UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of June 2019

 

 

 

Commission File Number: 001-35729

 

 

 

YY Inc.

 

Building B-1 North Block of Wanda Plaza

No. 79 Wanbo Er Road, Nancun Town

Panyu District, Guangzhou 511442

People’s Republic of China
(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F þ                         Form 40-F ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

 

 

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  YY INC.
   
  By:  

/s/ Bing Jin

    Name:  Bing Jin
    Title: Chief Financial Officer

 

Date: June 18, 2019

 

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EXHIBIT INDEX

 

Exhibit No.   Description
     
Exhibit 99.1   Press Release
     
Exhibit 99.2   Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 2018 and 2019
     
Exhibit 99.3   Unaudited Interim Condensed Consolidated Financial Statements of YY Inc. as of and for the Three Months Ended March 31, 2018 and 2019
     
Exhibit 99.4   Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 2018 and the Three Months Ended March 31, 2019
     
Exhibit 99.5   Audited Financial Statements of Bigo Inc as of and for the Year Ended December 31, 2018

 

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Exhibit 99.1

 

YY Inc. ANNOUNCES PROPOSED OFFERING OF US$850 MILLION CONVERTIBLE SENIOR NOTES

 

GUANGZHOU, CHINA – June 18, 2019: YY Inc. (Nasdaq: YY) (“YY” or the “Company”), a leading global social media platform, today announced the proposed offering (the “Notes Offering”) of US$425 million in aggregate principal amount of convertible senior notes due 2025 (the “2025 Notes”) and US$425 million in aggregate principal amount of convertible senior notes due 2026 (the “2026 Notes,” and, together with the 2025 Notes, the “Notes”), subject to market and other conditions. The Company intends to grant the initial purchasers in the Notes Offering a 13-day option to purchase up to an additional US$75 million in aggregate principal amount of the 2025 Notes and US$75 million in aggregate principal amount of the 2026 Notes. The Company plans to use part of the net proceeds from the Notes Offering to pay the costs of the capped call transactions described below, and use the remainder of the proceeds for (i) global expansion-related initiatives, including infrastructure investment, personnel recruiting, sales and marketing and other efforts aimed at acquiring and servicing global users, (ii) video-based content offering expansion and enrichment, (iii) technology enhancement, and (iv) working capital and other general corporate purposes.

 

The Notes will be senior, unsecured obligations of YY. The 2025 Notes will mature on June 15, 2025 and the 2026 Notes will mature on June 15, 2026, unless repurchased, redeemed or converted in accordance with their terms prior to such date. The Company may not redeem the Notes prior to maturity, unless certain tax-related events occur. Holders of the Notes may require the Company to repurchase all or part of their Notes in cash on June 15, 2023, in the case of the 2025 Notes, and June 15, 2024, in the case of the 2026 Notes, or in the event of certain fundamental changes.

 

Prior to December 15, 2024, in the case of the 2025 Notes, or December 15, 2025, in the case of the 2026 Notes, the Notes will be convertible at the option of the holders only upon satisfaction of certain conditions and during certain periods. Holders may convert their Notes at their option at any time on or after December 15, 2024, in the case of the 2025 Notes, or December 15, 2025, in the case of the 2026 Notes, until the close of business on the second scheduled trading day immediately preceding the relevant maturity date. Upon conversion, the Company will pay or deliver to such converting holders, as the case may be, cash, the Company’s American Depositary Shares (“ADSs”), each currently representing twenty Class A common shares of the Company, or a combination of cash and ADSs, at the Company’s election. The interest rate, initial conversion rate and other terms of the Notes will be determined at the time of pricing of the Notes.

 

The Notes will be offered in the United States to qualified institutional buyers pursuant to Rule 144A and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Notes, the ADSs deliverable upon conversion of the Notes, if any, and the Class A common shares represented thereby have not been and will not be registered under the Securities Act or the securities laws of any other place, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

 

In connection with the Notes Offering, the Company intends to enter into capped call transactions relating to each series of the Notes with one or more of the initial purchasers and/or their respective affiliates and/or other financial institutions (the “Option Counterparties”). The capped call transactions are expected generally to reduce the potential dilution to existing holders of the Class A common shares and ADSs of the Company upon conversion of the relevant Notes and/or offset any cash payments that the Company is required to make in excess of the principal amount of the converted Notes, as the case may be, with such reduction and/or offset subject to a cap. If the initial purchasers exercise their option to purchase additional Notes, the Company expects to enter into additional capped call transactions with the Option Counterparties with respect to the relevant series of the Notes as to which the option was exercised. The Option Counterparties advised the Company that, in connection with establishing their initial hedges of the capped call transactions, the Option Counterparties or their respective affiliates expect to purchase the ADSs and/or enter into various derivative transactions with respect to the Company’s ADSs concurrently with, or shortly after, the pricing of the Notes. This activity could increase (or reduce the size of any decrease in) the market price of the ADSs or the Notes at that time. If any such capped call transaction fails to become effective, whether or not the Notes Offering is completed, the Option Counterparty party thereto may unwind its hedge positions with respect to the ADSs, which could adversely affect the value of the ADSs and, if the Notes have been issued, the value of the Notes.

 

  

 

 

In addition, the Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to the ADSs and/or by purchasing or selling the ADSs or other securities of the Company in secondary market transactions following the pricing of the Notes and prior to the maturity of each series of the Notes. The Option Counterparties may engage in such activity during any observation period relating to a conversion of each series of the Notes. This activity could also cause or avoid an increase or a decrease in the market price of the ADSs or the Notes, which could affect noteholders’ ability to convert the Notes and, to the extent the activity occurs during any observation period related to a conversion of the Notes, it could affect the number of ADSs and the value of the consideration that noteholders will receive upon conversion of such Notes.

 

This press release shall not constitute an offer to sell or a solicitation of an offer to purchase any securities, nor shall there be a sale of the securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful.

 

This press release contains information about the pending offerings of the Notes, and there can be no assurance that any of the offerings will be completed.

 

About YY Inc.

 

YY Inc. (“YY” or the “Company”) is a leading global social media platform. The Company’s highly engaged users contribute to a vibrant social community by creating, sharing, and enjoying a vast range of content and activities. YY enables users to interact with each other in real time through online live media and offers users a uniquely engaging and immersive entertainment experience. YY owns YY Live, a leading live streaming social media platform in China and Huya, a leading game live streaming platform in China. In addition, YY completed the acquisition of Bigo in March 2019. Bigo is a fast-growing global tech-driven social media company. Headquartered in Singapore, Bigo owns Bigo Live, a leading global live streaming platform outside of China; Like, a leading global short form video social platform; IMO, a global video communication platform, and other social applications. YY has created an online community for global video and live streaming users. YY Inc. was listed on the Nasdaq in November 2012.

 

Safe Harbor Statement

 

This announcement contains forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as “will,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar statements. YY may also make written or oral forward-looking statements in its periodic reports to the U.S. Securities and Exchange Commission (“SEC”), in its annual report to shareholders, in press releases and other written materials and in oral statements made by its officers, directors or employees to third parties. Statements that are not historical facts, including but not limited to statements about YY’s beliefs and expectations, are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in any forward-looking statement, including but not limited to the following: YY’s goals and strategies; YY's future business development, results of operations and financial condition; the expected growth of the online communication social platform market in China; expected changes in the revenue and certain cost or expense items; the expectation regarding the rate at which to gain active users, especially paying users; YY’s ability to retain, increase, and monetize the user base; competition from companies in a number of industries; use of proceeds of this offering; fluctuations in general economic and business conditions in China and assumptions underlying or related to any of the foregoing. Further information regarding these and other risks is included in YY’s filings with the SEC. All information provided in this press release and in the attachments is as of the date of this press release, and YY does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

 

  

 

 

Investor Relations Contact

 

YY Inc.

