 8.25% on assessable profits up to HK$2,000,000; 16.5% on any part of assessable profits over HK$2,000,000 and on unincorporated businesses at 7.5% on assessable profits up to HK$2,000,000; and 15% on any part of assessable profits over HK$2,000,000. No Hong Kong profit tax has been levied as we did not have an assessable profit that was earned in or derived from the Hong Kong subsidiary during the periods presented. Hong Kong does not impose a withholding tax on dividends.

China

        Generally, our PRC subsidiary, variable interest entities and their subsidiaries, which are considered PRC resident enterprises under PRC tax law, are subject to enterprise income tax on their worldwide taxable income as determined under PRC tax laws and accounting standards at a rate of 25%. However, according to the PRC Enterprise Income Tax Law, the income tax of an enterprise that has been determined to be a high and new technology enterprise can be reduced to a preferential rate of 15%. One of our VIEs, Foshan Viomi, has obtained High and New Technology Enterprise Certificate and is thus eligible to enjoy a preferential tax rate of 15%, to the extent it has taxable income under the PRC Enterprise Income Tax Law.

        Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income with respect to Taxes on Income and Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. See "Risk Factors—Risks Related to Doing Business in China—We may rely on dividends paid by our PRC subsidiary to fund any cash and financing requirements we may have. Any limitation on the ability of our PRC subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares."

        If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a "resident enterprise" under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See "Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders."

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        For the foreseeable future, we intend to use all the undistributed earnings of our variable interest entities and their subsidiaries incorporated in the PRC for our business operations and do not plan to have our PRC subsidiary distribute any dividend. Therefore, no withholding tax is expected to be incurred in the foreseeable future.

Liquidity and Capital Resources

Cash flows and working capital

        To date, we have financed our operations primarily through cash generated by operating activities and historical equity financing activities. As of December 31, 2016 and 2017 and June 30, 2018, we had cash and cash equivalents of RMB156.9 million, RMB280.0 million (US$42.3 million) and RMB257.0 million (US$38.8 million), respectively. Our cash and cash equivalents primarily consist of cash on hand, demand deposits and highly liquid investments placed with banks. We believe that our cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months.

        Although we consolidate the results of our VIEs, we only have access to cash balances or future earnings of our VIEs through our contractual arrangements with them. See "Corporate History and Structure." For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see "—Holding Company Structure."

        Substantially all of our net revenues have been, and we expect they are likely to continue to be, in the form of Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments, and trade- and service-related foreign exchange transactions can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Our PRC subsidiary is required to set aside at least 10% of its after-tax profits after making up previous years' accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Historically, our PRC subsidiary has not paid dividends to us, and it will not be able to pay dividends until it generates accumulated profits. Furthermore, capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with SAFE, its local branches and certain local banks.

        The restricted net assets of our PRC subsidiary and VIEs amounted to RMB12.5 million, RMB18.8 million (US$2.8 million) and RMB18.8 million (US$2.8 million) as of December 31, 2016 and 2017 and June 30, 2018, respectively. The unrestricted portion, or amounts otherwise available for transfer in the form of dividends, loans or advances amounted to RMB34.1 million, RMB121.3 million (US$18.3 million) and RMB201.1 million (US$30.4 million) as of December 31, 2016 and 2017 and June 30, 2018, respectively.

        As a Cayman Islands exempted company and offshore holding company, we are permitted under PRC laws and regulations to provide funding to our wholly foreign-owned subsidiaries in China only through loans or capital contributions, subject to the approval of government authorities and limits on the amount of capital contributions and loans. In addition, our wholly foreign-owned subsidiaries in China may provide Renminbi funding to their respective subsidiaries through capital contributions and entrusted loans, and to our consolidated variable interest entities only through entrusted loans. See "Risk Factors—Risks Related to Our Corporate Structure—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary, which

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could materially and adversely affect our liquidity and our ability to fund and expand our business" and "Use of Proceeds."

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

 
 For the year ended December 31, For the six months ended
June 30,
 
 
 2016 2017 2017 2018 
 
 RMB RMB US$ RMB RMB US$ 
 
 (in thousands)
 

Summary Consolidated Cash Flow Data:

                   

Net cash provided by (used in) operating activities

  15,499  123,906  18,725  7,737  (17,880) (2,700)

Net cash (used in) provided by investing activities

  (1,609) (1,234) (186) (245) 25,336  3,828 

Net cash provided by (used in) financing activities

  12,999  2,671  404    (34,195) (5,168)

Effect of exchange rate changes on cash and cash equivalents

  2,913  (2,321) (351) (947) 3,739  565 

Net increase (decrease) in cash and cash equivalents

  29,802  123,022  18,592  6,545  (23,000) (3,475)

Cash and cash equivalents at beginning of the year/period

  127,128  156,930  23,715  156,930  279,952  42,307 

Cash and cash equivalents at end of the year/period

  156,930  279,952  42,307  163,475  256,952  38,832 

Operating activities

        Net cash used in operating activities was RMB17.9 million (US$2.7 million) for the six months ended June 30, 2018. The difference between net cash used in operating activities and our net income of RMB70.3 million (US$10.6 million) was primarily due to the effect of changes in working capital of RMB94.3 million (US$14.3 million), which in turn was attributable to a RMB209.3 million (US$31.6 million) increase in accounts and notes receivables, a RMB115.7 million (US$17.5 million) increase in inventories and a RMB47.6 million (US$7.2 million) increase in advances to suppliers, partially offset by a RMB206.4 (US$31.2 million) million increase in accounts payables. The increase in accounts and notes receivable, inventories, advances to suppliers and accounts payables were all due to the rapid growth of our business.

        The major cause of our negative cash flow in operating activities for the six months ended June 30, 2018 was due to the significant increase in sales to and respective accounts and notes receivable from a certain leading e-commerce platform. Sales to this customer generally experience a seasonal high towards the end of the second quarter as a result of popular online promotional events around that time. As a result, the significant increase in sales to this customer led to a significant increase of RMB122.8 million (US$18.6 million) in our accounts and notes receivable from this customer as of June 30, 2018.

        Net cash provided by operating activities was RMB123.9 million (US$18.7 million) in 2017. The difference between net cash provided by operating activities and our net income of RMB93.2 million (US$14.1 million) was mainly due to RMB5.8 million (US$0.9 million) in share-based compensation, as well as the effect of changes in working capital of RMB23.9 million (US$3.6 million). The changes in working capital were mainly due to a RMB218.6 million (US$33.0 million) increase in accounts payable, a RMB43.1 million (US$6.5 million) increase in accrued expenses and other liabilities, and a RMB19.3 million (US$2.9 million) increase in advances from customers, partially offset by a

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RMB204.5 million (US$30.9 million) increase in accounts receivable from a related party, a RMB26.6 million (US$4.0 million) increase in inventories and a RMB25.8 million (US$3.9 million) increase in other receivables from related parties. The increases in accounts payable, advances from customers, and inventories were due to the rapid growth of our business. The accounts receivable from a related party represent sales receivable of smart water purifiers and accessories to Xiaomi, the increase of which reflected the growth of our sales to Xiaomi.

        Net cash provided by operating activities was RMB15.5 million in 2016. The difference between net cash provided by operating activities and our net income of RMB16.3 million was mainly due to the effect of changes in working capital of RMB12.0 million, partially offset by RMB10.6 million in share-based compensation. The changes in working capital were mainly due to a RMB33.1 million increase in accounts receivable from a related party, and a RMB7.4 million increase in prepaid expenses and other current assets, partially offset by a RMB12.1 million increase in accounts payable and a RMB11.2 million increase in accrued expense and other liabilities. The increase in accounts payable was due to the growth of our business. The accounts receivable from a related party represent sales receivable of water purifiers and accessories to Xiaomi, the increase of which reflected the growth of our sales to Xiaomi.

Investing activities

        We received RMB25.3 million (US$3.8 million) from investing activities for the six months ended June 30, 2018, as a result of RMB31.4 million (US$4.7 million) received from collection of loan repayment by Xiaomi, partially offset by RMB6.1 million (US$0.9 million) used for the purchase of equipment. Net cash used in investing activities was RMB1.2 million (US$0.2 million) and RMB1.6 million in 2017 and 2016, respectively, all for the purchase of equipment.

Financing activities

        Net cash used in financing activities was RMB34.2 million (US$5.2 million) for the six months ended June 30, 2018, mainly a result of loan repayment to Xiaomi of RMB31.9 million (US$4.8 million).

        Net cash provided by financing activities was RMB2.7 million (US$0.4 million) in 2017 that the Company received from Red Better with the understanding that RMB2.5 million will be repaid to TianJin Jinxing in the PRC.

        Net cash provided by financing activities was RMB13.0 million in 2016, which was attributable to proceeds from our issuance of series A preferred shares to investors.

Working capital turnover

    Inventory

        Our inventory consists of finished products and raw materials. As of December 31, 2016 and 2017 and June 30, 2018, our inventory was RMB24.2 million, RMB50.7 million (US$7.7 million) and RMB166.3 million (US$25.1 million), respectively. The increase reflected the growth in our sales. Our inventory turnover days was 23 days and 26 days for the year ended December 31, 2017 and the six months ended June 30, 2018, respectively. Inventory turnover days for a given period are equal to average of the balances of inventories, net of allowance for doubtful accounts, at the beginning and the end of the period divided by cost of revenues during the period and multiplied by the number of days during the period.

    Accounts and notes receivable

        Our accounts and notes receivable represent primarily accounts receivable from Xiaomi as well as accounts and notes receivable from third parties. As of December 31, 2016 and 2017 and June 30, 2018, our accounts and notes receivable, net of allowance for doubtful accounts, were RMB45.0 million, RMB253.9 million (US$38.4 million) and RMB463.2 million (US$70.0 million), respectively. Our total

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accounts and notes receivable as of June 30, 2018 included RMB249.5 million (US$37.7 million) from Xiaomi and RMB122.8 million (US$18.6 million) from an e-commerce platform. The increase reflected a significant growth in our business and revenues. Our accounts and notes receivable turnover days was 68 days and 63 days for the year ended December 31, 2017 and the six months ended June 30, 2018, respectively. Accounts and notes receivable turnover days for a given period are equal to average of the balances of accounts and notes receivable, net of allowance for doubtful accounts, at the beginning and the end of the period divided by net revenues during the period and multiplied by the number of days during the period.

    Accounts payable

        Our accounts payable represent primarily accounts payable to contract manufacturers. As of December 31, 2016 and 2017 and June 30, 2018, our accounts payable were RMB73.0 million, RMB291.6 million (US$44.1 million) and RMB498.1 million (US$75.3 million), respectively. The increase reflected the growth of our sales. Our accounts payable turnover days was 112 days and 95 days for the year ended December 31, 2017 and the six months ended June 30, 2018, respectively. Accounts payable turnover days for a given period are equal to average of the balances of accounts payable, net of allowance for doubtful accounts, at the beginning and the end of the period divided by cost of revenues during the period and multiplied by the number of days during the period.

Contractual Obligations

        The following table sets forth our contractual obligations as of June 30, 2018.

 
 For the year ended December 31, 
 
 Total 2018 2019 2020 2021
and after
 
 
 (in RMB thousands)
 

Operating lease commitments(1)

  8,325  1,294  2,413  1,981  2,637 

    Note:

(1)
Operating lease commitments consist of the commitments under the lease agreements for our office premises.

        We entered into an agreement with a third party in May 2018, pursuant to which we and the third party agreed to set up a company primarily engaged in manufacturing of certain of our existing products. Under the agreement, our committed investment amount as of June 30, 2018 was RMB6.0 million. Other than those shown above, we did not have any significant capital and other commitments, long-term obligations or guarantees as of June 30, 2018.

Off-Balance Sheet Commitments and Arrangements

        We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder's equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Holding Company Structure

        Viomi Technology Co., Ltd is a holding company with no material operations of its own. We conduct our operations primarily through our VIEs and their subsidiaries in China. As a result, Viomi Technology Co., Ltd's ability to pay dividends depends upon dividends paid by our PRC and Hong Kong

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subsidiaries, our VIEs and their subsidiaries in China. If our existing subsidiaries or controlled entities or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiary in China is permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiary, our VIEs and their subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, our wholly foreign-owned subsidiary in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and each of our variable interest entities and their subsidiaries may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by the SAFE. Our PRC subsidiary has not paid dividends and will not be able to pay dividends until it generates accumulated profits and sets aside statutory reserve funds as required by PRC law.

Inflation

        Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2016 and December 2017 were increases of 2.1% and 1.8%, respectively. Although we have not been materially affected by inflation, we may be affected if China experiences higher rates of inflation in the future.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Risk

        Substantially all of our net revenues and expenses are denominated in Renminbi. Our exposure to foreign exchange risk primarily relates to cash and cash equivalents denominated in U.S. dollars. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although our exposure to foreign exchange risks should be limited in general, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and Renminbi because the value of our business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars.

        The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People's Bank of China. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, Renminbi has fluctuated against the U.S. dollar, at certain times significantly and unpredictably. With the development of the foreign exchange market progressing towards interest rate liberalization and Renminbi internationalization and economic uncertainties in both China and the world, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

        To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes,

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appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.

        We estimate that we will receive net proceeds of approximately US$102.2 million from this offering after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, based on the initial offering price of US$10.00 per ADS. Assuming that we convert the full amount of the net proceeds from this offering into Renminbi, a 10% appreciation (depreciation) of the U.S. dollar against the Renminbi, based on the exchange rate of RMB6.6171 for US$1.00 as of June 29, 2018 would result in an increase (decrease) of RMB67.6 million in our net proceeds from this offering.

Interest Rate Risk

        Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure.

Internal Control Over Financial Reporting

        Prior to this offering, we have been a private company with limited accounting personnel and other resources with which we address our internal control over financial reporting. In connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2016 and 2017 and the review of the consolidated financial statements as of and for the six months ended June 30, 2018, we and our independent registered public accounting firm identified three material weaknesses in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a "material weakness" is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

        The material weaknesses identified related to (i) our lack of sufficient resources regarding financial reporting and accounting personnel with understanding of U.S. GAAP, in particular, to address complex U.S. GAAP technical accounting issues, related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC, (ii) lack of comprehensive U.S. GAAP accounting policies and financial reporting procedures and (iii) lack of an effective control procedure to track and estimate warranty provision relating to our products sold to ensure accuracy. To remedy identified material weaknesses, we have implemented, and plan to continue to implement, several measures, including:

    hiring additional competent and qualified accounting and reporting personnel with appropriate knowledge and experience of U.S. GAAP and SEC financial reporting requirements;

    establishing an ongoing program to provide sufficient and additional appropriate training to our accounting staff, especially trainings related to U.S. GAAP and SEC financial reporting requirements;

    formulating internal accounting and internal control guidance on U.S. GAAP and SEC financial reporting requirements; and

    allocating additional resources to formalize the manual tracking process of warranty services and establishing a review procedure over estimation of warranty provision.