Matthew Zhao

  Tel: +86 (20) 8212-0000

  Email: IR@YY.com

 

ICR, Inc.

Jack Wang

  Tel: +1 (646) 915-1611

  Email: IR@YY.com

 

  

 

 

Exhibit 99.2

 

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 for the three months ended March 31, 2018 and 2019 in conjunction with the unaudited condensed consolidated financial statements and the notes thereto for the same period included in this offering memorandum, and the section titled “Operating and Financial Review and Prospects” in the 2018 Annual Report, which is incorporated by reference in this offering memorandum. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this offering memorandum.

 

Overview

YY is a leading global social media platform, offering users around the world a uniquely engaging and immersive experience across various video-based content categories, such as live streaming, short-form videos and video communication. Our global average mobile MAUs surpassed 400 million in the first quarter of 2019, of which over 75% came from overseas markets. With over 190 million average mobile MAUs engaged with our live streaming, short-form video and other services, and over 210 million average mobile MAUs on our IMO video communication platform, we have truly fostered a virtuous self-reinforcing ecosystem on a global scale.

 

With our pioneering business model in China, we have accumulated deep expertise in building and operating a vibrant video content ecosystem since our inception in 2005. Foreseeing the massive global opportunities, we began to expand overseas first by investing in Bigo Inc, or Bigo, in 2014, followed by the internationalization of YY Live and Huya, and lately by acquiring Bigo in March 2019. Our business model is not only successful in China, but has also been tested and replicated effectively on a global basis.

 

We pioneered the live streaming business model that has become widely adopted by leading industry players today, according to the Frost & Sullivan Report. Our business model optimizes the seamless integration of traffic generation, user engagement and monetization. While the basic use of our platforms is currently free to attract traffic, we monetize our user base mainly through virtual tips for live streaming. We believe that we will be able to capitalize on our large and highly engaged user base around the world by enriching our live streaming content categories, exploring additional monetization opportunities and diversifying our main revenue sources, such as advertising.

 

Our net revenues increased by 47.1% to RMB4,780.6 million (US$712.3 million) in the first quarter of 2019, from RMB3,248.9 million in the first quarter of 2018. Between 2017 and 2018, our net revenues increased by 36.0% from RMB11,594.8 million to RMB15,763.6 million (US$2,292.7 million). Net income attributable to common shareholders of YY Inc. was RMB3,104.3 million (US$462.6 million) in the first quarter of 2019, compared with RMB444.1 million in the first quarter of 2018. Net income attributable to common shareholders of YY Inc. was RMB2,493.2 million in 2017 and RMB1,642.0 million (US$238.8 million) in 2018.

 

Discussion of Selected Statements of Operations Items

 

Revenues

 

Starting from the first quarter of 2018, we re-classified our revenues from live streaming, online games, revenues from memberships, and other revenues (which mainly represented revenues from our online advertising revenues) to the categories of live streaming and other revenues. The revenue presentation for the year ended December 31, 2016 and 2017 has been retrospectively adjusted. Our live streaming revenues primarily comprised of revenues from YY Live, Huya and Bigo Live. Other revenues primarily include advertising revenues, and to a lesser extent revenues from online games, membership, online education, and financing income.

 

The following table sets forth the principal components of our total net revenues by amount and as a percentage of our total net revenues for the periods presented. Our revenues for the three months ended March 31, 2019 include revenues generated by Bigo from March 4, 2019 to March 31, 2019.

 

   For the year ended December 31,   For the three months ended March 31, 
   2016   2017   2018   2018   2019 
   RMB   %   RMB   %   RMB   US$   %   RMB   %   RMB   US$   % 
   (in thousands, except percentages) 
Live streaming   7,027,227    85.7    10,670,954    92.0    14,877,667    2,163,867    94.4    3,032,035    93.3    4,485,020    668,289    93.8 
Others   1,176,823    14.3    923,838    8.0    885,890    128,847    5.6    216,896    6.7    295,564    44,040    6.2 
Total net revenues(1)   8,204,050    100.0    11,594,792    100.0    15,763,557    2,292,714    100.0    3,248,931    100.0    4,780,584    712,329    100.0 

 

 
(1)Revenues are presented net of rebates and discounts.

 

Live streaming revenues. We generate live streaming revenues from the sales of in-channel virtual items used on our live streaming platforms, primarily including YY Live, Huya and Bigo Live. Users access content on our platforms free of charge, but are charged for purchases of virtual items.

 

The most significant factors that directly affect our live streaming revenues include the increase in the number of our paying users and ARPU:

 

·The number of paying users. Excluding the impact of Bigo, we had 6.9 million and 9.5 million paying users in the three months ended March 31, 2018 and 2019, respectively, for our live streaming services. We calculate the number of paying users during a given period as the cumulative number of registered user accounts that have purchased virtual items or other products and services on our live streaming platform at least once during the relevant period. We were able to achieve an increase in the number of paying users primarily due to a larger active user base and a higher conversion ratio of active users to paying users, and we expect that the number of our paying users will continue to grow in the future as we expand our services and products offerings and further monetize our existing platform.

 

·ARPU. Excluding the impact of Bigo, our ARPU for live streaming was RMB439.4 and RMB435.4 in the three months ended March 31, 2018 and 2019, respectively. The slight decrease resulted from our rapidly expanding paying user base and the higher contribution of revenues from Huya, which generally had a lower ARPU compared to the YY segment. ARPU is calculated by dividing our total revenues from live streaming during a given period by the number of paying users for our live streaming services for that period. As we begin to generate revenues from an increasing variety of live streaming services, our ARPU may fluctuate from period to period depending on the mix of live streaming services purchased by our paying users.

 

 

 

 

Other significant factors that directly or indirectly affect our live streaming revenues include:

 

·our ability to increase our popularity by offering new and attractive content, products and services that allow us to monetize our live streaming platform;

 

·our ability to attract and retain a large and engaged user base; and

 

·our ability to attract and retain certain popular performers, guilds, professional game playing team and commentators.

 

We create and offer to users virtual items that can be used on various channels. Users can purchase consumable virtual items from us to show support for their favorite performers or time-based virtual items that provide users with recognized status, such as priority speaking rights or special symbols on the music and entertainment channels.

 

Other revenues. We generate other revenues mainly from advertising services, and to a lesser extent, our online game business, memberships and other services.

 

(i) Advertising revenues. Advertising revenues were generated from sales of various forms of advertising and provision of promotion campaigns on our live streaming platforms.

 

(ii) Online games revenues. We generate online games revenues from the sales of in-game virtual items used for games developed by us or by third parties under revenue-sharing arrangements on our platforms. Users play online games free of charge, but are charged for purchases of virtual items. The online games we currently offer are primarily web games that can be run from an internet browser and require an internet connection to play.

 

(iii) Membership revenues. We generated membership revenues from the membership subscription fees paid by our users. In our membership program, users pay a flat monthly subscription fee in order to become members, and in exchange, we give them access to various privileges and enhanced features on our channels, including additional video usage, priority entrance to certain live performances, and exclusive rights to access VIP avatars, VIP ring-tones, VIP fonts and VIP emoticons.

 

(iv) Others. We generated other revenues from our online education and financing business. Online education service consists of vocational training, language training and K-12 afterschool education courses and we generated revenue from course fee. We also generated revenues from financing businesses.

 

Cost of Revenues

 

Cost of revenues consists primarily of (i) revenue sharing fees and content costs including payments to various channel owners and performers, and content providers, (ii) bandwidth costs, (iii) salary and welfare, (iv) depreciation and amortization expense for servers, other equipment and intangibles directly related to operating the platform, (v) payment handling costs, (vi) share-based compensation, (vii) other taxes and surcharges, and (viii) other costs. We expect that our cost of revenues will increase in absolute amount as we further grow our user base and expand our revenue-generating services.

 

Operating Expenses

 

Our operating expenses consist of (i) research and development expenses, (ii) sales and marketing expenses, (iii) general and administrative expenses, and (iv) goodwill impairment. The following table sets forth the components of our operating expenses for the years indicated, both in absolute amounts and as percentages of our total net revenues. We expect our operating expenses to generally increase in absolute amount in the near future.

 

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   For the Year Ended December 31,   For the Three Months Ended March 31, 
   2016   2017   2018   2018   2019 
   RMB   %   RMB   %   RMB   US$   %   RMB   %   RMB   US$   % 
   (in thousands, except percentages) 
Operating expenses:                                                            
Research and development   675,230    8.2    781,886    6.7    1,192,052    173,377    7.6    249,465    7.7    404,736    60,308    8.4 
Sales and marketing   387,268    4.7    691,281    6.0    1,149,316    167,161    7.3    235,658    7.3    534,236    79,604    11.2 
General and administrative   482,437    5.9    544,641    4.7    883,225    128,460    5.6    163,976    5.0    276,424    41,188    5.8 
Goodwill impairment   17,665    0.2    2,527    0.0                                 
Total operating expenses   1,562,600    19.0    2,020,335    17.4    3,224,593    468,998    20.5    649,099    20.0    1,215,396    181,100    25.4 

 

Research and Development Expenses

 

Research and development expenses consist primarily of salaries and benefits and share-based compensation expenses for research and development personnel, rental expenses and depreciation of office premises and servers utilized by the research and development personnel. Research and development expenses generally increased in the past three years ended December 31, 2018 and between the three months March 31, 2018 and 2019, due to the need for additional research and development personnel to accommodate the growth of our business, especially the increase in AI-focused research personnel supporting the build-up of our AI capabilities. We expect our research and development expenses to increase in absolute amount since AI technology improvement has become one of our key strategies and we intend to retain existing research and development personnel and also hire new ones to, among other things, develop new series of applications for our platforms, improve technology infrastructure to further enhance user experience, and further develop enhanced features for mobile devices to reach more users. However, we also expect to be able to leverage the expertise of our established research and development team to achieve better efficiency.

 

Sales and Marketing Expenses

 

Sales and marketing expenses consist primarily of (i) advertising and promotion expenses, and (ii) salary and welfare for sales and marketing personnel. Our sales and marketing expenses generally increased over the past three years ended December 31, 2018 and between the three months ended March 31, 2018 and 2019, primarily reflecting increased marketing and promotional activities. We expect that our sales and marketing expenses will increase in absolute amount as we expect to increase our spending on promotional activities, particularly relating to the user acquisition for our multi-platform global expansion.

 

General and administrative expenses

 

General and administrative expenses consist primarily of (i) salary and welfare for general and administrative personnel, (ii) share-based compensation for management and administrative personnel, and (iii) professional service fees. Our general and administrative expenses generally increased over the past three years ended December 31, 2018 and between the three months ended March 31, 2018 and 2019 as our business expanded, primarily due to an increase in the share-based compensation. We expect our general and administrative expenses will generally increase in absolute amount in the near future as our business grows.

 

Goodwill Impairment

 

We have noted further impairment indicator for 100 Online as well as impairment indicator for Bilin Online in 2016. Based on the result of the impairment assessment, impairment charges of RMB17.7 million were recognized in 2016. In December 2017, we have identified impairment indicator for a subsidiary. Based on the results of the impairment assessment, an impairment charge of RMB2.5 million for the subsidiary was recognized.

 

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Share-based Compensation Expenses

 

Our operating expenses include share-based compensation expenses as follows:

 

   For the Year ended December 31,   For the Three Months ended March 31, 
   2016   2017   2018   2018   2019 
   RMB   RMB   RMB   US$   RMB   RMB   US$ 
   (in thousands) 
Research and development expenses   78,816    122,348    225,173    32,750    54,467    70,607    10,521 
Sales and marketing expenses   3,107    4,417    5,723    832    1,869    1,976    294 
General and administrative expenses   59,469    88,137    342,790    49,857    36,563    94,877    14,137 
Total   141,392    214,902    573,686    83,439    92,899    167,460    24,952 

 

We grant stock-based award such as, but not limited to, share options, restricted shares, restricted share units and warrants to eligible employees, officers, directors, and non-employee consultants. Awards granted to employees, officers, and directors are initially accounted for as equity-classified awards, which are measured at the grant date fair value of the award and are recognized using the graded vesting method, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. Awards granted to non-employees are initially measured at fair value on the grant date and periodically re-measured thereafter until the earlier of the performance commitment date or the date the service is completed and recognized over the period in which the service is provided.

 

Operating Income

 

Gain on deconsolidation and disposal of subsidiaries

 

In June 2016, we disposed 60% of the equity interest in Shanghai Beifu for a consideration of RMB3.5 million, and recognized a loss of RMB23.5 million. After the disposal, we retained 10% of the equity interest in Shanghai Beifu. In December 2016, we disposed 33.86% of the equity interest in Beijing Xingxue for a consideration of RMB118.5 million, and recognized an income of RMB127.4 million. After the disposal, we retained 31.14% of the equity interest in Beijing Xingxue. In February 2017, we disposed 46% the equity interest in Beijing Yunke Online, and recognized an income of RMB38.0 million.

 

Other income

 

Other income primarily consists of government grants in connection with our contributions to technology development, tax refund and investments in local business districts. These grants may not be recurring in nature.

 

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Results of Operations

 

The following table sets forth a summary of our consolidated statements of operations for the periods indicated, both in absolute amounts and as percentages of our net revenues:

 