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            However, we cannot assure you that we will remediate our material weaknesses in a timely manner. See "Risk Factors—Risks Related to Our Business and Industry—In connection with the audit of our consolidated financial statements included in this prospectus, we and our independent registered public accounting firm identified three material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud."

            As a company with less than US$1.07 billion in revenues for fiscal year of 2017, we qualify as an "emerging growth company" pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company's internal control over financial reporting.

    Critical Accounting Policies, Judgments and Estimates

            An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

            We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.

            The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and accompanying notes and other disclosures included in this prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

    Revenue recognition

            In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09") and subsequently, the FASB issued several amendments which amend certain aspects of the guidance in ASC 2014-09 (ASU No. 2014-09 and the related amendments are collectively referred to as "ASC 606"). According to ASC 606, revenue is recognized when control of the promised good or service is transferred to the customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We will enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for returns, and any taxes collected from customers, which are subsequently remitted to governmental authorities. We adopted ASC 606 for all periods presented.

            Our revenue is primary derived from (i) sales of IoT-enabled smart home products including the flagship smart water purification systems, smart kitchen products, and other smart products, (ii) sales of consumable products complementary to our IoT-enabled smart home products, such as water purifier filters, (iii) sales of other related household products such as water quality meters, water filter pitchers, stainless steel insulated water bottles, among others, as well as rendering of various services.

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            We conduct our business through various contractual arrangements, including:

      Cooperation with Xiaomi. Under the business cooperation agreement entered between us and Xiaomi, we are responsible for design, research, development, production and delivery of certain types of water purifiers and affiliated products using the brand name of "Xiaomi," or Xiaomi-branded products, and Xiaomi is then responsible for commercial distributions and terminal sales of the products supplied by us.

      Sales via our own and other sales channels, including our own online stores, other online platforms, and Viomi offline experience stores operated by our network partners. Under the cooperation agreements with our network partners we on-sell products to the stores, who are responsible for the subsequent sales to end customers. For our business cooperation with a leading third-party e-commerce platform entered into in 2018, please refer to "—Contract with a leading e-commerce platform". We also conduct online direct sales to end customers via several online platforms, including both self-owned and other online platforms.

    Cooperation with Xiaomi

            For the periods presented, we generated a majority of our revenues from sales of certain types of Xiaomi-branded water purifiers and related products.

            The sales arrangement includes two installment payments. The first installment is priced to recover the costs incurred by us in developing, producing and shipping the products to this customer and is due from the customer to us upon acceptance by the customer after delivery. We are also entitled to receive a potential second installment payment calculated as 50 percent of the future gross profits from sales made by this customer. Accordingly, we determine the sales price as the fixed first installment payment plus the variable second installment payment to the extent that it is probable that revenue reversal will not occur when settling with the customer subsequently. We estimate the variable consideration using the expected value method. In assessing the variable second installment payment, we take into consideration the historical experience with that customer, that customer's sales price of the same or similar products as at the report date as well as the recent market trend.

            Revenue from Xiaomi is recognized upon acceptance by this customer after delivery, which is considered at the time the control of the products is transferred to Xiaomi. Revenue from Xiaomi does not meet the criteria to be recognized over time since (i) even if the products use "Xiaomi" brand, it does not require significant rework to make them suitable to be sold to other customers, (ii) under the cooperation agreement, we do not have the right of payment for the work performed to date.

    Sales through our own and other sales channels

            We recognize revenue for each of the distinct performance obligations identified in accordance with the applicable revenue recognition method relevant for that obligation. Revenue relating to the sales of products is recognized upon acceptance by the customer after delivery, and revenue relating to the installation services is recognized when the service is rendered.

            Certain products including Viomi-branded water purifiers require installation before being ready for use. For such products sold through our online stores, other online platforms, and Viomi offline experience stores operated by our network partners, the end customers have the right without expiry date, to ask us to provide installation service. No separate installation service fee is charged to end customers. The installation service is considered being distinct and accounted for as a separate performance obligation in addition to the sales of products after considering that the products and installation services are not inputs into a combined item the end customer has contracted to receive and we can fulfill our promise to transfer each of the products or services separately and do not provide any significant integration, modification, or customization services. However, customers do not always exercise their rights to ask us to provide

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    installation services as the installation of Viomi-branded water purifiers is not complicated and could be done by end customers themselves. Therefore, we expect to be entitled to a breakage amount in the contract liabilities related to installation services. We estimate the breakage portion based on historical customers' requests for provision of installation services after the customers' acceptance of products and recognize estimated breakage as revenue in proportion to the pattern of rights exercised by end customers. The assessment of estimated breakage would be updated on a quarterly basis. Changes in estimated breakage should be accounted for by adjusting contract liabilities to reflect the remaining rights expected to be exercised.

            Judgment is required to determine standalone selling price for each distinct performance obligation and we then allocate the arrangement consideration to the separate accounting of each distinct performance obligation based on its relevant standalone selling price. The standalone selling price of the products is determined based on adjusted market assessment approach by estimating the price the customer is willing to pay for the product without installation service. For the standalone selling price of the installation services, We determine it by referring to actual costs charged by the third-party vendors which are engaged by us for provision of installation services, plus an estimated profit margin of 5% based on consideration of both company specific and relevant market factors.

    Sales returns and sales incentives (except for those being discussed in "—Contract with a leading e-commerce platform")

            Except for product quality issues, we do not allow sales returns from Xiaomi or sales through our offline sales channels. Pursuant to consumer protection law, our customers have an unconditional right to return the products purchased through online platforms within 7 days. We base our estimates of sales returns on historical results, taking into consideration the type of customers, the type of transactions and the specifics of each arrangement.

            We may provide sales incentives in the forms of discounts or cash to customers through online platforms in a bundle transaction and revenue is recognized on a net basis after such sales incentives are allocated based on the relevant standalone selling prices for respective products. In addition, we may also provide sales rebates to certain third-party distribution partners based on purchase volume, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to our network partners considering the contracted rebate rates and estimated sales volume based on historical experience, and reduce revenues recognized.

    Warranty

            We offer product warranty pursuant to standard product quality required by consumer protection law. The warranty period is calculated starting from the date when products are sold to the end customers. We have the obligation, at the customer's sole discretion, to either repair or replace the defective product. The customers cannot separately purchase the warranty and the warranty doesn't provide the customer with additional service other than assurance that the product will function as expected. Therefore, these warranties are accounted for in accordance with ASC 460 Guarantees. At the time revenue is recognized, an estimate of warranty expenses is recorded. The reserves established are regularly monitored based upon historical experience and any actual claims charged against the reserve. Warranty reserves are recorded as cost of revenues.

    Contract with a leading e-commerce platform

            In 2018, we entered into a cooperation contract with a leading e-commerce platform. Pursuant to the contract, the e-commerce platform purchases Viomi-branded products from us and resells the products to end customers through its platform. Upon the acceptance of our products, the e-commerce platform has legal title and physical possession of the products and it would bear the inventory risk of loss due to

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    physical damage before the products are transferred and accepted by the end customers. The e-commerce platform is then responsible for delivering the specified products to end customers and has ability to direct the use of the products and obtain the remaining benefits from the products by reselling the products. The e-commerce platform also has flexibility in determining the retail sales price within a relatively broad price range set by us for substantial majority of the products purchased. Based on these indicators, we determined the e-commerce platform (as opposed to the end customers) as our customer according to ASC 606-10-55-39, and we recognize revenues equal to the sales price to this e-commerce platform when control of the inventory is transferred.

            As stipulated in the contract, slow-moving goods are those unsold products after they are in possession by the e-commerce platform for more than 30 days or 60 days, depending on the category of product. For those goods that are slow-moving after they are controlled by the e-commerce platform for more than 60 days, we shall coordinate with the e-commerce platform to sell the slow-moving products to end customers through promotions within 30 days, and we shall bear all losses caused by such discounted sales, otherwise, the e-commerce platform can return such slow-moving products to us. For those goods that are slow-moving after they are controlled by the e-commerce platform for more than 30 days, the e-commerce platform can return such slow-moving products to us. Based on our history of cooperation with the e-commerce platform and the pattern in which the e-commerce platform has dealt with slow-moving goods, we estimate that slow-moving goods will be returned to us instead of being sold through discounted sales by the e-commerce platform. Under ASC 606, a right of return is not a separate performance obligation, but it affects the estimated transaction price for transferred goods. Revenues are only recognized for those products that are not expected to be returned. The estimate of expected returns should be calculated in the same way as other variable consideration. Based on historical information and other relevant evidence such as expected sales and inventory level of the e-commerce platform we assess the minimum level of sales, for which it is probable there will be no significant reversal of cumulative revenues, and recognizes those sales as revenues. We would update our estimate of expected returns at each period end. The expected return asset is presented and assessed for impairment separately from the refund liability. We would assess the expected return asset for impairment, and adjust the value of the asset if it becomes impaired.

            Further, we might pay, or are expected to pay, a few types of consideration to this e-commerce platform, mainly including gross margin guarantee and advertising and promotion fees, in the form of cash or directly reducing amounts owed to us by this e-commerce platform. We evaluate each type of incentives or fees to be paid in accordance with ASC 606. Considering the fact that we neither receive any service from the e-commerce platform nor can elect to engage another vendor to provide similar advertising services on a standalone basis that is distinct from the contract we have with this e-commerce platform, we reduce the transaction price for the sale of products by the amount of various types of consideration payable to this e-commerce platform.

    Fair value of ordinary shares

            In determining the grant date fair value of our ordinary shares for purposes of recording share-based compensation expenses in connection with restricted shares owned by our founder, restricted shared owned by our founder on behalf of certain management and share options under the 2015 Share Incentive Plan, as well as the re-measurement date fair value for restricted shares owned by the founder which have been classified as liability awards, we, with the assistance of AVISTA Valuation Advisory Limited, evaluated the use of three generally accepted valuation approaches: market, cost and income approaches to estimate the enterprise value of our company and income approach (discounted cash flow, or DCF method) was relied on for value determination with market approach (guideline companies method, or GCM) taken as reference.

            DCF method of the income approach involves applying appropriate weighted average cost of capital, or WACC, to discount the future cash flows forecast, based on our best estimates as of the valuation date,

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    to present value. The WACC was determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk premium, company size and non-systematic risk factors.

            GCM under the market approach was adopted as reference of the equity valuation for our company. GCM employs trading multiples method of selected public comparable companies including trailing and leading enterprise value/revenues multiples.

            In deriving the equity value of each class of shares, we applied the Option Pricing Method. The Option Pricing Method treats different classes of shares as call options on the total equity value, with exercise prices based on the liquidation preference or redemption amount of the relevant classes of shares. Under this method, the ordinary share has value only if the fund available for distribution to shareholders exceeds the value of liquidation preference or redemption amounts at the time of a liquidity event, assuming the enterprise has funds available to pay for liquidation preference or redemption. Given the nature of the different classes of shares, the modeling of different classes of capital as call options on company's enterprise value is analyzed and the values of different classes of shares were derived accordingly.

            We also applied a discount for lack of marketability, or DLOM, which was quantified by the Black-Scholes option pricing model. Under this option-pricing method, which assumed that the put option is struck at the average price of the stock before the privately held shares can be sold, the cost of the put option was considered as a basis to determine the DLOM.

            The determination of the equity value requires complex and subjective judgments to be made regarding prospects of the industry and the products at the valuation date, our projected financial and operating results, our unique business risks and the liquidity of our shares.

            We have therefore estimated, with assistance from AVISTA Valuation Advisory Limited, the fair value of our ordinary shares at certain dates for the periods presented to determine the fair value of our ordinary shares as of the grant date of share-based compensation awards related to restricted shares owned by our founder on behalf of certain management and share options under the 2015 Share Incentive Plan as one of the inputs into determining the fair value of the awards as of the grant date.

            The following table sets forth the fair values of our ordinary shares estimated from July 1, 2016 to the date of this prospectus:

    Date of valuation
     Fair Value Per Share
    (US$)
     Discount of Lack of
    Marketability (DLOM)
     Discount Rate 

    July 1 and 2, 2016

      0.51  30% 18.3%

    January 1, 2017

      0.76  30% 17.2%

    April 1, 2017

      0.81  30% 17.0%

    July 1, 2017

      1.21  20% 15.6%

    December 24, 2017

      1.59  20% 15.5%

    December 31, 2017

      1.60  20% 15.5%

    January 2, 2018

      1.61  20% 15.5%

    March 21, 2018

      3.17  10% 14.8%

    March 31, 2018

      3.19  10% 14.8%

    April 1, 2018

      3.15  10% 14.8%

    August 23, 2018

      3.30  10% 14.3%

            The increase in the fair value of our ordinary shares from US$0.51 per share as of July 1, 2016 to US$1.60 per share as of December 31, 2017 was primarily attributable to continuous organic growth of our business and more certainty over the timing of our initial public offering.

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            The determined fair value of our ordinary shares increased from US$1.60 per share as of December 31, 2017 to US$3.30 per share as of August 23, 2018. We believe the increase in the fair value of our ordinary shares was primarily attributable to the following factors:

      Two types of our products won the 2018 iF Product Design Award which contributed to a further increase of our products' market recognition and thus increase in sales;

      As we progressed towards an initial public offering, the lead time to an expected liquidity event decreased, resulting in a decrease of DLOM from 20% as of December 31, 2017 to 10% as of August 23, 2018;

      We adjusted our financial forecast to reflect the anticipated higher revenue growth rate, in particular the impact for the several series of new products launched in March 2018, and better financial performance in the future due to the abovementioned developments; and

      As a result of milestone events described above and the continuous growth of our business, the discount rate decreased from 15.5% as of December 31, 2017 to 14.3% as of August 23, 2018.

    Share-based compensation

            Share-based compensation expenses arise from share based awards, mainly including restricted shares held by our management and share options for the purchase of ordinary shares. We account for share-based awards granted to our management in accordance with ASC 718 Stock Compensation.