   For the Year ended December 31,   For the Three Months ended March 31, 
   2016   2017   2018   2018   2019 
   RMB   %   RMB   %   RMB   US$   %   RMB   %   RMB   US$   % 
   (in thousands, except for percentages) 
Consolidated statements of comprehensive income data:                                                
Net revenues:(1)(2)                                                            
Live streaming   7,027,227    85.7    10,670,954    92.0    14,877,667    2,163,867    94.4    3,032,035    93.3    4,485,020    668,289    93.8 
Others   1,176,823    14.3    923,838    8.0    885,890    128,847    5.6    216,896    6.7    295,564    44,040    6.2 
Total net revenues   8,204,050    100.0    11,594,792    100.0    15,763,557    2,292,714    100.0    3,248,931    100.0    4,780,584    712,329    100.0 
Cost of revenues   (5,103,430)   (62.2)   (7,026,402)   (60.6)   (10,017,134)   (1,456,932)   (63.5)   (2,015,797)   (62.0)   (3,160,325)   (470,903)   (66.1)
Gross profit   3,100,620    37.8    4,568,390    39.4    5,746,423    835,782    36.5    1,233,134    38.0    1,620,259    241,426    33.9 
Operating expenses                                                            
Research and development   (675,230)   (8.2)   (781,886)   (6.7)   (1,192,052)   (173,377)   (7.6)   (249,465)   (7.7)   (404,736)   (60,308)   (8.4)
Sales and marketing   (387,268)   (4.7)   (691,281)   (6.0)   (1,149,316)   (167,161)   (7.3)   (235,658)   (7.3)   (534,236)   (79,604)   (11.2)
General and administrative   (482,437)   (5.9)   (544,641)   (4.7)   (883,225)   (128,460)   (5.6)   (163,976)   (5.0)   (276,424)   (41,188)   (5.8)
Goodwill impairment   (17,665)   (0.2)   (2,527)   (0.0)                                
Total operating expenses   (1,562,600)   (19.0)   (2,020,335)   (17.4)   (3,224,593)   (468,998)   (20.5)   (649,099)   (20.0)   (1,215,396)   (181,100)   (25.4)
Gain on deconsolidation and disposal of subsidiaries   103,960    1.3    37,989    0.3                                 
Other income   129,504    1.6    113,187    1.0    117,860    17,142    0.7    12,374    0.4    68,688    10,235    1.4 
Operating income   1,771,484    21.6    2,699,231    23.3    2,639,690    383,926    16.7    596,409    18.4    473,551    70,561    9.9 
Gain on deemed disposal and disposal of investments   25,061    0.3    45,861    0.4    16,178    2,353    0.1                     
Fair value loss on derivative liabilities                   (2,285,223)   (332,372)   (14.5)   (11,868)   (0.4)            
Gain on fair value changes of investments                   1,689,404    245,714    10.7    426,547    13.1    2,649,843    394,839    55.4 
Foreign currency exchange (losses)/gains, net   1,158    0.0    (2,176)   (0.0)   (514)   (75)   (0.0)   6,719    0.2    1,333    199    0.0 
Interest expense   (81,085)   (1.0)   (32,122)   (0.3)   (8,616)   (1,253)   (0.1)   (2,019)   (0.1)   (6,219)   (927)   (0.1)
Interest income and investment income   67,193    0.8    180,384    1.6    485,552    70,621    3.1    92,191    2.8    148,289    22,096    3.1 
Other non-operating expense                   (2,000)   (291)   (0.0)                    
Income before income tax expenses   1,783,811    21.7    2,891,178    24.9    2,534,471    368,623    16.1    1,107,979    34.1    3,266,797    486,768    68.3 
Income tax expenses   (280,514)   (3.4)   (415,811)   (3.6)   (477,707)   (69,480)   (3.0)   (148,245)   (4.6)   (123,971)   (18,472)   (2.6)
Income before share of income in equity method investments, net of income taxes   1,503,297    18.3    2,475,367    21.3    2,056,764    299,143    13.0    959,734    29.5    3,142,826    468,296    65.7 
Share of income in equity method investments, net of income taxes   8,279    0.1    33,024    0.3    58,933    8,571    0.4    9,179    0.3    7,156    1,066    0.1 
Net income   1,511,576    18.4    2,508,391    21.6    2,115,697    307,714    13.4    968,913    29.8    3,149,982    469,362    65.9 
Less: Net (loss) income attributable to the non-controlling interest shareholders and the mezzanine classified non-controlling interest shareholders   (12,342)   (0.2)   (4,532)   (0.0)   (93,310)   (13,571)   (0.6)   5,384    0.2    29,549    4,403    0.6 
Net income attributable to controlling interest of YY Inc.   1,523,918    18.6    2,512,923    21.7    2,209,007    321,285    14.0    963,529    29.7    3,120,433    464,959    65.3 
Less: Accretion of subsidiaries’ redeemable convertible preferred shares to redemption value           19,688    0.2    73,159    10,641    0.5    30,107    0.9    9,365    1,395    0.2 
Cumulative dividend on subsidiary’s Series A preferred shares                   4,606    669    0.0            6,730    1,003    0.1 
Deemed dividend to subsidiary’s Series A preferred shareholders                   489,284    71,163    3.1    489,284    15.1             
Net income attributable to common shareholders of YY Inc.   1,523,918    18.6    2,493,235    21.5    1,641,958    238,812    10.4    444,138    13.7    3,104,338    462,561    64.9 

 

 
(1)Net of rebates and discounts.

 

(2)From January 1, 2018, revenue presentation has been changed to live streaming and others. We also have retrospectively changed the revenue presentation for the years ended December 31, 2016 and 2017.

 

 5 

 

 

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

 

Net revenues

 

Net revenues increased by 47.1% to RMB4,780.6 million (US$712.3 million) in the three months ended March 31, 2019 from RMB3,248.9 million in the corresponding period of 2018, primarily driven by an increase in live streaming revenues, and the contribution from the consolidation of Bigo segment.

 

Live streaming. Live streaming revenues increased by 47.9% to RMB4,485.0 million (US$668.3 million) in the three months ended March 31, 2019 from RMB3,032.0 million in the corresponding period of 2018, primarily attributable to the continued live streaming revenues growth in YY and Huya segments and, to a lesser extent, the consolidation of the live streaming revenues of Bigo for most of the month of March 2019.

 

Other revenues. Other revenues increased by 36.3% to RMB295.6 million (US$44.0 million) in the three months ended March 31, 2019 from RMB216.9 million in the corresponding period of 2018, primarily driven by the increase in advertising revenues from Huya and Bigo segments.

 

Cost of revenues

 

Cost of revenues increased by 56.8% to RMB3,160.3 million (US$470.9 million) in the three months ended March 31, 2019 from RMB2,015.8 million in the corresponding period of 2018, mainly attributable to an increase in revenue-sharing fees and content costs to RMB2,524.7 million(US$376.2 million) in the three months ended March 31, 2019 from RMB1,621.0 million in the corresponding period of 2018. The increase in revenue-sharing fees and content costs paid to performers, guilds and content providers was in line with the increase in live streaming revenues for both YY and Huya segments, respectively. Bandwidth costs increased to RMB297.4 million (US$44.3 million) in the three months ended March 31, 2019 from RMB225.4 million in the corresponding period of 2018, primarily reflecting the increase in demands for bandwidth that came with the continued overseas user base expansion.

 

Operating expenses

 

Operating expenses were RMB1,215.4 million (US$181.1 million) in the three months ended March 31, 2019, as compared to RMB649.1 million in the corresponding period of 2018.

 

Research and development. Our research and development expenses increased by 62.2% from RMB249.5 million in the three months ended March 31, 2018 to RMB404.7 million (US$60.3 million) in the corresponding period of 2019. This increase was primarily due to increase in staff related expenses for AI research and development personnel.

 

Sales and marketing. Our sales and marketing expenses increased by 126.7% from RMB235.7 million in the three months ended March 31, 2018 to RMB534.2 million (US$79.6 million) in the corresponding period of 2019. This increase was primarily due to increased efforts in sales and marketing activities in overseas markets.

 

General and administrative. Our general and administrative expenses increased by 68.6% from RMB164.0 million in the three months ended March 31, 2018 to RMB276.4 million (US$41.2 million) in the corresponding period of 2019. This increase was primarily due to the increase in staff related expenses for general and administrative personnel.

 

Other income

 

Other income increased from RMB12.4 million in the three months ended March 31, 2018 to RMB68.7 million (US$10.2 million) in the corresponding period of 2019. Other income primarily consisted of government grants in connection with our contributions to technological research and development, as well as tax refund due to investments in local business districts.

 

 6 

 

 

Interest income and investment income

 

Interest income and investment income increased from RMB92.2 million in the three months ended March 31, 2018 to RMB148.3 million (US$22.1 million) in the corresponding period of 2019, primarily because of the issuance of the Series B-2 Preferred Shares and initial public offering of HUYA Inc. in 2018.

 

Gain on fair value change of investments

 

Gain on fair value change of investments increased from RMB426.5 million in the three months ended March 31, 2018 to RMB2,649.8 million (US$394.8 million) in the corresponding period of 2019, primarily due to remeasurement gain of our previously held interests in Bigo.

 

Income tax expense

 

We recorded income tax expenses of RMB124.0 million (US$18.5 million) in the three months ended March 31, 2019, compared to RMB148.2 million in the corresponding period of 2018. The effective tax rate in the first quarter of 2019 was significantly impacted by the gain on fair value change of investment in Bigo, as it was non-taxable for income tax purpose.

 

Net income

 

As a result of the foregoing, we had a net income attributable to common shareholders of YY Inc. of RMB3,104.3 million (US$462.6 million) in the first quarter of 2019 as compared to a net income attributable to common shareholders of YY Inc. of RMB444.1 million in the corresponding period of 2018.

 

Liquidity and Capital Resources

 

In recent years, we have financed our operations primarily through cash flows from operations, the proceeds from our initial public offering in November 2012, the proceeds from our convertible senior notes offering in March 2014 and the proceeds from our follow-on offering in August 2017. We expect to require cash to fund our ongoing operational needs, particularly our revenue sharing fees and content costs, salaries and benefits, bandwidth costs and potential acquisitions or strategic investments. We believe that our current cash and cash equivalents and the anticipated cash flow from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures needs for the next 12 months. However, we may require additional cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may decide to selectively pursue. If our existing cash resources are insufficient to meet our requirements, we may seek to sell equity or equity-linked securities, debt securities or borrow from banks.

 

In March 2014, we issued an aggregate of US$400.0 million 2.25% convertible senior notes due in 2019. The net proceeds from the sale of the notes were US$390.8 million. The notes bore interest at a rate of 2.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, and such notes matured on April 1, 2019. On April 1, 2017, we repurchased for cash the notes of an aggregate principal amount of US$399.0 million. As of the date of this offering memorandum, no principal amount of the notes remain outstanding.

 

On January 19, 2017, we entered into a loan agreement with a bank, pursuant to which we borrowed a loan with a principal amount of US$30 million. The annualized interest rate of the loan is 3-month LIBOR plus 1.5%, accruing from draw-down. The draw-down of US$30 million took place on March 8, 2017 and have been repaid on March 1, 2018. Term deposit of RMB500 million was pledged as collateral for the loan until March 13, 2018.

 

On February 17, 2017, we entered into a loan agreement with a bank, pursuant to which we borrowed a loan with a total principal amount of US$60 million. The annualized interest rate of the loan is 3-month LIBOR, accruing from draw-down. The first draw-down of US$45 million took place on March 21, 2017 and the second draw-down of US$15 million took place on March 30, 2017. The loan shall be repaid before February 9, 2018. Term deposit of RMB500 million was pledged as collateral for the loan until February 23, 2018. On February 9, 2018, we repaid the loan with a total amount of US$60 million.

 

 7 

 

 

On February 28, 2019, we entered into a facility agreement with Goldman Sachs Lending Partners LLC, or Goldman Sachs. Subject to the terms of this agreement, Goldman Sachs agreed to make available to us a U.S. dollar term loan facility in an aggregate amount of up to US$100.25 million. In March 2019, we borrowed a loan amounting to US$100.25 million under this facility agreement. In April 2019, we have fully repaid such loan.

 

On May 16, 2017, HUYA Inc. entered into a series A preferred shares subscription agreement with its series A investors and pursuant to which, HUYA Inc. issued 22,058,823 series A preferred shares of HUYA Inc. at a price of US$3.4 per share for an aggregate consideration of US$75 million (equivalent to RMB509.7 million as of the issuance date). The issuance of the series A preferred shares was completed on July 10, 2017.

 

On August 21, 2017, we completed a secondary offering and received US$442.2 million in net proceeds, after deducting commissions and offering expenses.

 

On March 8, 2018, HUYA Inc. issued 64,488,235 shares of Series B-2 redeemable convertible preferred shares at a price of US$7.16 per share for cash consideration of US$461.6 million to Linen Investment Limited, a wholly owned subsidiary of Tencent Holdings Limited.

 

In May 2018, HUYA Inc., our majority-controlled subsidiary, successfully completed its initial public offering of 17,250,000 ADSs at a price of US$12.0 per ADS, including 2,250,000 ADSs offered pursuant to the underwriters’ full exercise of their over-allotment options. Each HUYA Inc. ADS represents one Class A ordinary share of HUYA Inc. HUYA Inc. received net proceeds of US$190.1 million.

 

In June 2018, we invested US$272 million in the Series D round of financing of Bigo as the lead investor. We were then an existing shareholder of Bigo and had become its largest shareholder after the Series D financing.

 

In March 2019, we completed the acquisition of the remaining 68.3% of equity interest in Bigo from the other shareholders of Bigo, including Mr. David Xueling Li, our chairman of the board of directors and chief executive officer. Pursuant to the agreement, we paid US$343.1 million in cash and issued 38,326,579 Class B common shares and 305,127,046 Class A common shares to the selling shareholders of Bigo.

 

In April 2019, HUYA Inc. successfully completed a follow-on public offering, issuing 13,600,000 ADSs at a price of US$24.00 per ADS. We, as a selling shareholder, participated in the follow-on public offering and offered 4,800,000 ADSs. HUYA and we raised from such public offering approximately US$313.8 million in net proceeds after deducting underwriting commissions and the offering expenses payable.

 

As of December 31, 2016, 2017, 2018 and March 31, 2019, we had RMB1,579.7 million, RMB3,617.4 million, RMB6,004.2 million (US$873.3 million) and RMB9,837.3 million (US$1,465.8 million), respectively, in cash, cash equivalents and restricted cash.

 

As of March 31, 2019, our subsidiaries, VIEs, and VIE’s subsidiaries located in the PRC held cash and cash equivalents in the amount of RMB6,458.0 million (US$962.3 million). Aggregate undistributed earnings and reserves of our subsidiaries, VIEs, and VIE’s subsidiaries located in the PRC that are available for distribution to our company as of March 31, 2019 was RMB12,635.7 million (US$1,882.8 million). We would need to accrue and pay withholding taxes if we were to distribute funds from our subsidiaries in the PRC to our offshore subsidiaries. We do not intend to repatriate such funds in the foreseeable future, as we plan to use existing cash balance in the PRC for general corporate purposes.

 

 8 

 

 

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

 

   For the Year Ended December 31,   For the Three Months Ended March 31, 
   2016   2017   2018   2018   2019 
   RMB   RMB   RMB   US$   RMB   RMB   US$ 
   (in thousands) 
Net cash provided by operating activities   2,421,135    3,718,452    4,464,814    649,379    780,276    966,079    143,949 
Net cash (used in) provided by investing activities   (2,172,359)   (3,037,516)   (6,295,386)   (915,626)   (2,943,377)   1,502,650    223,903 
Net cash provided by financing activities   10,651    1,392,525    4,167,270    606,105    2,695,180    1,379,037    205,482 
Net increase in cash, cash equivalents and restricted cash   259,427    2,073,461    2,336,698    339,858    532,079    3,847,766    573,334 
Cash, cash equivalents and restricted cash at the beginning of the period   1,318,155    1,579,743    3,617,432    526,134    3,617,432    6,004,231    894,658 
Effect of exchange rates change on cash, cash equivalents and restricted cash   2,161    (35,772)   50,101    7,287    (62,994)   (14,729)   (2,193)
Cash, cash equivalents and restricted cash at end of the period   1,579,743    3,617,432    6,004,231    873,279    4,086,517    9,837,268    1,465,799 

 

Operating Activities

 

Net cash used in or generated from operating activities consists primarily of our net income mitigated by non-cash adjustments, such as share-based compensation, depreciation of property and equipment and deferred taxes, and adjusted by changes in operating assets and liabilities, such as accounts receivable, prepayments and other assets, account payables, accrued liabilities and deferred revenue.