            Before the reorganization, pursuant to certain equity interest investment entered into by and between the founder and Xiaomi dated as of June 6, 2014, the restricted shares held by our management were subject to a repurchase feature under which Xiaomi shall purchase the interest held by our management at the original investment amount if our management voluntarily terminate their employment with Foshan Viomi. The restricted shares should be classified as equity classified awards as the underlying shares of the awards are ordinary shares of Foshan Viomi and the awards do not contain any of the characteristics of liability awards described in ASC718. The restricted shares are accounted for as share-based compensation based on the grant date fair value over the vesting period.

            After the reorganization completed in July 2015, the repurchase feature remains, however, it became our Company's right, and not the obligation, to repurchase. With respect to the remaining unvested interest granted to the founder on behalf of certain key management founders, the underlying shares changed from ordinary shares of Foshan Viomi to Class A Ordinary Shares of the Company. These shares remain to be equity classified awards as they do not contain any characteristics of a liability award and were continually accounted for as share-based compensation based on the grant date fair value over the remaining vesting period. With respect to the remaining unvested interest granted to the Founder, the underlying shares changed from ordinary shares of Foshan Viomi to redeemable class B ordinary shares of the Company, which are redeemable convertible shares. These awards have been reclassified as liability classified awards as the underlying class B ordinary shares are redeemable at a fixed price plus 6% interest per year at the option of the holder if there is no qualified IPO after a certain period of time. According to ASC718, such awards effectively consist of: (1) a liability component representing the company's obligation to pay the redemption price if the holder chooses to redeem, and (2) an equity component representing the fair value of the upside potential of the class B ordinary shares, measured using an option pricing model. At the time of the modification, the Company compared the fair value of the original award immediately before the modification, and the total fair value of the liability component and the equity component immediately after the modification. The incremental compensation amount is recognized over the remaining vesting period. The amount related to the liability component is recorded as a liability measured at the redemption price, subsequently accreted at 6% per year to reflect the increase in redemption price over time according to the terms of the class B ordinary shares, until the award is settled. The liability award is considered settled only upon redemption or IPO, when the class B ordinary shares are converted to class A ordinary shares at which time, the redemption feature would expire.

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            For share options for the purchase of ordinary shares granted to our employees determined to be equity classified awards, the related share-based compensation expenses are recognized in our consolidated financial statements based on the grant date fair values which are calculated using the binomial option pricing model. The determination of the fair value is affected by the share price as well as assumptions regarding a number of complex and subjective variables, including the expected share price volatility, actual and projected employee share option exercise behavior, risk-free interest rates and expected dividends. The fair value of our ordinary shares is assessed using the income approach/discounted cash flow method, with a discount for lack of marketability, given that the shares underlying the awards were not publicly traded at the time of grant. Share-based compensation expenses are recorded net of estimated forfeitures using graded-vesting method during the service period requirement, such that expenses are recorded only for those share-based awards that are expected to ultimately vest.

      Share options

            On September 17, 2015, our board of directors approved the establishment of 2015 Share Incentive Plan, the purpose of which is to provide an incentive for employees contributing to us. The 2015 Share Incentive Plan is valid and effective for 10 years from the grant date. The maximum number of shares that may be issued pursuant to all awards (including incentive share options) under 2015 Share Incentive Plan is 12,727,272 shares.

            In 2016 and 2017, we granted 1,860,000 and 2,700,000 share options to our employees pursuant to the 2015 Share Incentive Plan.

            In June 2018, our board of directors and shareholders approved the 2018 Share Incentive Plan, pursuant to which the maximum aggregate number of shares issuable was initially 17,672,728. No share options were granted under the 2018 Share Incentive Plan for the six months ended June 30, 2018.

            During the six months ended June 30, 2017 and 2018, we granted 1,060,000 and 3,980,000 share options to our employees pursuant to the 2015 Share Incentive Plan.

            We calculated the estimated fair value of the options on the respective grant dates using the binomial option pricing model with assistance from AVISTA Valuation Advisory Limited. Assumptions used to determine the fair value of share options granted during 2016 and 2017 and the six months ended June 30, 2017 and 2018 are summarized in the following table:

     
      
      
     For the six months ended June 30,
     
     2016 2017 2017 2018

    Risk-free interest rate

     2.86% 3.06% - 3.89% 3.06% ~ 3.29% 3.75% ~ 3.92%

    Expected volatility

     50.14% - 50.15% 47.02% - 49.44% 48.36% ~ 49.44% 46.39% ~ 46.99%

    Expected life of option (years)

     10 10 10 10

    Expected dividend yield

        

    Fair value per ordinary share

     US$0.51 US$0.76 - US$1.59 US$0.76 ~ 0.81 US$1.61 ~ 3.17

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

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

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

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

    Redeemable convertible preferred shares

            Pursuant to a shares purchase agreement, we issued certain class B ordinary shares to Mr. Chen and Xiaomi during the reorganization, and we also issued a total of 18,181,818 shares of series A preferred shares.

            We classified the series A preferred shares and class B ordinary shares as mezzanine equity in the consolidated balance sheets because they were redeemable at the holders' option any time after a certain date and were contingently redeemable upon the occurrence of certain liquidation events outside of our control. The series A preferred shares and class B ordinary shares are recorded initially at fair value, net of issuance costs.

            Prior to the reorganization, the 40% initial equity interests of Foshan Viomi held by the founder for himself has liquidation preference, and the 40% initial equity interests of Foshan Viomi held by Tianjin Jinxing has liquidation preference and also becomes redeemable in the event of a breach of contract by Foshan Viomi.

            Upon completion of the reorganization, both Mr. Chen and Tianjin Jinxing's equity interests in Foshan Viomi were exchanged into 67,636,364 class B ordinary shares of us, respectively. After the reorganization, the most significant change in the provision is the addition of redemption clause which allows the holders of the class B ordinary shares to redeem the class B ordinary shares if there is no IPO after the fifth anniversary of the completion of the series A preferred share financing. This transaction was considered as an extinguishment of the previous equity interests and therefore, the class B ordinary shares are measured at their fair value on the extinguishment date.

            We recognize changes in the redemption value ratable over the redemption period. Increases in the carrying amount of the redeemable preferred shares are recorded by charges against retained earnings, or in the absence of retained earnings, by charges as reduction of additional paid-in capital until additional paid-in capital is reduced to zero. Once additional paid-in capital is reduced to zero, the redemption value measurement adjustment is recognized as an increase in accumulated deficit.

    Recent Accounting Pronouncements

            In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)"("ASU 2016-02"), which requires lessees to recognize assets and liabilities for all leases with lease terms of more than 12 months on the balance sheet. Under the new guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will depend on its classification as a finance or operating lease. The ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted on a modified retrospective basis. We are in the process of evaluating the impact of adopting this guidance.

            In June 2016, the FASB issued ASU No. 2016-13 (ASU 2016-13), "Financial Instruments—Credit Losses", which introduces new guidance for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments, including, but not limited to, trade and other receivables, held-to-maturity debt securities, loans and net investments in leases. The new guidance also modifies the impairment model for available-for-sale debt securities and requires the entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. The standard also indicates that entities may not use the length of time a security has been in an unrealized loss position as a factor in concluding whether a credit loss exists. The ASU 2016-13 is effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact of adopting this guidance.

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    INDUSTRY

            The information presented in this section have been derived from an industry report commissioned by us and prepared by iResearch, an independent research firm, regarding our industry and our market position in China. We refer to this report as the"iResearch Report."

    Overview of IoT Consumption Scenarios

            The IoT is an interconnected network of devices, or "things," that can communicate with one another through the internet. IoT consumer products are the next-generation consumer products that are connected through the internet and equipped with advanced features of receiving, processing, analyzing and transmitting data using a mobile app or other network devices.

            Consumer-related applications of the IoT span across a variety of scenarios, including the home, office, automobile and on-the-go wearable devices, among others.

    The IoT-enabled smart home scenario

            Consumption scenarios in people's daily lives can be broadly categorized into time spent at home, at work, outdoors and travelling. Consumers tend to spend the most time at home in a day, making it the most convenient and natural consumption scenario, or the consumer's "primary space." People spend an average of 8 to 12 hours at home each day, which makes it a large and attractive scenario for monetization. Accordingly, gaining entry into the family home, for example through IoT-enabled smart home products, and being able to capture the various consumption scenarios that arise in the home environment provides huge monetization potential.

            The diagram below illustrates different scenarios in a person's daily life.

    GRAPHIC

    Source: iResearch Report

    Overview of IoT-enabled smart home products

            IoT-enabled smart home products can be divided into four categories: smart white goods, smart brown goods, smart small appliances and other smart products:

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      Smart white goods.  Smart large electrical goods, traditionally white in color, including smart refrigerators, smart washing machines, smart air conditioners, smart range hoods, smart stoves, smart sterilizers, smart dish-washing machines, smart ovens, smart microwaves, etc. White goods are also called major appliances.

      Smart brown goods.  Smart consumer electronics equipment generally for entertainment, and mainly includes televisions.

      Smart small appliances.  Smart portable or semi-portable machines, generally used on table-tops, counter-tops or other platforms, to accomplish a household task, including smart water purifiers, smart water heaters, smart rice cookers, smart mixers, smart electric kettles, smart air purifiers, smart vacuum cleaners, smart electric fans, etc.

      Other smart products.  Includes various IoT products such as smart door locks, smart cameras, smart gateways, smart sockets, smart security devices, smart windows, smart shading systems, etc.

            Of the Company's key IoT-enabled smart home product lines, smart water purifiers and smart kettles can be classified as smart small appliances. Smart kitchen products and other smart products (excluding smart kettles) can be classified as smart white goods. These IoT products are an integral part of an IoT-enabled smart home platform and our IoT @ Home platform.

            Demand for IoT-enabled smart home products in China is growing rapidly. According to the iResearch Report, the market for IoT-enabled smart home products in China, a subset of the broader home appliances market, reached RMB345.6 billion (US$52.2 billion) in terms of retail sales in 2017, having grown at a CAGR of 26.5% from 2013. Please see "Business—The Market Opportunity" for more details. Key players in the IoT-enabled smart home products market in China include Viomi, Midea, Haier and Gree, among others.

            The following charts set forth a breakdown by product category of China's IoT-enabled smart home products market, in terms of units shipped as well as retail sales value in 2017.

    GRAPHIC GRAPHIC

    Source: iResearch Report

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    Development Stages of the IoT-enabled Smart Home Industry

            The evolution of home appliances and IoT-enabled smart home products can be broadly divided into three developmental stages. The diagram below summarizes the key characteristics of the past, present and future development stages of home appliances and IoT-enabled smart home products:

    GRAPHIC

    Source: iResearch Report

    Past: traditional appliances

            Historically, traditional appliances performed a singular function, and were not intelligent or connected. Nevertheless, household appliances and electronics have generally been regarded as essential daily use items in the home environment given their importance to everyday lives.

    Present: isolated smart home products

            The past few years have seen a rapid increase in the use of connected home appliances that allow consumers to control and operate them remotely through mobile apps. For instance, an IoT water heater can be switched to the appropriate settings when consumers are on their way home from work, so they can enjoy warm water as soon as they walk in the door, but without having to keep water hot when there is no one there that needs it. While these home devices are connected to the internet, they are generally isolated from one another, requiring the consumer to download a number of different mobile apps to operate them. Instead of interacting with one unified ecosystem of interconnected home appliances through an integrated platform, the user must separately interact with each device, leading to growing demand for a more efficient solution.

    Future: IoT-enabled smart home platform

            The next stage of development is a seamless interconnected ecosystem of IoT-enabled smart home products. Within this ecosystem, home appliances can communicate with one another to optimize the user experience. A household's water purifier, for instance, will be able to identify water hardness level and send this information to the washing machine so that settings can be automatically adjusted accordingly. In addition, consumers will be able to access and control devices through multiple interfaces, at anywhere and anytime.

            Advances in AI-powered voice-, facial- and gesture-recognition technologies will enable the IoT products companies to develop more human and intuitive user interfaces, enabling consumers to interact with appliances in an increasingly human-like manner. By transforming how consumers interact with their home appliances, AI and IoT-driven technologies could trigger shifts in consumer and consumption behavior that could create huge market opportunities.

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            As IoT-enabled smart home products become interconnected and more human-like, such an ecosystem can become the primary channel for communication within the home environment, which can facilitate scenario-based consumption scenarios. An IoT-enabled smart home platform can enable consumers to make purchase decisions as soon as the need arises from within the comfort of their own homes, for example, through integrated e-commerce platforms embedded within the respective IoT products. Predictive features can also anticipate when certain household supplies are running low and allow consumers to make the necessary purchases directly, eliminating the need to step out of the house or access other e-commerce marketplaces on their computer or mobile phones. Going forward, IoT-enabled smart home platforms have the potential to become the most convenient way to satisfy consumption needs in the home environment.

    Comparison of US and China's IoT-enabled Smart Home Markets

            The IoT-enabled smart home products market in the United States is built around an open IoT operating system that is provided by internet and technology giants through their smart speaker technology or smart home kits. Smart home products players make their devices compatible with these operating systems and are generally focused on developing IoT-enabled smart home products in specific verticals.

            In contrast, the IoT-enabled smart home market in China is more vertically and horizontally integrated. There are several key factors that make China's IoT-enabled smart home unique and attractive:

      Well-developed hardware manufacturing value chain.  China has historically been a key manufacturing base for appliances and consumer electronics. Hence, Chinese IoT products companies are able to enjoy certain advantages in terms of procurement and manufacturing efficiency.

      Consumer receptiveness to innovative technology and smart products.  Chinese consumers have shown significant receptiveness towards adopting new and innovative technology and smart products, as can be seen by the rapid adoption and penetration of smart phones and smart televisions in recent years. As consumers become more educated about the benefits of the IoT-enabled home, adoption and penetration are expected to quickly escalate. For example, penetration of IoT-enabled white goods products is expected to increase from approximately 24.0% in 2017 to 55.8% by 2022.

      Highly efficient logistics and mobile-payment infrastructure.  China has one of the most established and efficient logistics and mobile-payment infrastructures in the world. Such infrastructure provides ease of access to new and innovative IoT-enabled smart home products for consumers and also effectively enables scenario-based purchase decisions in the home environment.

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      BUSINESS

      Our Mission

              IoT @ Home: Redefining the future home.