 

Net cash provided by operating activities amounted to RMB966.1 million (US$143.9 million) for the three months ended March 31, 2019. In the three months ended March 31, 2019, the difference between our net cash provided by operating activities and our net income of RMB3,150.0 million (US$469.4 million) was primarily due to a non-cash item adjustment in fair value change of long-term investments of RMB2,649.8 million (US$394.8 million) and a decrease in accrued liabilities and other payables of RMB167.5 million (US$25.0 million), partially offset by an increase in deferred revenue of RMB227.5 million (US$33.9 million), a non-cash item adjustment in share-based compensation of RMB181.8 million (US$27.1 million), a decrease in prepayments and other current assets of RMB117.6 million (US$17.5 million) and a non-cash item adjustment in amortization of acquired intangible assets and land use rights of RMB82.9 million (US$12.4 million).

 

Investing Activities

 

Net cash used in investing activities largely reflects placements of short-term deposits, purchases of property and equipment and other non-current assets in connection with the expansion and upgrade of our technology infrastructure, and our acquisitions of and investments in certain companies.

 

 9 

 

 

Net cash provided by investing activities amounted to RMB1,502.7 million (US$223.9 million) in the three months ended March 31, 2019. Net cash provided by investing activities primarily resulted from maturities of short-term deposit of RMB6,065.3 million (US$903.8 million), partially offset by placements of short-term deposits of RMB2,760.2 million (US$411.3 million) and acquisition of businesses, net of cash, cash equivalents and restricted cash acquired, of RMB1,387.8 million (US$206.8 million). The increase in cash provided by investing activities was mainly due to the maturities of short-term deposits.

 

Financing Activities

 

Net cash provided by financing activities was RMB1,379.0 million (US$205.5 million) in the three months ended March 31, 2019, primarily attributable to proceeds from bank borrowings.

 

Capital Expenditures

 

We made capital expenditures of RMB86.6 million (US$12.9 million) in the three months ended March 31, 2019. Our capital expenditures are primarily used to purchase office space, computers, servers, office furniture, operating rights, domain names and other assets.

 

Contractual Obligations

 

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

 

   Payments due by period 
   Total   Less than
1 year
   1 - 2 years   3 - 5 years   More than
5 years
 
   (in thousands) 
Operating lease obligations(1) (in RMB)   348,777    126,096    104,421    118,260     
Capital commitments(2) (in RMB)   94,815    57,845    26,890    10,077    3 
Convertible senior notes(3) (in US$)   1,011    1,011             

 

 

(1)Operating lease obligations refer to the lease of offices under operating lease agreements, where a significant portion of the risks and rewards of ownership are retained by the lessor. Payments made under operating leases are charged to the consolidated statements of operations on a straight-line basis over the period of the lease, including any free lease periods. Operating lease obligations presented in this table reflected undiscounted cash payments of both leases recognised as lease liabilities on the unaudited interim condensed consolidated balance sheet and lease commitments not recognised as lease liabilities.

 

(2)Capital commitment refers to capital expenditures related to properties and additional investments in equity investments.

 

(3)The convertible senior notes were redeemable at the holders’ option on April 1, 2017. US$399,000,000 aggregate principal amount of the notes were redeemed on April 1, 2017. We has accepted the repurchase and has forwarded cash in payment of the repurchase price to the paying agent for distribution to the holders who had exercised the option. Following the repurchase, US$1,000,000 aggregate principal amount of the notes remained outstanding and has been fully repaid as of the date of this offering memorandum.

 

Other than the obligations set forth above, we did not have any other long-term debt obligations, operating lease obligations, purchase obligations or other long-term liabilities as of March 31, 2019.

 

 10 

 

Exhibit 99.3

 

YY INC.

 

INDEX TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Contents   Page
     
Unaudited Interim Condensed Consolidated Balance Sheets as of December 31, 2018 and March 31, 2019   1
     
Unaudited Interim Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2019   3
     
Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2018 and 2019   5
     
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2019   7
     
Notes to the Unaudited Interim Condensed Consolidated Financial Statements   8

  

 

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2018 AND MARCH 31, 2019 (CONTINUED)

(All amounts in thousands, except share, ADS, per share and per ADS data)

 

       As of December 31,   As of March 31, 
   Note   2018   2019   2019 
       RMB   RMB   US$ 
               (Note2(c)) 
Assets                    
Current assets                    
Cash and cash equivalents        6,004,231    8,936,229    1,331,540 
Restricted cash and cash equivalents        -    263,132    39,208 
Short-term deposits        7,326,996    4,907,121    731,184 
Restricted short-term deposits        -    637,907    95,051 
Short-term investments        979,053    1,402,678    209,006 
Accounts receivable, net        198,428    632,357    94,224 
Amounts due from related parties   12    193,559    10,330    1,539 
Financing receivables, net        768,343    704,451    104,966 
Prepayments and other current assets   4    1,019,019    639,029    95,218 
Total current assets        16,489,629    18,133,234    2,701,936 
                     
Non-current assets                    
Long-term deposits        1,000,000    -    - 
Deferred tax assets        70,834    113,059    16,846 
Investments        4,591,524    1,436,281    214,013 
Property and equipment, net        1,296,319    1,697,773    252,976 
Land use rights, net        1,784,639    1,772,615    264,128 
Intangible assets, net   5    74,685    3,533,432    526,498 
Right-of-use assets, net (1)        -    266,728    39,744 
Goodwill   3    11,763    12,497,140    1,862,132 
Financing receivables, net        224,793    224,609    33,468 
Other non-current assets        223,859    246,938    36,794 
Total non-current assets        9,278,416    21,788,575    3,246,599 
Total assets        25,768,045    39,921,809    5,948,535 
                     
Liabilities, mezzanine equity and shareholders’ equity                    
Current liabilities                    
Convertible bonds        6,863    6,734    1,003 
Accounts payable        114,589    235,556    35,099 
Deferred revenue        951,616    1,210,396    180,355 
Advances from customers        101,690    90,516    13,487 
Income taxes payable        235,561    307,124    45,763 
Accrued liabilities and other current liabilities   6    2,414,371    3,324,934    495,431 
Amounts due to related parties   12    28,336    33,745    5,028 
Lease liabilities due within one year(1)        -    103,350    15,400 
Short-term loans   7    -    1,282,516    191,101 
Total current liabilities        3,853,026    6,594,871    982,667 
                     
Non-current liabilities                    
Lease liabilities (1)        -    172,138    25,649 
Deferred revenue        91,710    129,876    19,352 
Deferred tax liabilities        27,505    350,981    52,298 
Total non-current liabilities        119,215    652,995    97,299 
Total liabilities        3,972,241    7,247,866    1,079,966 

 

 1 

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2018 AND MARCH 31, 2019 (CONTINUED)

(All amounts in thousands, except share, ADS, per share and per ADS data)

 

       As of December 31,   As of March 31,
   Note   2018   2019   2019
       RMB   RMB   US$
               (Note 2(c))
Commitments and contingencies   14              
                
Mezzanine equity        418,673    420,525   62,660
                
Shareholders’ equity                  
Class A common shares (US$0.00001 par value; 10,000,000,000 and 10,000,000,000 shares authorized, 981,740,848 shares issued and outstanding as of December 31, 2018; 1,297,051,264 shares issued and 1,286,804,655 shares outstanding as of March 31, 2019, respectively)        59    80   12
Class B common shares (US$0.00001 par value; 1,000,000,000 and 1,000,000,000 shares authorized, 288,182,976 and  326,509,555 shares issued and outstanding as of December 31, 2018 and March 31, 2019, respectively)        21    24   4
Additional paid-in capital        11,168,866    19,048,058   2,838,249
Statutory reserves        101,725    101,725   15,157
Retained earnings        6,913,469    10,024,537   1,493,703
Accumulated other comprehensive income        336,152    228,389   34,031
                
Total YY Inc.’s shareholders’ equity        18,520,292    29,402,813   4,381,156
                
Non-controlling interests        2,856,839    2,850,605   424,753
                
Total shareholders’ equity        21,377,131    32,253,418   4,805,909
                
Total liabilities, mezzanine equity and shareholders’ equity        25,768,045    39,921,809   5,948,535

 

(1)The Company has adopted ASC 842 “Leases” beginning January 1, 2019 using the optional transition method and prior periods were not restated. The only major impact of the standard is that assets and liabilities amounting to RMB145.2 million and RMB141.2 million, respectively, are recognized beginning January 1, 2019 for leased office space with terms of more than 12 months.