      Overview

              We have developed a unique IoT @ Home platform, consisting of an ecosystem of innovative IoT products, together with a suite of complementary consumable products and value-added businesses. This platform provides an attractive entry point into the consumer home, enabling consumers to intelligently interact with a broad portfolio of IoT products in an intuitive and human-like manner to make daily life more convenient, efficient and enjoyable, while allowing us to grow our household user base and capture various additional scenario-driven consumption events in the home environment. As of June 30, 2018, our IoT @ Home platform had over 1.2 million household users.

              Powered by advanced AI, proprietary software and data analytics systems, our IoT @ Home platform generates extensive and deep consumer behavior data and insights, enabling us to continue to enhance our products and offer additional bespoke value-added businesses over time.

              Xiaomi is our strategic partner, shareholder and customer. Our strategic partnership with Xiaomi gives us access to Xiaomi's ecosystem users, market and data resources and related support. Meanwhile, our strong research and development capabilities and innovative products and services also enrich Xiaomi's suite of offerings, resulting in a mutually beneficial relationship between Xiaomi and us.

      Our Business Model

              We operate a highly scalable business model based on three key pillars: 1) our IoT-enabled smart home products; 2) complementary consumable products and value-added businesses ecosystem; and 3) a factory-to-consumer, or F2C, new retail sales strategy.

      IoT-enabled smart home products

              We generate a significant portion of our revenues through sales of our IoT products. Aimed at China's young, modern, "new middle-class" consumers, our portfolio of innovative AI-powered, IoT products, which are equipped with cloud-based internet connectivity, advanced software and interface features, form the core of our IoT @ Home platform. From our inception up to June 30, 2018, we had successfully brought to market an extensive range of over 40 IoT product lines, including our flagship line of smart water purification systems, smart kitchen products and other smart products. These products engage users across a wide spectrum of essential daily activities and create new consumption scenarios for the home environment. We strive to offer our core products at attractive price points to facilitate initial household user acquisition and entry into the family home. We think of customers' initial purchases of our products as the start of our relationship with them rather than the end, as that first purchase drives broad home-wide adoption of our products and long-term customer loyalty. The inherent connected nature, synergies, and network effects within our IoT @ Home platform are demonstrated by the fact that the percentage of our household users possessing at least two of our IoT products increased from 3.5% as of March 31, 2016 to 12.5% as of June 30, 2018.

      Consumable products and value-added businesses ecosystem

              In addition to our IoT products, we offer a suite of complementary consumable products and value-added businesses. Consumable products, such as water purifier filters, are complementary, and often essential, to our IoT products, allowing us to generate additional, recurring and ongoing revenue streams for us beyond the initial sales of the IoT products with minimal customer acquisition costs. Our value-added businesses consist of sales of other products such as water quality meters and water filter pitchers,

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      provision of installation services, and services related to our e-commerce platform embedded within various of our IoT products.

              We believe home is the most important and natural consumption environment. Hence, in addition to facilitating sales of our IoT products, our IoT @ Home platform, together with our vibrant partner ecosystem, is also set up to capture scenario-driven consumption events in the home environment, enabling users to purchase products and services as and when the need arises within the comfort of their home. For example, users can easily and directly purchase products, including our consumable products as well as other fast-moving consumer goods, supplied by us or our ecosystem partners, through platforms and interfaces integrated and embedded within various of our IoT products. This unique aspect of our business model allows us to capture users' consumption events and purchasing behavior across the entire life cycle of our core products and differentiates us from hardware-focused peers.

      F2C new retail

              At the heart of our omnichannel F2C new retail experience is our network of approximately 700 Viomi offline experience stores across China, the majority of which were stand-alone stores, as of June 30, 2018. These stores, operated by our third-party network partners, enable consumers to physically test our IoT @ Home lifestyle experience firsthand. After experiencing our products in this home lifestyle environment, consumers can then purchase the products they like by either directly placing orders with the store or scanning the QR code, after which the selected products will be delivered to them directly. We also sell our products directly to customers through our online platforms as well as through other platforms at prices consistent with the network of Viomi offline experience stores, subject to occasional sales promotions offered through different sales channels.

              Our efficient omnichannel F2C new retail strategy enhances our brand awareness and cuts out unnecessary layers of middlemen, preserving profitability for us, supports attractive pricing of our products, and also promotes bundled product sales.

      The Market Opportunity

      The addressable market

              Our addressable market consists of China's broader home appliances industry, which is large and relatively mature, though still growing at a steady pace. According to the iResearch Report, China's home appliances market reached approximately RMB800.5 billion (US$121.0 billion) in terms of retail sales in 2017, having grown at a CAGR of 6.2% from 2013 to 2017, and is estimated to grow at a CAGR of 7.8% from 2017 to 2022 to reach RMB1,167.9 billion (US$176.5 billion) by 2022. In particular, the white goods market, our current key focus market, reached approximately RMB457.0 billion (US$69.1 billion) in terms of retail sales in 2017, having grown at a CAGR of 6.0% from 2013 to 2017, and is estimated to grow at a CAGR of 11.3% from 2017 to 2022, the fastest projected growth among all home appliances categories, to reach RMB781.4 billion (US$118.1 billion) by 2022.

              The iResearch Report identifies key growth drivers for China's overall home appliances market and white goods market as growth in disposable income and overall consumption upgrade trends as well as replacement demand. In 2008 and 2009, the Chinese government implemented several stimulus projects, including "home appliances for rural areas," "appliance trade-in rebates," and "energy saving rebates." These initiatives drove strong home appliances sales from 2009 to 2011. Given that the useful life for home appliances, in particular for white goods, is approximately 10 to 12 years, there is expected to be substantial replacement demand for these products from 2018 to 2023.

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              The following chart sets forth the size of China's home appliances market in terms of retail sales, broken down by major product categories.


      Market Size of Home Appliances in China (2013-2022E)
      (RMB Bn)

      GRAPHIC

      Source: iResearch Report

              The following chart breaks down the size and addressable market of some of the key home appliances categories in China in terms of retail sales in 2017.


      Market Size of Key Home Appliances Categories in China (2017)
      (RMB Bn)

      GRAPHIC

      Source iResearch Report

      The Internet-of-Things

              The IoT is the interconnected network of devices, or "things," that can communicate with one another seamlessly through the internet. Enabled by the proliferation of mobile technology and advancements in AI, IoT-enabled smart home products are rapidly gaining popularity in China. IoT-enabled smart home products refer to next-generation home appliances and consumer electronics that are powered by AI and the internet and equipped with advanced features for receiving, processing, analyzing and transmitting data. These products can provide consumers with various benefits in the home environment, including increased convenience and improved quality of life.

              Demand for IoT-enabled smart home products is growing rapidly. According to the iResearch Report, the market for IoT-enabled smart home products in China, a subset of the broader home appliances

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      market, reached RMB345.6 billion (US$52.2 billion) in terms of retail sales in 2017, having grown at a CAGR of 26.5% from 2013. Despite this recent rapid growth, there is still expected to be significant room for growth in the market. According to the iResearch Report, the market is estimated to continue its robust growth at a CAGR of 20.1% to reach RMB865.2 billion by 2022 in terms of retail sales. Penetration of IoT-enabled smart home products, excluding others, is expected to increase from approximately 35.8% in 2017 to 59.0% by 2022. Penetration of IoT-enabled white goods products is expected to increase from approximately 24.0% in 2017 to 55.8% by 2022.

              The following chart and table set forth the size of China's IoT-enabled smart home products market in terms of retail sales and the penetration rates within the broader home appliances market, respectively.


      Market Size of IoT-enabled Smart Home Products in China (2013-2022E)
      (RMB Bn)

      GRAPHIC

      Penetration Rate of IoT-enabled Smart Home Products in China (2013-2022E)

      %
       2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 

      Brown Goods

        72.9  75.6  77.4  87.6  88.7  91.3  93.9  96.1  98.0  99.1 

      Small Appliances

        4.3  7.0  9.4  14.2  17.9  22.6  25.8  28.6  31.2  33.6 

      White Goods

        3.2  4.6  8.2  14.7  24.0  34.9  42.3  49.6  53.9  55.8 

      Total

        18.7  20.9  24.8  30.9  35.8  43.1  48.4  53.7  57.2  59.0 

      Source: iResearch Report

              Of the Company's key IoT-enabled smart home product lines, smart water purifiers and smart kettles can be classified as smart small appliances. Smart kitchen products and other smart products (excluding smart kettles) can be classified as smart white goods.

      Key industry trends

              According to the iResearch Report, there are powerful industry and consumer trends driving the increased adoption of IoT-enabled smart home products in China, including:

        Aspiration-driven consumption upgrade:  In line with sustained economic growth and increases in disposable income, China has seen a clear consumption upgrade trend and expectations for higher living standards. Chinese consumers now have greater purchasing power and an increasing preference for high quality, aspirational products with innovative features and functionalities.

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        Increased receptiveness towards and adoption of AI and IoT technology:  Chinese consumers, particularly the young, modern, "new middle class" consumers, are becoming increasingly receptive to next generation products that incorporate AI and IoT technologies to create a modern living experience. New technologies such as voice- and motion-activated controls have also gained increasing prominence as these technologies become more mainstream and consumers become more educated about their applications.

        Product innovation and technological developments:  Continued advancements in product innovation have provided consumers products with greater functionalities and practical use in the home environment. In addition, technological developments and increasing competition have led to continued declines in the prices of microchips, sensors, network infrastructure and bandwidth, which in combination have reduced the cost of smart home products, making them more affordable and accessible.

        Busier lifestyles and demand for convenience:  With increased urbanization, a more connected world and a highly competitive job environment, Chinese consumer lifestyles are more hectic than ever. Accordingly, Chinese consumers are seeking new ways to make their lives more convenient and enjoyable, especially in the home and family environment, and are more willing to pay for solutions that help them realize these benefits.

      What consumers are looking for

              Consumers are always looking for ways to improve their productivity and quality of life and to complete tasks more effectively and efficiently in a more affordable manner. Driven by powerful industry trends as well as shifts in consumption and usage preferences, according to the iResearch Report, modern consumers are looking for the following key characteristics in the next generation of IoT-enabled smart home products and smart home solutions:

        A smart home solution as a way to make their lives more convenient, efficient and enjoyable.

        A platform that seamlessly works with a broad range of IoT products to create a truly holistic IoT @ Home lifestyle experience.

        A multi-interfaced platform that they can interact with across a number of devices.

        An intuitive, easy-to-use solution that is also affordable and easy to acquire.

        A highly flexible, intelligent and dynamic solution that adapts to their behavior and makes relevant recommendations.

        A future-proof platform that can be upgraded to incorporate new functionality.

      Limitations of existing and legacy products

              Existing and legacy products, including traditional home appliances and first generation smart home products, generally have several aspects that limit their effectiveness and attractiveness:

        Isolated devices:  Many smart home products currently on the market, while performing a single function well, are isolated from and unable to communicate with other devices. Users are required to manage multiple, disconnected products, which can be time consuming and unattractive for a user seeking a holistic smart home solution.

        Lack intelligence:  Many legacy products can only respond to direct commands and are unable to act independently on the user's behalf based on the user's activity and behavior. Similarly, because existing and legacy devices have generally not been able to communicate with each other, consumers lack the ability to leverage AI to create a bespoke experience.

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        Not future-proof:  Since most legacy products are not cloud-based, they cannot receive updates of new software, and risk quickly becoming obsolete. These offerings generally require physical hardware and software replacements once new features, devices or technologies are introduced, resulting in additional hassle and costs for consumers.

        Overly complex and expensive:  Some products, while having a multitude of features and a degree of connectivity, can be difficult for the users to understand or use intuitively. This eliminates at first instance one of the key attractions of smart home devices, which is to make users' lives easier and more efficient. These types of devices can also be expensive, which creates high barriers to entry for widespread adoption.

      Our Value Proposition

              We believe that China's RMB800+ billion home appliances market is ripe for disruption, providing huge upside potential for our business. Our IoT @ Home platform aims to redefine, transform and greatly enhance user experience in the home environment through the solutions we provide. Our solutions offer consumers the following value propositions:

        Intuitive easy-to-use experience:  We have designed our IoT @ Home platform and user interfaces to be intuitive, simple and easy to use. Users can communicate with our IoT products in an interactive, human-like manner, using techniques such as speech and gestures, or remotely through mobile devices.

        Multi-interfaced, connected platform:  Our IoT @ Home platform provides consumers with multiple points of interaction across a number of devices, removing restrictions on relying on a single point of control. The connectivity among our products means some of them can communicate with our other smart home appliances and share information to go beyond their singular functions, further enhancing user experience and creating powerful network effects, which promote repeat and bundled purchases.

        Intelligent and dynamic system:  Leveraging upon our proprietary software and data analytics systems, our products grow smarter over time. The insights into user behavior we gain as consumers use our products allows us to further enhance our products and services, thereby providing better solutions and attracting more users over time, creating a sustainable virtuous cycle.

        Essential daily use:  Our products and services are relevant to everyone in their daily lives. This means that the solutions our IoT @ Home platform provides can form an important function in making people's everyday lives more convenient, efficient and enjoyable.

        Scenario-driven consumption events:  Our IoT @ Home platform enables users to directly engage in consumption events through our devices—as and when the need arises and within the specific scenario in which the need arises—without consumers having to engage another service provider.

        Accessible and affordable:  Our technologically advanced, high quality products are priced at attractive price points, providing a cost-effective and value-for-money entry point for our target market of young, modern, "new middle-class" consumers seeking the smart home experience.

              Some common examples of how users can engage with our IoT @ Home platform and the related benefits include:

        A user forgets to change the filter in her water purification system.  Our water purification systems automatically sense when the filters will soon need changing, and advise the user to order a replacement, which can be done directly through voice commands.

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        A user opens her refrigerator and sees a need to replenish supplies.  Our integrated and embedded e-commerce platform within the refrigerator allows the user to seamlessly order the needed products at the point of interaction—the refrigerator.

        A user wishes to cook a dish, but lacks the know-how.  Our oven steamer advises on recipes and ingredients and can automatically cook to order certain food products by scanning the product's barcode.

        A user wants to do her laundry, but is out of detergent.  Our washing machine advises on the correct cycles and quantity of washing products required, and takes voice commands to directly order related products as needed.

        A user has just finished work, and would like to start the defrosting process.  The user can remotely control his or her smart refrigerator at home via our mobile app to start the defrosting process by raising the temperature in the independent temperature-controlled compartment.

      Our Track Record

              We have experienced significant growth since our inception, largely driven by increasing brand recognition, new product launches, strong product sales, and increasing receptiveness towards and adoption of smart home AI and IoT technology in China. Our number of household users increased by close to 10 times from approximately 113 thousand as of March 31, 2016 to over 1.2 million as of June 30, 2018, with the number of IoT products shipped increasing by 212.3% from approximately 382 thousand units in 2016 to approximately 1.2 million units in 2017. Our net revenues increased by 179.4% from RMB312.6 million in 2016 to RMB873.2 million (US$132.0 million) in 2017. Our net revenues increased by 284.4% from RMB270.6 million for the six months ended June 30, 2017 to RMB1,040.2 million (US$157.2 million) for the same period of 2018. Our net income increased by 473.5% from RMB16.3 million in 2016 to RMB93.2 million (US$14.1 million) in 2017. Our net income increased by 271.5% from RMB18.9 million for the six months ended June 30, 2017 to RMB70.3 million (US$10.6 million) for the same period of 2018.

      Our Competitive Strengths

              We believe the following competitive strengths contribute to our success and differentiate us from our competitors:

      Multi-interfaced, connected and synergistic IoT @ Home platform

              Our unique IoT @ Home platform consists of an ecosystem of innovative AI-powered, IoT products, together with a suite of complementary consumable products and value-added businesses, providing an attractive entry point into the consumer home. This platform provides consumers with multiple points of interaction across a number of devices, removing the limitations of relying on a single point of control. The connectivity among our various products means that they can interact with each other and share information to go beyond their singular functions, further enhancing the user experience and creating powerful network effects and promoting bundled purchases, which drives higher revenue and wallet share per customer. The integrated and embedded value-added e-commerce platform within our IoT products further facilitates scenario-driven consumption events and creates additional monetization opportunities, including purchases of consumable products such as replaceable filters as well as other household fast-moving consumer goods. This adds further synergies across the entire ecosystem and generates additional, recurring and ongoing revenues streams for us beyond the initial sales of our IoT products, with minimal customer acquisition costs. Our value-added businesses also include sales of other related products such as water quality meters and water filter pitchers, promoting regular impulse purchase by consumers.

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              The appeal to consumers of the inherent connected nature, synergies and network effects within our IoT @ Home platform is demonstrated by the fact that the percentage of our household users possessing at least two of our IoT products increased from 3.5% as of March 31, 2016 to 12.5% as of June 30, 2018.

      Aspirational brand with a rapidly growing user base

              Viomi has been built as an aspirational, "next generation" brand with attractive value propositions that aims to bring the full suite of AI capabilities and IoT experience to the home environment. Our strategic partnership with Xiaomi also allows us to effectively access and leverage Xiaomi's established, entrenched and growing user base.

              Despite our relatively short operating history, the success of our unique IoT @ Home platform and the positive consumer experience it delivers have allowed us to rapidly develop a large and growing user base. Our number of household users increased by close to 10 times from approximately 113 thousand as of March 31, 2016 to over 1.2 million as of June 30, 2018, with the number of IoT products shipped increasing by 212.3% from approximately 382 thousand units in 2016 to approximately 1.2 million units in 2017. As a testament to the rapid penetration of our brand, during the 618 Shopping Festival in 2018, our iLive smart refrigerator ranked first among refrigerator models and we ranked among the top ten refrigerator brands in terms of online sales, according to All View Cloud, a retail data research firm in China.

      Unique and highly scalable business model

              Our business model allows us to enjoy a high customer lifetime value. We see a consumer's point of purchase and the entry of our products into their home as the start of our relationship rather than the end. Consumers who have made their first hardware purchase are incentivized to make additional purchases to benefit from the synergies and connectivity among our IoT products. More users on our platform then generate more data for our software analytics, enhance our software and algorithms, and lead to better user experiences, which in turn attracts more users to our platform—a powerful virtuous cycle. In addition, leveraging these customer relationships, we are also able to generate additional, recurring and ongoing revenues streams from sales of consumable products, together with various value-added businesses across the life cycle of the IoT products with minimal customer acquisition costs.

              Further, our omnichannel F2C new retail model cuts out inefficient layers of middle-men and caters to the buying behavior of the modern consumer, providing access to consumers in a cost-effective manner and also facilitating the rapid expansion of our coverage network.

      Powerful data analytics capabilities

              We have developed advanced proprietary software and data analytics capabilities to derive actionable insights from the large amounts of data we collect from our IoT products. We believe that the home is the most important and natural consumption environment. Our IoT products also generate vast quantities of user data in this environment with significant monetization potential.

              We have built a large database of usage and behavior data through our IoT products and value-added businesses. By analyzing this data, we are able to gain deep customer insights, enhance our software, make our products smarter, provide bespoke marketing and promotional initiatives, and discover additional customer acquisition opportunities. Our products are powered by cloud-based software that can be updated based on what we learn from data and other customer feedback, making our products smarter over time. We also leverage predictive customer analytics to understand what and when consumers want to buy based on past behavior, and we can remind our users of their purchasing needs, which facilitate the use and monetization of our consumable products and value-added businesses.

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      Proven research and development capabilities with commitment to innovation

              Our R&D team comprised 124 hardware engineers and 104 software engineers and designers as of June 30, 2018, which in aggregate represented 43.3% of our total number of employees. We have developed or adopted several key technology innovations that have enabled the development of our IoT @ Home platform, including AI-based voice-, facial- and gesture-recognition technology, connectivity and control technology, and hardware technologies including sophisticated sensor technology. From our inception to June 30, 2018, we had successfully brought to market an extensive range of over 40 IoT products lines, including our flagship line of smart water purification systems, smart kitchen products and other smart home products, with a strong product pipeline of upcoming product launches.

              As a testament to our innovation capabilities, as of June 30, 2018, we had over 680 patents registered with the State Intellectual Property Office of China and over 500 pending patent applications in China. Globally, we had over 30 patents registered and over 70 pending patent applications in various overseas countries and jurisdictions, as of June 30, 2018.

      Visionary and professional management team

              Our visionary and professional management team is led by our founder and CEO Mr. Xiaoping Chen and supported by our strategic partner Xiaomi.

              Mr. Xiaoping Chen founded our Company with a vision of revolutionizing the home lifestyle experience with AI technologies and IoT platforms. He is a former senior executive at Midea and has over 20 years of experience in China's home appliances industry with deep understanding and knowhow across all core functions, ranging from product development to operations and from supply chain management to sales and marketing as well as finance. Our entrepreneurial spirit, hardware expertise and experience, together with Xiaomi's internet DNA, have been important factors that have contributed to our success, and we believe set us apart from traditional home appliances brands and consumer internet companies.

      Our Strategies

              We intend to achieve our mission, grow our household user base and strengthen our market position through successful execution of the key elements of our growth strategy, which include:

      Continue to introduce new and innovative products

              Our success is built upon our ability to grow our household user base by delivering a broad portfolio of innovative IoT products at attractive price points, which form the foundation of our IoT @ Home platform. Going forward, we intend to explore additional application scenarios for our products across the home environment, and we will continue to introduce new and innovative devices as we relentlessly pursue our goal of creating a unique and holistic IoT @ Home lifestyle experience for the benefit of consumers, and additional monetization opportunities for us. In 2018, we successfully introduced new IoT products such as our 21Face smart refrigerator and the Viomi dishwasher, and we will be launching new products such as our Eyebot smart range hood, VioV smart speaker, and smart mirror, among others.

              As we continue to grow our business and introduce additional new products to improve connectivity and synergies across our IoT @ Home platform and further promote the IoT @ Home lifestyle experience, we expect to deliver further growth through repeat customer purchases and bundled sales, as well as additional monetization of our consumable products and value-added businesses. Going forward, we intend to promote an open and compatible system through partnerships with other smart home products and technologies.

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      Enhance our technology, software and data insights

              The advanced proprietary software and data analytics systems that drive our IoT @ Home platform are essential parts of our value proposition, and we will continue to invest significant resources to continue to enhance our technology, software and data insights. We plan to further develop our AI technology, potentially together with partners, to enable increasingly human-like interaction between users and our IoT products through voice-, facial- and gesture-recognition. In addition, we will consistently upgrade and improve our software capabilities and introduce innovative new features to enhance the user experience.

              As the household user base continues to grow, our data collection and analytics capabilities will continue to strengthen, which will enable us to introduce products, services and functionalities that best address each household's profile and preferences, and provide optimal solutions for users' scenario-driven consumption needs within the home environment.

      Strengthen our brand recognition and expand our user base

              The Viomi brand has been designed to communicate innovation, functionality, quality and value. The uniqueness and effectiveness of our products and related benefits, together with our strategic partnership with Xiaomi, have enabled us to enjoy strong word-of-mouth and extensive media coverage, which has provided us with strong momentum when launching new products and expanding our market presence. We will continue to invest in increasing the awareness of our Viomi brand as well as in educating consumers about the benefits of our overall IoT @ Home platform through a unique and informative in-store retail experience, together with progressive and bespoke marketing initiatives as well as various traditional and social media campaigns.

      Enrich our value-added businesses ecosystem

              We will continue to invest in the seamless integration of our value-added businesses ecosystem into our IoT @ Home platform to enhance user experience and capture a larger share of scenario-based consumption needs in the home environment. We intend to leverage our advanced proprietary software and data analytics capabilities to improve the user experience through smarter and more customized services. We will continue to expand our service offerings by bringing in more readily accessible ecosystem partners including online grocers, daily-life service platforms, fast-food chains, and third-party e-commerce platforms. Having a robust value-added businesses ecosystem is a key component of our IoT @ Home platform, and it will enable us to differentiate our offerings, continue to grow our household user base and create additional monetization opportunities.

      Expand and enhance our sales channels

              Our omnichannel F2C new retail sales strategy is an important pillar of our business model. We are committed to providing our customers a convenient, efficient and enjoyable shopping experience across our omnichannel network. We plan to expand our sales channels and customer service points, as well as the network of Viomi offline experiences stores, together with our network partners across China. We will continue to invest in in-store training and enhance our in-store experience, which will enable customers to test first-hand the IoT @ Home lifestyle experience we offer, and see the connectivity and synergistic benefits of our IoT @ Home platform.

              Xiaomi will continue to serve as an important partner for us. We will continue to strengthen our mutually beneficial relationship with Xiaomi to sell products through their large and entrenched user base and sales network.

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      Invest along our product value chain

              We may selectively pursue strategic investments or acquisitions that complement our business, represent a strategic fit and are consistent with our overall growth strategy. These investments could include acquisitions along our product value chain, including suitable upstream companies that manufacture critical components of our products. These types of acquisitions could expand our technologies and know-how, which would allow us to add new features and functionalities to our IoT @ Home platform and accelerate our pace of innovation. They may also provide us with greater control over our supply chain in terms of ensuring the continuity of supply for critical components, optimal quality control, on-time delivery and fulfillment, and help us achieve potential cost savings.

      Our IoT @ Home platform

              Our unique IoT @ Home platform consists of an ecosystem of innovative IoT products together with a suite of complementary consumable products and value-added businesses.

              Powered by our advanced software, innovative AI technology and powerful data analytics capabilities, our IoT @ Home platform generates extensive and deep consumer behavior data and insights, which enable us to continue enhancing our products and offering additional bespoke value-added businesses over time. As of June 30, 2018, our IoT @ Home platform had over 1.2 million household users.

              We generate a significant portion of our net revenues through sales of our IoT products, which form the core of our IoT @ Home platform. From our inception up to June 30, 2018, we had successfully brought to market an extensive range of over 40 IoT product lines, that engage users across a wide spectrum of essential daily usage activities. We also sell a range of consumable products complementary, and often essential, to our IoT products, such as water filters for our water purifiers and air filters for our refrigerators, which provide us with additional, recurring and ongoing revenues streams across the life cycle of the IoT product. In addition, we have various value-added businesses, including sales of related household products as well as offering various installation services and e-commerce services through a platform embedded within various of our IoT products.

              The table below sets forth the revenue contribution of our key business lines:

       
       For the year ended December 31, For the six months ended June 30, 
       
       2016 2017 2017 2018 
       
       RMB % RMB US$ % RMB % RMB US$ % 
       
       (in thousands, except for percentages)
       

      Net revenues:

                                     

      IoT-enabled smart home products

        273,282  87.4  712,317  107,648  81.6  232,687  86.0  828,212  125,163  79.6 

      Smart water purification systems

        250,442  80.1  570,784  86,259  65.4  194,005  71.7  432,443  65,353  41.6 

      Smart kitchen products

            50,656  7,655  5.8  3,299  1.2  285,595  43,160  27.4 

      Other smart products

        22,840  7.3  90,877  13,734  10.4  35,383  13.1  110,174  16,650  10.6 

      Consumable products

        19,376  6.2  87,500  13,223  10.0  26,944  10.0  87,610  13,240  8.4 

      Value-added businesses(1)

        19,916  6.4  73,402  11,093  8.4  10,994  4.0  124,357  18,793  12.0 

      Total

        312,574  100.0  873,219  131,964  100.0  270,625  100.0  1,040,179  157,196  100.0 

      Note:

      (1)
      Including sales of other products and rendering of services. See footnote (9) to the Consolidated Financial Statements and footnote (8) to the Unaudited Interim Condensed Consolidated Financial Statements for more details.

      Our IoT products

              The IoT products we offer can be divided into smart water purification systems, smart kitchen products and other smart products.

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      Smart water purification systems

              We offer comprehensive water purification solutions, including home-wide water purification and hot water distribution, sharing and exchange of water quality data, and seamless integration and interaction with other water-consuming smart home products, such as water heaters, washing machines, and dishwashers. The core of our water purification solutions is our self-branded and Xiaomi-branded smart water purifiers, which are complemented by our easy-to-install replaceable water filter consumable products. Some of our key smart water purification system product lines include:

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              V1 Super Water Purifier.    Our V1 water purifier features reverse osmosis (RO) technology, which applies pressure through a RO membrane to separate purified water from tap water. It employs a four-step RO filtration process, and is equipped with a high flow RO filter and an optimized water purification path that improves filtration efficiency. V1 went on sale in June 2016.

              With its built-in precision sensors, V1 can monitor in real time the water purification process, and the parameters of the water including water quality, pressure, temperature, and volume. V1 then analyzes this information using AI technology and automatically adjusts various aspects of its operation, such as the waste water ratio, intelligent pulse cleaning, and system water pressure to maintain ideal working conditions.