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

 2 

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2019

(All amounts in thousands, except share, ADS, per share and per ADS data)

 

       For the three months ended March 31, 
   Note   2018   2019   2019 
       RMB   RMB   US$ 
               (Note2(c)) 
Net revenues                    
Live streaming        3,032,035    4,485,020    668,289 
Others        216,896    295,564    44,040 
                     
Total net revenues        3,248,931    4,780,584    712,329 
                     
Cost of revenues (1)   8    (2,015,797)   (3,160,325)   (470,903)
                     
Gross profit        1,233,134    1,620,259    241,426 
                     
Operating expenses (1)                    
Research and development expenses        (249,465)   (404,736)   (60,308)
Sales and marketing expenses        (235,658)   (534,236)   (79,604)
General and administrative expenses        (163,976)   (276,424)   (41,188)
                     
Total operating expenses        (649,099)   (1,215,396)   (181,100)
                     
Other income        12,374    68,688    10,235 
                     
Operating income        596,409    473,551    70,561 
                     
Interest expense        (2,019)   (6,219)   (927)
Interest income and investment income        92,191    148,289    22,096 
Foreign currency exchange gains, net        6,719    1,333    199 
Gain on fair value changes of investments        426,547    2,649,843    394,839 
Fair value loss on derivative liabilities        (11,868)   -    - 
                     
Income before income tax expenses        1,107,979    3,266,797    486,768 
                     
Income tax expenses   9    (148,245)   (123,971)   (18,472)
                     
Income before share of income in equity method investments, net of income taxes        959,734    3,142,826    468,296 
                     
Share of income in equity method investments, net of income taxes        9,179    7,156    1,066 
                     
Net income        968,913    3,149,982    469,362 
                     
Less: Net income attributable to the non-controlling interest shareholders and the mezzanine equity classified non-controlling interest shareholders        5,384    29,549    4,403 
                     
Net income attributable to controlling interest of YY Inc.        963,529    3,120,433    464,959 
                     
Less: Accretion of subsidiaries’  redeemable convertible preferred shares to redemption value        30,107    9,365    1,395 
Cumulative dividend on subsidiary’s Series A Preferred Shares        -    6,730    1,003 
Deemed dividend to subsidiary’s Series A Preferred shareholders        489,284    -    - 
                     
Net income attributable to common shareholders of YY Inc.        444,138    3,104,338    462,561 
                     
Foreign currency translation adjustments, net of nil tax        (119,187)   (107,763)   (16,057)
                     
Comprehensive income attributable to the common shareholders of YY Inc.        324,951    2,996,575    446,504 

 

 3 

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2019 (CONTINUED)

(All amounts in thousands, except share, ADS, per share and per ADS data)

 

       For the three months ended March 31, 
   Note   2018   2019   2019 
       RMB   RMB   US$ 
               (Note2(c)) 
Net income per ADS*                    
—Basic   11    6.97    44.93    6.69 
—Diluted   11    6.86    44.55    6.64 
Weighted average number of ADS used in calculating net income per ADS                    
—Basic   11    63,694,535    69,097,090    69,097,090 
—Diluted   11    64,713,421    69,640,885    69,640,885 
                     
Net income per common share*                    
—Basic   11    0.35    2.25    0.33 
—Diluted   11    0.34    2.23    0.33 
Weighted average number of common shares used in calculating net income per common share                    
—Basic   11    1,273,890,701    1,381,941,802    1,381,941,802 
—Diluted   11    1,294,268,422    1,392,817,695    1,392,817,695 

 

*Each ADS represents 20 common shares.

 

(1)Share-based compensation was allocated in cost of revenues and operating expenses as follows:

 

       For the three months ended March 31, 
   Note   2018   2019   2019 
       RMB   RMB   US$ 
               (Note2(c)) 
                 
Cost of revenues       19,608    14,309    2,132 
Research and development expenses       54,467    70,607    10,521 
Sales and marketing expenses        1,869    1,976    294 
General and administrative expenses        36,563    94,877    14,137 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

 4 

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2019

(All amounts in thousands, except share, ADS, per share and per ADS data)

  

   Class A
common shares
   Class B
common shares
              


             
   Number
of shares
   Amount   Number
of shares
   Amount  

Additional

paid-in
capital

   Statutory
reserves
   Retained
earnings
  

Accumulated

other

comprehensive
loss

   Total YY Inc.’s
shareholders’ equity
   Non-
controlling
interests
  

Total

shareholders’
equity

 
       RMB       RMB   RMB   RMB   RMB   RMB   RMB   RMB   RMB 
                                             
Balance as of December 31, 2017       945,245,908    57    317,982,976    23    5,339,844    62,718    5,218,110    (9,597)   10,611,155    101,704    10,712,859 
Adoption of ASU 2016-01   -    -    -    -    -    -    87,802    (87,802)   -    -    - 
Issuance of common shares for vested restricted share units     682,760    -    -    -    1    -    -    -    1    -    1 
Class B common shares converted to Class A common shares     20,000,000    1    (20,000,000)   (1)   -    -    -    -    -    -    - 
Share-based compensation     -    -    -    -    112,507    -    -    -    112,507    -    112,507 
Capital injection in subsidiaries from non-controlling interest shareholders     -    -    -    -    -    -    -    -    -    658    658 
Acquisition of subsidiary’s shares from mezzanine equity holders       -    -    -    -    (13,315)   -    -    -    (13,315)   -    (13,315)
Partial disposal of a subsidiary’s interests to non-controlling interest shareholders   -    -    -         389,358    -    -    (529)   388,829    (34,081)   354,748 
Components of comprehensive income                                                       
Net income attributable to YY Inc. and non-controlling interest shareholders       -    -    -    -    -    -    963,529    -    963,529    4,027    967,556 
Accretion of subsidiaries' redeemable convertible preferred shares to redemption value   -    -    -    -    -    -    (30,107)   -    (30,107)   (474)   (30,581)
Deemed dividend to subsidiary’s Series A Preferred shareholders   -    -    -    -    -    -    (489,284)   -    (489,284)   (7,711)   (496,995)
Foreign currency translation adjustments, net of nil tax       -    -    -    -    -    -    -    (119,187)   (119,187)   -    (119,187)
                                                        
Balance as of March 31, 2018       965,928,668    58    297,982,976    22    5,828,395    62,718    5,750,050    (217,115)   11,424,128    64,123    11,488,251 

 

 5 

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2019 (CONTINUED)

(All amounts in thousands, except share, ADS, per share and per ADS data)

 

   Class A
common shares
   Class B
common shares
                             
   Number
of shares
   Amount   Number
of shares
   Amount   Additional
paid-in
capital
   Statutory
reserves
   Retained
earnings
   Accumulated
other
comprehensive
income (loss)
   Total YY Inc.’s
shareholders’ equity
   Non-
controlling
interests
   Total
shareholders’
equity
 