              V1 is equipped with a dynamic water pressure sensor that monitors the pressure against the surface of the water filter so that V1 can intelligently adjust the water pressure using pulse-width modulation technology, which can extend the life of the system. This innovative intelligent pulse cleaning function increases the purification effectiveness and extends the life span of the water filter. Users can also remotely monitor the water quality and purchase replacement filters with one click through our mobile app.

              X series Instant Boiling Water Purifiers.    Our X series water purifiers combine instant boiling and water purification. In addition to cutting-edge water purification technologies and functions featured on our water purifier product line, our premium X series water purifiers are also hot water dispensers with instant heating and precision temperature control functions. These products can control water temperatures with great precision. The X series water purifiers went on sale in December 2016.

              Mi Water Purifier.    Mi Water Purifier is our smart water purifier designed and manufactured for Xiaomi. It features a high flow RO filter and real-time total dissolved solid (TDS) water quality monitoring. Its RO filter is designed to accommodate multiple water channels instead of one, increasing filtration area and efficiency. The Mi Water Purifier is equipped with a special booster pump that sustains a high-flux flow. Through the mobile app connected to the Mi Water Purifier, users can monitor the TDS value and water quality status in real time. The mobile app calculates filter lifespan precisely by analyzing the water quality and frequency of use, and alerts users when filters need to be replaced. The Mi Water Purifier includes an independent automatic detection module that checks on each of its 23 core components for easy troubleshooting. The Mi Water Purifier also features a compact design and easy installation. Mi Water Purifier went on sale in July 2015.

              Our smart water purifier product line also includes Mee, C1, and S1 water purifiers and hot water dispensers.

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      Smart kitchen products

              Our smart kitchen line of IoT products make our users' everyday activities within the kitchen more convenient and enjoyable. Our smart kitchen products include IoT-enabled smart refrigerators, oven steamers, dishwashers, range hoods and gas stoves. Some of our key smart kitchen products lines include:

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              21Face Smart Refrigerator.    Our 21Face smart refrigerator helps users manage their home and life with food management, connected living, and information and entertainment capabilities—all controlled through voice recognition, hands-free AI technology from anywhere in the kitchen. 21Face also serves as the control center for users' homes. It can give commands to other IoT products such as our hot water dispenser and washing machine. 21Face is also a full infotainment center. It can speak out recipes for the user's reference, stream the security camera feed so the user can recognize a visitor without leaving the kitchen, and enable the user to take calls from the kitchen. With respect to entertainment, users can stream the latest TV shows and listen to their favorite songs while cooking. 21Face is fitted with 4 microphones and speakers, guaranteeing smooth voice communication even with typical kitchen background noise. We began selling 21Face in June 2018.

              21Face is seamlessly embedded with an interface through which users can access our value-added businesses, such as purchasing various household fast-moving consumer goods, including fresh produce, as well as ordering food delivery. In addition to 21Face, we also offer our iLive smart refrigerator with voice control and face recognition that offers users the IoT @ Home lifestyle experience at a more attractive price.

              Connected Oven Steamer.    Our smart two-in-one steamer machine can scan the QR code on a food package that is embedded with a recipe and cook the food automatically according to the recipe. Users can purchase food with the QR code from our ecosystem partners through 21Face or the Viomi Store app. Users can also design their own individualized recipes, share them with friends, or download popular user-created recipes. We began selling our connected oven steamer in July 2018.

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              Hurri Series Smart Range Hood.    Hurri is our smart side-suction range hood. Equipped with a powerful suction fan, blades made from special steel, and a 172 mm exhaust vent, it offers a maximum exhaust volume of almost 19 cubic meters per minute. Its 110° convertible automatically-deployed capture panel further limits the smoke to the capture area. It can act in tandom with the stove, adjusting suction power based on the flame level. When users turn the stove on, Hurri automatically turns on. Users do not need to adjust the suction power, as Hurri automatically adjusts based on the flame level. Users can control the smart hood remotely using an mobile app. An up-scale version, Hurri With Voice Control range hoods, adds more features. The maximum exhaust volume is increased to 21 cubic meters per minute. Equipped with our VioBrain system with voice recognition function, the voice control version Hurri can take voice commands from users, such as turning on and off and adjusting the suction power, freeing up the user to fully enjoy cooking. We also offer the Free Series smart range hood, which is our European style smart range hood. We began selling our Hurri Series and Free Series range hoods in June 2017.

              Power Series Gas Stoves.    Our Power series smart gas stoves are equipped with special nozzles that develop a very powerful flame suitable for Chinese-style stir fry cooking. Using our mobile app, users can monitor the status of the stove while away from home. The battery usage display ensures that users can replace the battery before experiencing ignition failures. We began selling the Power series in July 2017.

              Viomi Dishwasher.    Our Viomi dishwasher employs 3D water jet technology and two-layer high-pressure water jet arms, giving it deep cleaning capability. Its PTC hot air drying system dries the dishes quickly and kills 99.99% of bacteria. If it is not used for two consecutive days, our smart dishwasher will remind the user to remove the bacteria by using the hot air system. We began selling our dishwasher in March 2018.

      Other smart products

              In addition to our smart water purification system and our smart kitchen lineup, we also offer a diverse array of IoT products that complements our IoT @ Home platform and addresses users' needs across different home scenarios. Some of our key other smart products lines include:

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              W9X Voice Control Washing Machine.    When using our smart washing machine, users no longer need to navigate through a bewildering washing cycle selection menu. Instead, they can simply use short sentence voice commands like "wash this bedsheet for me" or "pick a mode." The high-capacity detergent compartment can store up to one-month's usage, and precisely dispense detergent and softener based on an analysis of the load, fabric, and water quality. Our W9X washing machine is seamlessly embedded with an interface through which users can access our value-added businesses. When the detergent or the softener level is low, the washing machine will remind users to replenish and can directly place orders after the users confirm through the embedded interface. The washing machine can be remotely controlled via

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      the Viomi app or other Viomi smart home devices, and will notify users when the washing cycle is finished. We also offer a washer-dryer unit. We began selling our W9X washing machine in April 2018.

              Smart Water Heater (16L Voice Control Version).    Traditional water heaters do not perform consistently all year round because they are not tailored to water temperatures and the weather conditions of different seasons. Thanks to our AI technology and the duo control mode (water and gas two-way adjustment), our on-demand water heater can intelligently select and maintain the water temperature that is the most suitable for the season, while allowing the user to set the temperature with precision of ±1°C. Our water heater is fitted with bypass channel technology to avoid sudden temperature fluctuations when the user turns the faucet on and off. In the voice control version, the smart water heater can be controlled via natural language commands. It can also be controlled by our other IoT products such as the 21Face and the VioV. In the app that is compatible with the water heater, the user can set up different profiles for family members so that each has a preferred setting. We began selling our smart water heater in August 2018.

      Products in development

              We continue to focus on new, innovative product development to address evolving user preferences and to further expand our offerings of IoT-enabled smart home products across all our product lines. Below are some products that we are expect to roll out in the near future.

      GRAPHIC

              Eyebot.    Eyebot is our AI-enabled range hood that can track and recognize the volume and movement of the smoke. When users are cooking Chinese cuisines, the volume and moving patterns of the smoke vary significantly. Eyebot uses its high-definition camera with a 210° wide-angle lense. The camera captures the image of smoke and transmits the image to the processing unit. The image is then recognized and analyzed in real time using our AI technology, which can distill information regarding the smoke's volume and movement, and intelligently distinguish that information from the user's movement. Based on its analysis of the volume and movement of the smoke, the processing unit adjusts the operation of the suction fan. In addition, the hood's capture panel can be lowered to reduce its distance from the smoke, achieving maximum capture. Using a powerful suction fan, Eyebot can achieve a maximum exhaust volume of 23 cubic meters per minute. Eyebot's other features include the camera's night vision function, active noise cancellation, voice control, and reminder to turn off the stove when not active. We expect to begin selling Eyebot in October 2018.

              VioV.    VioV is our smart speaker with touch screen; it can control all of our other smart home products and monitor the status of the tasks they are running. For example, it can set our smart hot water dispenser to the user's desired temperature, which it identifies through facial recognition. VioV can tell the smart robot vacuum to start cleaning at the proper time, as well as notify users when the washing machine finishes its cycle.

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              VioV is also capable of voice interaction, gesture control, music playback, making to-do lists, setting alarms, playing audiobooks, and providing weather, traffic and other real-time information—all hands-free. It is distinguished from other smart speakers by its touchscreen, which visually displays VioV's responses to demands as well as various content and information. It can also display prompts regarding news headlines, suggested commands, and other information. Users can ask it to play a song of a particular artist or genre and stream over Wi-Fi. We expect VioV to keep getting smarter and to have new features as we continuously upgrade the system and collect more data on users' individual preferences. We expect to begin selling VioV in October 2018.

              Smart air system.    We are developing a smart air system that will consist of our air ventilator and purifier, our aromatherapy humidifier, and air sensors. We expect to begin selling these products in 2019.

              Air ventilator and purifier.    Our two-in-one air ventilator and purifier offers the following features in a sleek form: ventilation, air purification, supplementary heating, and sterilization. It can achieve a high clean air delivery rate, resulting in a more efficient air purification process and cleaning. Through our mobile app, the air ventilator and purifier allows the users to monitor in real time the air quality at home and start and shut down the system. If connected with an air conditioner and other smart appliances, the air ventilator and purifier can control the environment of the home. The machine operates quietly so that the users get the air quality they want without unwanted noise. We expect to begin selling this product in 2019.

      Consumable products

              We offer a range of consumable products complementary, and often essential, to our IoT products, which provide us with additional, recurring and ongoing revenue streams across the life cycle of our IoT products. Consumers can purchase such products either through our sales channels or through the e-commerce platform embedded within various of our IoT products. They feature easy installation mechanisms so that consumers can effortlessly install the products themselves.

              Water filters.    We offer replacement water filters compatible with both our self-branded and Xiaomi-branded smart water purifiers. Our water filters play a major role in the innovative design, high performance, and economic efficiency of our water purifiers. Our filters feature authentication verification through QR codes.

              Water pitcher filter.    Our water pitcher filter features seven-layer filtration that can effectively remove small particles, limescale, chlorine, lead, copper, and cadmium. Both the filter shell and the filtering materials can kill bacteria. The pitchers use a 360° water channel design that optimizes the use of the filtering materials.

              Plant-based air filter.    Our refrigerators are equipped with plant-based air filters that kill bacteria and freshen the air in the refrigerators' compartments. Traditional refrigerators are also equipped with air filters, but they are typically buried in the air channel and cannot be easily replaced. Our air filters are easily replaceable, guaranteeing constant freshness of the air.

      Value-added businesses

              Another key component of our IoT @ Home platform is our suite of value-added businesses.

        Services

              We believe home is the most important and natural consumption environment. Together with our vibrant partner ecosystem, we offer value-added services that can capture various scenario-driven consumption events in the home environment, such as enabling users to purchase products as and when the need arises within the comfort of their home. We achieve this through e-commerce platforms and

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      interfaces embedded within and integrated with various of our IoT products. We work closely with our ecosystem partners to deliver these services to our users.

              A consumption scenario is a combination of specific location, timing and user that leads to a user's ultimate decision to make a purchase. A user's willingness to purchase and the considerations related to the purchase vary depending on the scenario. When there is a household need in a specific scenario, our products can address that need the moment it arises. Moreover, because our products can collect a vast amount of household behavior data, analyze that data utilizing AI technology and deep learning, and create accurate household profiles, the consumption need can be addressed before the user realizes that it exists. After the need is identified, the user can interact with our IoT products operating in that exact scenario and place the order for the product or service.

              For example, when the laundry detergent is running low, our washing machine can remind the user or automatically place the order for refill. Similarly, our water purifier can detect when the water filter needs to be replaced and alert the user or automatically order replacements.

              We also offer certain installation services for our products.

        Other products

              We also offer a variety of other household products to supplement our IoT products and promote regular impulse purchases by consumers. These products include water quality meters, aromatherapy humidifiers, water filter pitchers, and stainless steel insulated water bottles.

      Software, Artificial Intelligence and Data Analytics Systems

              We rely on our advanced software, innovative AI technology and powerful data analytics capability to develop, operate, and continuously enhance our IoT @ Home platform.

      Advanced software

              We have developed advanced software to achieve interconnectivity among our IoT products and to support and expand their functionalities. Our software is equipped with public API (application programming interface) through which other parties' software and products can be connected to and integrated with ours.

              All of our IoT products that are equipped with interactive screens run the Android operating system, which can operate software applications with advanced and diverse functions and serve as the platform on which all of our IoT products connect. The rest of our products have embedded systems that operate both locally and on the cloud. Our Viomi Store mobile app allows customers to quickly and efficiently discover, review, select and purchase our products. In addition, the Viomi Store serves as the control app for our products, and enables our users to manage, monitor and interact with our IoT products. Using our cloud-based software system, our products receive automatic updates, often on an overnight basis, to incorporate new functionalities and grow smarter over time based on our data analysis.

      Artificial Intelligence

              We intend to leverage ongoing advancements in artificial intelligence by incorporating them into our products and services. Our AI technology team develops and refines our proprietary, artificial intelligence-based algorithms, and leverages third-party AI components to build a more effective system. For example, for our voice recognition technologies, we have independently developed the natural language processing and semantic recognition functions (including the e-commerce component), while utilizing speech synthesis engine and Q&A components provided by iFLYTEK, an industry leader in voice recognition technologies.

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        Voice, facial, gesture, and image recognition and control

              Our artificial intelligence technology enables certain of our products to utilize voice-, facial-, gesture-, and image-recognition to offer natural-language user interfaces. These capabilities allow users to communicate with and give commands to these IoT products through common speech or gestures, mimicking natural interactions among human beings. In addition to the added convenience in user interface, the user can communicate with our products in new and advanced ways. For example, when voice control is not ideal because the background noise is too strong or, on the contrary, when everyone is asleep, the user can use gestures to wake up certain of our products and give commands.

              Our products' facial-recognition capabilities replace password-based security measures, achieving convenient, natural, and smooth user interaction while safeguarding the security and integrity of user-connected smart homes. The image recognition function incorporated in some of our products helps those products to better carry out their specific tasks in an unprecedented way. For example, Eyebot, our under-development smart range hood, identifies the volume and moving patterns of the smoke using image recognition, processes the information collected, and adjusts the operation of the fans accordingly to achieve maximum efficiency and effectiveness.

              We have developed VioBrain, an AI-based back-end system that operates on all of our IoT products that use AI functions. VioBrain carries out the voice-, facial-, gesture-, and image-recognition functions on our IoT products. It intelligently employs the analysis results from our data analytics platform and pushes the most relevant and actionable information to the user. For example, it can remind the user to replace a filter based on the water quality data uploaded by our smart water purifiers. It also enables the refrigerator to remind the user to replenish food based on the user's consumption behavior and by identifying the food in storage. VioBrain forms a virtuous cycle between user interaction, big data analytics and AI-driven features. As more of our users interact with smart home products, the more data points we gather, enabling further refinement of algorithms and functionalities.

        Water quality analysis

              Our smart water purifiers can monitor in real time the water purification process and parameters of water, including water quality, pressure, temperature, and volume. This information is then analyzed using our AI algorithms and the water purifier automatically adjusts various aspects of its operation, such as the waste water ratio, intelligent pulse cleaning, and system water pressure to maintain ideal working conditions.

      Data analytics

              Through users' interaction with many of our products, advanced sensors embedded in our products can capture, accumulate and upload large quantities of user and household usage data. Our users' behavior and sequential data is stored strictly in compliance with stringent data privacy standards and data security requirements.

              Our dedicated big data analysis team has developed our own data analytics platform. We use this platform to extract intelligence from large amounts of data. Analyzing this data enhances our understanding of user behavior, and we are thus able to further develop our IoT @ Home platform to better serve our customers. By providing better solutions, we believe we will attract more household users over time. More household users on our platform can then generate more data for our software analytics, enhance our software and algorithms, and lead to a better user experience, which in turn can attract more household users to our platform, a powerful virtuous cycle. For example, we are able to draw a complete map of China's water quality levels by region and improve our water purifier's performance through this insight. We can also generate dynamic predictions of the remaining service life of the filters based on this insight.

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              We consider the protection of the personal privacy of each of our users to be of paramount importance. We collect only anonymous data and only with users' consent, and all sensitive data is encrypted. We use such data only for the improvement of our products and services. Furthermore, our employees' access to our internal information management system is limited to verified IP address and we restrict the scope of such access based on the duty of the employee. Our data is stored securely in both KSYUN and Alibaba Cloud.

      Omnichannel F2C New Retail Platform

              Our Omnichannel F2C new retail platform consists of an efficient network of online retail channels and Viomi offline experience stores. This platform supports us in offering consistent pricing and a flattened distribution channel. We provide a seamless, consistent shopping experience that makes purchasing our products easy, inviting and hassle-free.

      Online

              We sell our products online primarily through online direct sales and to third-party online platforms, such as JD.com and Suning.

              We sell our products directly to consumers through our official website, our Viomi Store mobile app, and our flagship stores on TMall.com and JD.com, as well as through Youpin.mi.com. Through our official website, potential customers can learn about our customer service and after-sale service programs. Our official website provides a detailed description and illustration of the innovative features and technologies of our full product line-up. Our official website also includes a QR code linked to our WeChat Viomi store, which has a logical layout that makes the purchasing experience more convenient. Our official website can also connect potential customers to their nearest offline stores for them to actually experience our IoT products in a home-like setting. Our Viomi Store mobile app allows customers to quickly and efficiently discover, review, select and purchase our products.

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              Below is a screenshot of our Viomi Store mobile app.

      GRAPHIC

              We also sell our products to third-party online platforms, including major e-commerce players such as JD.com and Suning. We believe that the sales of our products to these leading e-commerce platforms enables us to take advantage of their established customer base and brand recognition, and helps us to reach a wide group of customers in a variety of markets.

      Offline

              As an integral part of our F2C new retail strategy, we have established a large network of Viomi offline experience stores operated by our third-party network partners. We provide consistent training to educate the salespersons of our network of offline experience stores as we believe that the sales of our products can be enhanced by knowledgeable salespersons who can convey the value of hardware and software integration and demonstrate the benefits of our IoT @ Home platform. Also, we believe that having direct interaction with our targeted customers is an effective way to demonstrate the advantages of our products over those of our competitors, and that providing a high-quality sales and after-sales customer support is critical to attracting new users and retaining existing ones.

              Together with our network partners, we had established a network of approximately 700 Viomi offline experience stores, the majority of which were stand-alone stores, as of June 30, 2018.

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              Below are pictures of a Viomi offline experience store.

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        Scenario-driven presentation and bundled sales

              We display our products so that consumers are able to test first-hand our IoT @ Home platform and the IoT @ Home lifestyle experience. Customers can then place orders for products they wish to purchase either directly at those stores or by scanning the QR code, after which the selected products are delivered to them directly.

              In addition, since customers in these Viomi offline experience stores can experience the full range of our products and see how they interact with each other, we believe they are more likely to engage in bundled purchases, which drive higher revenue and wallet share per customer while reducing customer acquisition costs.

        Asset-light model and flattened distribution channel

              Through our agreements with our regional network partners, we authorize them to open and operate Viomi offline experience stores within a designated area, either by directly operating those stores or through franchise operating arrangements. We have the technology infrastructure to manage our regional network partners. We control the qualification of new regional network partners, provide extensive ongoing training to them, and periodically review their performance.

              Such an asset-light model is cost-efficient, and we believe the network of Viomi offline experience stores is well-suited to China's fragmented and localized customer needs. With our flattened distribution layers, we are able to support attractive pricing of our products. Utilizing this highly scalable model, we can leverage the resources of our regional network partners to achieve rapid expansion and deep penetration of our network without significant capital outlays.

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              Below is an illustration of our F2C sales model and flattened distribution structure.

      GRAPHIC

        Retail channel control

              We conduct our offline sales mostly through the network of Viomi offline experience stores, giving us control of the presentation of our brand. This strategy allows us to present our brand in a consistent manner, including marketing, pricing and product presentation. It also enables us to reduce logistical complexities and costs as we are not subject to timing, delivery and quantity requirements set by third-party retailers, allowing our employees to instead concentrate on product development and customer service.

      Research and Development

              We are passionate about developing new and innovative products and services.

      Scenario-driven approach

              Instead of focusing on bringing a new product to market, we start our product development process by identifying a scenario built upon a number of our IoT products that together can address the user's specific scenario-based needs. Based on this information, we identify the respective products necessary to cater to such a scenario.

      Team composition

              As of June 30, 2018, our total research and development staff consisted of approximately 228 employees across multiple R&D centers and product groups teams, representing 43.3% of our total number of employees. We incurred RMB29.9 million, RMB60.7 million (US$9.2 million) and RMB49.0 million (US$7.4 million) in research and development expenses in 2016, 2017 and the six months ended June 30, 2018, respectively.

              Our research and development team includes global and cross-industry experts in technical product hardware development, software, AI, including industry experts who previously worked at Dyson, Siemens, and Bosch.

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      Hardware

              Our hardware engineering team supports our product design and the design of key system components. Our industrial design team works closely with product managers and development engineers throughout the entire production cycle.

              Our product development cycle consists of five phases: conceptualization, product design, technical design, tooling and pilot production, and commercial production. After a product is launched, we continuously improve our products, refine our design and uncover defects by monitoring user feedback. This feedback is both manually reviewed and automatically aggregated and analyzed, and through it we draw key insights for product improvement.

              We opened a hardware innovation center in 2017, which is headed by an industry expert who previously worked with market leaders for innovation.

      Software

              Our software engineering team, consisting of about 104 software engineers as of June 30, 2018, is responsible for developing our company-wide software platform to support the integration of our products and applications, the transmission, storage and processing of user data, the implementation of user-product interaction, the internal management of manufacturing and distribution, as well as our AI algorithms. We rely on our software to connect our IoT products and our cloud-based system. The key elements of our software engineering philosophy include security, reliability and extensibility.

      Artificial Intelligence

              In 2016, we opened our specialized AI lab that focuses on applying AI technology to our IoT @ Home platform. These applications include voice and gesture recognition and control, facial, image, and movement recognition, and algorithms based on big data and deep learning. We develop certain core components of our AI technologies and incorporate third-parties' solutions with respect to other components to build an effective system.

      Intellectual Property

              Intellectual property rights are fundamental to our business, and we devote significant time and resources to their development and protection. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. We generally do not rely on third-party licenses of intellectual property for use in our business.

              As of June 30, 2018, we had 686 patents registered with the State Intellectual Property Office of China, among which: (1) 69 registered patents will expire in 2024; (2) 63 registered patents will expire in 2025; (3) 307 registered patents will expire in 2026; (4) 216 registered patents will expire in 2027; (5) 5 registered patents will expire in 2028; (6) 13 registered patents will expire in 2034; (7) 9 registered patents will expire in 2035; and (8) 4 registered patents will expire in 2036.

              Globally, as of June 30, 2018, we had 34 patents registered and over 70 pending patent applications in various overseas countries and jurisdictions, including the United States, Europe, India, Korea and certain Southeast Asia countries, among which: (1) 7 registered patents will expire in 2020; (2) 1 registered patent will expire in 2021; (3) 9 registered patents will expire in 2025; (4) 1 registered patent will expire in 2026; (5) 7 registered patents will expire in 2027; (6) 1 registered patent will expire in 2028; (7) 1 registered patent will expire in 2031; (8) 5 registered patents will expire in 2035; (9) 1 registered patent will expire in 2036; and (10) 1 registered patent will expire in 2041.

              As of June 30, 2018, we had registered over 100 trademarks in China.

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              In addition to the protections described above, we generally control access to and use of our proprietary and other confidential information through the use of internal and external controls, such as use of confidentiality agreements with our employees and outside consultants, and our employees seconded at our contract manufacturers.

      Relationship with Xiaomi

              Xiaomi is our strategic partner and shareholder. Our strategic partnership with Xiaomi gives us access to Xiaomi's ecosystem users, market and data resources and related support. Meanwhile, our strong research and development capabilities and innovative products and services also enrich Xiaomi's suite of offerings, resulting in a mutually-beneficial relationship between Xiaomi and us.

              Our cooperation with and sales to Xiaomi extends to a wide arrange of products, which currently include Xiaomi-branded water purification systems, water purifier filters, as well as other complimentary products such as kettles and water quality meters. Sales of these products are governed by a business cooperation agreement, pursuant to which Xiaomi is responsible for the distribution and sales of these products through its networks and sales channels. Please see the description under "Related Party Transactions—Our Relationship with Xiaomi" for a summary of the material terms of this business cooperation agreement. We recover our manufacturers and logistics cost when we deliver Xiaomi-branded products. In addition, we will also share a portion of net profits when Xiaomi is successful in selling such products to end users.

              We also sell our own Viomi-branded products through Xiaomi's e-commerce platform, Youpin.mi.com, directly to consumers. We are charged with service fees proportionate to the sales amount of our products excluding refunds, or as otherwise agreed for certain products. Please see the description under "Related Party Transactions—Our Relationship with Xiaomi" for a summary of the material terms of the commission sales agreement.

              In 2016 and 2017 and the six months ended June 30, 2018, we generated a majority of our net revenues from sales to Xiaomi of Xiaomi-branded smart water purifiers and affiliated products. For a detailed discussion of our risks associated with the cooperation with Xiaomi, see "Risk Factors—Risks Related to Our Business and Industry—Xiaomi is our strategic partner and our most important customer. Any deterioration of our relationship with Xiaomi could have a material adverse effect on our operating results."

      Sales and Marketing

      Our sales team

              Our sales team consists of a marketing team and a branding team. Our sales team works directly with customers across our platforms including our Viomi store mobile app, our official website, our WeChat Viomi store, and our third-party online platforms. Our sales team also works closely with third-party online platforms.

              Our marketing team positions and prices our products and produces promotional materials such as informative videos and brochures. They manage the relationships with our extensive network of third-party partners, design the Viomi offline experience stores, and provide training and support to ensure the proper presentation of the functionalities of our IoT @ Home platform in our offline expansion efforts.

              Our branding team operates our participation in offline events such as the Appliance & Electronics World Expo and our product launches. They manage our public relation activities and direct our advertising and branding efforts.

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      Marketing

              Our marketing is focused on building our brand reputation, increasing market awareness of our IoT @ Home platform, driving customer demand and developing a strong sales pipeline, as well as collaborating with our third-party partners across our sales channels. Examples of our marketing initiatives include:

        Branding and endorsements

              Since our inception we have been emphasizing the value of customer feedback and direct communications with our users. In order to reach a wider customer base, we engage popular celebrities as brand ambassadors for our products and sponsor popular variety shows in China. For example, we hired Ms. Mi Yang, a successful actress with significant following, as our brand ambassador in 2017 to promote our water purifier. On April 11, 2017, we launched our "Viomi 11-18 Brand Day" campaign under which we offer sales and promotions during an 8-day period of each month. In 2018, we also started to sponsor the TV seriesNegotiator, and the reality showWho's the Detective, and the music showCome Sing With Me, all broadcast on the leading entertainment channel Hunan TV. InWho's the Detective, our connective smart home devices are deeply integrated into the plot of the show, often advancing the development of the story as an AI detective.

        Events marketing

              We organize and participate in various official offline events to promote our brand and the idea of a connected smart home. Our "Viomi 11-18 Brand Day" campaign includes not only online promotions, but also offline marketing efforts in the Viomi offline experience stores across the nation. We participated in exhibitions and forums such as the Appliance & Electronics World Expo 2018 and the 2018 "Belt and Road" Finance and Investment Forum. We successfully participated in shopping festivals across e-commerce platforms such as "618," "Singles' Day" and "Double Twelve," which are highly popular among Chinese consumers.

        Social media

              Our Viomi fans form WeChat groups where they can learn about our upcoming products, share thoughts and experiences, discover new functionalities, and make recommendations for improvements for our products and service. Our representatives regularly participate in the group discussions to respond to users' queries and to better understand users' fast-changing needs. We also maintain various official social media accounts to actively engage with users by answering their questions and concerns. As of June 30, 2018, we had a total of about 0.8 million followers on our WeChat and Viomi Store App.

      Customer service

              User experience is a key focus for our business. We strive to provide personalized support for our users, including support from live customer service representatives. If customers who shop through our online channels have any inquiries or complaints about our products or the ordering process, they can contact customer service representatives through real-time online chat or through our toll-free customer service phone number. To better serve our customers who may prefer offline interaction, our Viomi Store app also automatically shows the nearest Viomi offline experience store based on the location of the user.

      After-sale service

              The goal of our after-sale service is to create the best user experience for our customers. Our customers may return all products purchased from our official Viomi online store and other online platforms within seven days from receipt. Our customers may also have their products replaced for specific types of defects or quality issues as required under the relevant laws and regulations.

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      Delivery, installation, and maintenance

              We ship, install, and maintain our products purchased online through third-party service providers. We have developed relationships with third-party logistics service providers to expand the geographic coverage of our shipping capabilities. We generally are able to have our products installed at the home of the customer within 10 days after online order placement.

      Manufacturing and Fulfillment

      Procurement and manufacturing

              We outsource the substantial majority of the manufacturing of our products to our contract manufacturers, while assembling certain key components and high-end products, such as the UV module in our water purifiers, the instant heating modules, and V series water purifiers, in our own manufacturing facility.

              Our outsourcing arrangements include confidentiality agreements, supply agreements, and quality control agreements. For products we sell to Xiaomi, Xiaomi provides us with production forecasts on a rolling basis, which serve as the primary indicator for our component procurement efforts. For our self-branded products, we procure completed components based on our internal sales and production plan for the next three months at the beginning of each month on a rolling basis.

              We believe that outsourcing the manufacturing of our products provides us with greater scale and flexibility at lower costs than solely relying on our own manufacturing facility. We outsource the manufacturing of our products to a number of contract manufacturers, who produce our products using design specifications and standards that we have established. We also help our contract manufacturers to design the equipment and tooling used in the production and help train their workers. We evaluate on an ongoing basis our current contract manufacturers and component suppliers, including whether or not to utilize new or alternative contract manufacturers or component suppliers.

              We procure certain key raw materials and components from domestic and overseas suppliers, and then consign them to our contract manufacturers. Our suppliers generally also provide direct order fulfillment services with logistics that include delivery of parts and assembly to either our own facility for inspection or our contract manufacturers directly.

      Inventory management

              Our inventory primarily consists of finished products and raw materials. We manage our inventory with measures appropriate to the use and nature of the inventory. Our manufacturing plans are designed and implemented to accommodate our sales and maintain reasonable inventory levels. We receive aggregated and geographically-enabled inventory data feeds from our centralized distribution network, which facilitates product shipment from warehouses that are closer to the delivery destination. Through close coordination with our customers and contract manufacturers and frequent purchases of components from suppliers, we are able to carry low levels of raw materials and in-process inventories, minimizing inventory risk.

      Product quality assurance

              We are committed to maintaining the highest level of quality in our products. We developed the quality assurance management software that monitors the manufacturing and quality assurance process used across our own manufacturing facility as well as our contract manufacturers. We have designed and implemented a quality management system that provides the framework for continuing improvement of our products and processes. For our new product lines, we conduct thorough examinations of product samples and each of their components at the product verification testing stage to make sure they satisfy all of our technical requirements. For our existing product lines, we also have a quality assurance team that

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      establishes, communicates and monitors quality standards by product category. In addition, we have quality assurance personnel seconded to the facilities of our contract manufacturers to ensure that they fully adhere to our quality standards in the production process.

              We have constant access to each manufacturing facility of our contract manufacturers, and our quality control team continuously monitors the quality of incoming components, materials and finished products, as well as the manufacturing processes at our contract manufacturers' facilities. We also require our partners to maintain quality control over their logistics, production and quality inspection procedures based on ISO9001 quality standards.

      IT Infrastructure

              Our network infrastructure is designed to satisfy the requirements of our operations, to support the growth of our business and to ensure the reliability of our operations as well as the security of information on our platform. We continuously develop our platform to offer users an effortless and seamless experience across all of our products and services, while at the same time enhancing the reliability and scalability of our platform.

              We have contracted with KSYUN and Alibaba Cloud Services to utilize their infrastructure, such as computing services, storage, server and bandwidth. We have a working data redundancy model with comprehensive backups of both cloud services. This redundancy supports the reliability of our network and the stable operation of our business.

      Competition

              We compete with other companies in all aspects of our business, particularly companies that are in the household appliances and smart home markets. The household appliances and smart home markets have a large number of participants, including traditional appliances and consumer electronics companies as well as AI and consumer internet companies that are moving into the hardware space.

              We believe the principal competitive factors impacting the market for our products include: brand recognition, value for money, user experience, breadth of product and service offerings, product functionality and quality, sales and distribution as well as supply chain management. We believe we can compete favorably on the basis of these factors. Viomi has been developed as an aspirational, "next generation" brand with attractive value propositions that aims to bring the full suite of AI capabilities and IoT experience to the home environment, while continuing to leverage Xiaomi's brand recognition for Xiaomi-branded products. We plan to continue to leverage our strong research and development capabilities and introduce new and innovative products with advanced functionalities to market. In addition, we have developed strong and diversified sales channels via our omnichannel F2C new retail sales strategy and are making investments to strengthen our supply chain management resources. However, the industry in which we compete is evolving rapidly and is becoming increasingly competitive. For additional information, see "Risk Factors—Risks Related to our Business and Industry—We operate in highly competitive markets, and the scale and resources of some of our competitors may allow them to compete more effectively than we can, which could result in a loss of our market share and a decrease in our net revenues and profitability."

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      Employees

              We had 527 employees as of June 30, 2018. The following table sets forth the numbers of our employees categorized by function as of June 30, 2018:

       
       As of
      June 30, 2018
       

      Function:

          

      Research and development

        228 

      Operational management

        20 

      Sales and marketing

        257 

      General administration

        22 

      Total

        527 

              We invest significant resources in the recruitment and training of our employees in support of our fast-growing business operations. We have a variety of training programs.

              As required by laws and regulations in China, we participate in various employee social security plans that are organized by municipal and provincial governments, including housing, pension, medical insurance, childbirth insurance, work-related injury insurance, employment injury insurance, maternity insurance and unemployment insurance. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time.

              We enter into standard confidentiality and employment agreements with our key employees. The agreements with our key personnel typically include standard non-compete covenants that prohibit the employee from competing with us, directly or indirectly, during his or her employment and for two years after the termination of his or her employment, provided that we pay compensation equal to a certain proportion of his or her pre-departure salary on a monthly basis during the restriction period.

              We believe that we maintain a good working relationship with our employees, and we have not experienced any material labor disputes.

      Properties and Facilities

              Our headquarters are located in Guangzhou, China, where we rent the office building with an aggregate floor area of approximately 1,080 square meters. Our research and development facilities and our management and operations facilities are located at our headquarters. Our manufacturing facility and office space located in Shengda Industry Park in Foshan, Guangdong Province, has an aggregate floor area of approximately 8,025 square meters.

              We currently lease and occupy approximately 1,301 square meters of office space in Guangzhou, approximately 84 square meters of office space in Beijing and approximately 95 square meters of office space in Hangzhou. These leases vary in duration from one to six years.

      Insurance

              We maintain various insurance policies to safeguard against risks and unexpected events. We have purchased product liability insurance for our products, including water purifiers, gas stoves, range hoods and refrigerators, sold in the domestic market as well as those exported to the overseas market. We maintain public liability insurance for any personal injury or property loss of any third party occurred in our operating address of Foshan Viomi.

              In line with general market practice, we do not maintain any business interruption insurance, which is not typical in our industry or mandatory under Chinese laws. We do not maintain key-man life insurance or

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      insurance policies covering damages to our IT infrastructure or information technology systems. We also do not maintain insurance policies against risks relating to the Contractual Arrangements.

      Legal Proceedings

              We are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. For instance, please refer to "Risk Factors—Risk Related to Our Business and Industry—We may encounter claims alleging our infringement of third-party intellectual properties from time to time" for information of certain such litigation. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management's time and attention.

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      REGULATIONS

              The majority of our business is located in PRC, and laws and regulations in PRC are most relevant to our business. This section sets forth a summary of the most significant rules and regulations that affect our business activities in China.

      Regulation on Value-Added Telecommunication Services

              The Telecommunications Regulations of the PRC, promulgated by the State Council in 2000 and last amended in February 2016, provide a regulatory framework for telecommunications services providers in PRC. These regulations require telecommunications services providers to obtain operating licenses prior to the commencement of their operations. The telecommunications services are categorized into basic telecommunications services and value-added telecommunications services. According to the Catalog of Telecommunications Business, attached to the Telecommunications Regulations and last amended by the Ministry of Industry and Information Technology, in December 2015, transaction processing services provided via fixed network, mobile network and Internet fall within value-added telecommunications services.

              The Administrative Measures on Internet Information Services, promulgated by the State Council in 2000 and amended in January 2011, set out guidelines on the provision of internet information services. This rule classified internet information services into commercial internet information services and non-commercial internet information services, and a commercial operator of transaction processing services must obtain an operating permit for value-added telecommunications services of internet information for the provision of online data processing and transaction processing services (the EDI License) from the appropriate telecommunications administration authorities. The Administrative Measures for Telecommunications Businesses Operating Licensing, promulgated by the Ministry of Industry and Information Technology, or the MIIT, in July 2017 and effective on September 1, 2017, provides that a commercial operator of value-added telecommunications services must first obtain a telecommunication operating license, from the MIIT or its provincial level counterparts. The Value-added Telecommunications Operating License is classified as the Cross-regional Value-added Telecommunications Operating License and the Value-added Telecommunications Operating License within a province, autonomous region and municipality directly under the central government. In addition, in the first quarter of every year while the operator is holding the license, it must report information such as business performance of the telecommunications business in the previous year, the actual progress in network buildup, business development, turnover of staff, institutional restructuring and service quality to the issuing authorities.

              Pursuant to the Provisions on the Administration of Foreign-Invested Telecom Enterprises, promulgated by the State Council in 2001 and amended in 2016, the primary foreign investor of a foreign-invested telecom enterprise operating value-added telecom services shall have a good track record of, and operation experience in, operating value-added telecom services. In addition, the establishment of a foreign-invested telecom enterprise operating value-added telecom services requires approval from the Ministry of Industry and Information Technology.

              To comply with these regulations, we have adopted the VIE structure and obtained an EDI license through Foshan Viomi, one of our VIEs, which allows us to provide value-added telecommunications services through our value-added e-commerce platform.

      Regulation on Catalogue relating to Foreign Investment

              Investment activities in the PRC by foreign investors are subject to the Catalogue for the Guidance of Foreign Investment Industry, or the Catalogue, which was promulgated and is amended from time to time by the Ministry of Commerce and the National Development and Reform Commission. Pursuant to the latest Catalogue, amended and issued on June 28, 2018, and effective on July 28, 2018, or the 2018

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      Catalogue, industries listed therein are divided into two categories: encouraged industries and the industries within the catalogue of special management measures, or the Negative List. The Negative List is further divided into two sub-categories: restricted industries and prohibited industries. Any industry not falling into any of the encouraged, restricted or prohibited categories is classified as a permitted industry for foreign investment. Establishment of wholly foreign-owned enterprises is generally allowed in industries outside of the Negative List. For the restricted industries within the Negative List, some are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to government approvals and certain special requirements. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Negative List are generally open to foreign investment unless specifically restricted by other PRC regulations.

              In October 2016, the Ministry of Commerce issued the Interim Measures for Record-filing Administration of the Establishment and Change of Foreign-invested Enterprises, and revised in July 2017. Pursuant to FIE Record-filing Interim Measures, the establishment and change of FIE are subject to record-filing procedures, instead of prior approval requirements, provided that the establishment or change does not involve special entry administration measures. If the establishment or change of FIE matters involves the special entry administration measures, the approval of the Ministry of Commerce or its local counterparts is still required. Pursuant to the Announcement [2016] No. 22 of the National Development and Reform Commission and the Ministry of Commerce dated October 8, 2016, the special entry administration measures for foreign investment apply to restricted and prohibited categories specified in the Catalogue, and the encouraged categories are subject to certain requirements relating to equity ownership and senior management under the special entry administration measures.

              Currently, our business related to the development and application of IoT technology falls within the encouraged category while our provision of e-commerce services falls within the permitted category.

      Regulation on Product Quality and Consumer Protection

              The PRC Product Quality Law applies to all production and sale activities in China. Pursuant to this law, products offered for sale must satisfy the relevant quality and safety standards. Enterprises may not produce or sell counterfeit products in any fashion. Any producer or seller producing or selling products that do not conform to the national standards or trade standards for ensuring human health and the personal or property safety shall be ordered to stop production or sale of the products; the products illegally produced or sold shall be confiscated; a fine no less than the equivalent of, but not more than three times, the value of the products illegally produced or sold (including those already sold and those not yet sold, hereinafter the same) shall be imposed concurrently; if there are illegal proceeds, such proceeds shall be confiscated concurrently; if the circumstances are serious, the business license shall be revoked. If the case constitutes a crime, criminal liability shall be investigated. Where a defective product causes physical injury to a person or damage to another person's property, the victim may claim compensation from the manufacturer or from the seller of the product. If the seller pays compensation and it is the manufacturer that should bear the liability, the seller has a right of recourse against the manufacturer. Similarly, if the manufacturer pays compensation and it is the seller that should bear the liability, the manufacturer has a right of recourse against the seller.

              The PRC Consumer Protection Law, as amended in October 2013 and effective in March 2014, sets out the obligations of business operators and the rights and interests of the consumers. Pursuant to this law, business operators must guarantee that the commodities they sell satisfy the requirements for personal or property safety, provide consumers with authentic information about the commodities and guarantee the quality, function, usage and term of validity of the commodities. Where business operators use internet, television, telephone, mail or other means to sell their commodities, consumers have the right to return such commodities, except the following commodities within seven days from the date when the consumers receive the commodities without giving any reason:

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        1.
        commodities customized by the consumers;

        2.
        fresh perishable commodities;

        3.
        digitized commodities such as audio-video products and computer software downloaded online or opened by the consumers; and

        4.
        delivered newspapers and periodicals.

              Where business operators use internet, television, telephone, mail or other means to provide goods or services, or provide securities, insurance, banking or other financial services, they shall provide consumers with information in regard to themselves and the goods or services provided such as business address, contact information, quantity and quality, price or fees, term and method of performance, safety precautions, risk warnings, after-sale services, and civil liabilities. Consumers whose legitimate rights and interests are infringed while purchasing goods or receiving services via an online trading platform shall have the right to claim compensation from the vendor of the goods or the provider of the services. Failure to comply with the Consumer Protection Law may subject business operators to civil liabilities such as refunding purchase prices, exchanging commodities, repairing, remanufacturing, ceasin