       RMB       RMB   RMB   RMB   RMB   RMB   RMB   RMB   RMB 
                                             
Balance as of December 31, 2018      981,740,848    59    288,182,976    21    11,168,866    101,725    6,913,469    336,152    18,520,292    2,856,839    21,377,131 
Issuance of common shares for vested restricted share units     1,421,920    -    -    -    -    -    -    -    -    -    - 
Issuance of common shares in connection with the acquisition of Bigo   305,127,046    21    38,326,579    3    7,704,396    -    -    -    7,704,420    -    7,704,420 
Forfeiture of restricted shares   (1,485,159)   -    -    -    -    -    -    -    -    -    - 
Share-based compensation     -    -    -    -    181,769    -    -    -    181,769    -    181,769 
Issuance of a subsidiary’s common shares for exercised share options   -    -    -    -    (6,973)   -    -    -    (6,973)   17,655    10,682 
Components of comprehensive income   -                                                   
Net income attributable to YY Inc. and non-controlling interest shareholders       -    -    -    -    -    -    3,120,433    -    3,120,433    29,549    3,149,982 
Accretion of subsidiaries' redeemable convertible preferred shares to redemption value   -    -    -    -    -    -    (9,365)   -    (9,365)   (408)   (9,773)
Foreign currency translation adjustments, net of nil tax       -    -    -    -    -    -    -    (107,763)   (107,763)   (53,030)   (160,793)
                                                        
Balance as of March 31, 2019     1,286,804,655    80    326,509,555    24    19,048,058    101,725    10,024,537    228,389    29,402,813    2,850,605    32,253,418 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

 6 

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2019

(All amounts in thousands)

 

       For the three months ended March 31, 
   Note   2018   2019   2019 
       RMB   RMB   US$ 
               (Note2(c)) 
Cash flows from operating activities                     
                     
Net cash provided by operating activities         780,276    966,079    143,949 
                     
Cash flows from investing activities                     
Placements of short-term deposits         (5,338,720)   (2,760,181)   (411,280)
Maturities of short-term deposits         2,504,224    6,065,339    903,764 
Placements of short-term investments        (98,000)   (490,001)   (73,012)
Cash paid for investments        (242,658)   (74,127)   (11,045)
Cash received from disposal of investments         213,028    141,875    21,140 
Acquisition of businesses, net of cash, cash equivalents and restricted cash acquired         -    (1,387,840)   (206,795)
Loans to a related party    12    (20,000)   (170,000)   (25,331)
Payments to originate financing receivables        -    (462,678)   (68,941)
Principal collection from financing receivables        -    559,000    83,294 
Cash flows from other investing activities         38,749    81,263    12,109 
                     
Net cash (used in) provided by investing activities         (2,943,377)   1,502,650    223,903 
                     
Cash flows from financing activities                    
Capital contributions from mezzanine equity holders        2,919,112    100,536    14,980 
Partial disposal of subsidiary’s interests to non-controlling interest shareholders        378,548    -    - 
Proceeds from bank borrowings   7    -    1,278,601    190,517 
Repayments of bank borrowings        (569,166)   -    - 
Cash flows from other financing activities        (33,314)   (100)   (15)
                     
Net cash provided by financing activities        2,695,180    1,379,037    205,482 
                     
Net increase in cash, cash equivalents and restricted cash        532,079    3,847,766    573,334 
Cash, cash equivalents and restricted cash at the beginning of the year        3,617,432    6,004,231    894,658 
Effect of exchange rate changes on cash, cash equivalents and restricted cash        (62,994)   (14,729)   (2,193)
                     
Cash, cash equivalents and restricted cash at the end of the period        4,086,517    9,837,268    1,465,799 
                     
Supplemental disclosure of cash flows information:                    
—Cash paid for interest, net of amounts capitalized        (2,796)   (4,687)   (698)
—Income taxes paid        (116,259)   (120,014)   (17,883)
                     
Supplemental disclosures of non-cash investing and financing activities:                    
—Acquisition of property and equipment        14,270    176,737    26,335 
—Disposal of  investments        12,140    17,790    2,651 
—Common shares issued for the acquisition of Bigo        -    7,704,420    1,147,994 

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

 7 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

1. Organization and principal activities

 

  (a) Organization and principal activities

 

YY Inc. (the “Company”), together with its subsidiaries, its variable interest entities (“VIEs”, also refer to VIEs and their subsidiaries as a whole, where appropriate) (collectively, the “Group”), is a leading global social media platform, offering users around the world a uniquely engaging and immersive experience across various video-based products and services, such as live streaming, short-form videos and video communication.

 

In March 2019, the Company completed the acquisition of Bigo Inc (“Bigo”). Bigo is primarily engaged in the video and audio broadcast business all over the world. The Company paid US$343.1 million in cash and issued 305,127,046 Class A common shares and 38,326,579 Class B common shares of the Company to Bigo’s other shareholders. The details of this acquisition are disclosed in Note 3 “Business combination”.

 

  (b) Initial Public Offering

 

The Company completed its initial public offering (“IPO”) on November 21, 2012 on the NASDAQ Global Market.

  

  (c) Principal subsidiaries and VIEs

 

The details of the principal subsidiaries and VIEs through which the Company conducts its business operations as of March 31, 2019 are set out below:

 

Name  Place of
incorporation
  Date of
incorporation or
acquisition
  % of direct
or indirect
economic
ownership
   Principal activities
              
Principal subsidiaries              
Duowan Entertainment Corporation (“Duowan BVI”)  British Virgin Islands (“BVI”)  November 6, 2007   100%  Investment holding
               
Huanju Shidai Technology (Beijing) Co., Ltd. (“Beijing Huanju Shidai” or “Duowan Entertainment”)  PRC  March 19, 2008   100%  Investment holding
               
Guangzhou Huanju Shidai Information Technology Co., Ltd. (“Guangzhou Huanju Shidai”)  PRC  December 2, 2010   100%  Software development
               
Engage Capital Partners I, L.P. (“Engage L.P.”)  Cayman Islands  March 23, 2015   93.5%  Investment
               
HUYA Inc. (“Huya”)  Cayman Islands  March 30, 2017   43.9%  Investment holding
               
Guangzhou Huya Technology Co., Ltd. (“Huya Technology”)  PRC  June 16, 2017   43.9%  Software development
               
Hago Singapore Pte. Ltd. (“Hago Singapore”)  Singapore  May 7, 2018   100%  Internet value added services
               
Bigo  Cayman Islands  March 4, 2019   100%  Investment holding
               
Bigo Technology Pte. Ltd. (“Bigo Singapore”)  Singapore  March 4, 2019   100%  Investment holding, operation of live streaming platform
               
Bigo (Hong Kong) Limited (“Bigo HK”)  Hong Kong  March 4, 2019   100%  Investment holding
               
Guangzhou BaiGuoYuan Information Technology Co., Ltd. (“BaiGuoYuan Technology”)  PRC  March 4, 2019   100%  Software development and provision of information technology services

 

 8 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

1. Organization and principal activities (continued)

 

  (c) Principal subsidiaries and VIEs (continued)

 

Name  Place of
incorporation
   Date of
incorporation or
acquisition
  % of direct
or indirect
economic
ownership
   Principal activities
               
Principal VIEs                
Guangzhou Huaduo Network Technology Co., Ltd. (“Guangzhou Huaduo”)   PRC     April 11, 2005    100%  Holder of internet content provider licenses and internet value added services
                 
Zhuhai Huanju Interactive Entertainment Technology Co., Ltd. (“Zhuhai Huanju Interactive”)   PRC     May 4, 2015    100%  Software development
                 
Shanghai Yilian Equity Investment Partnership (LP) (“Shanghai Yilian”)   PRC     June 23, 2015    93.5%  Investment
                 
Guangzhou Huanju Microfinance Co., Ltd. (“Guangzhou Microfinance”)   PRC     January 11, 2016    100%  Financing services
                 
Guangzhou Huya Information Technology Co., Ltd. (“Guangzhou Huya”)   PRC     August 10, 2016    43.9%  Holder of internet content provider licenses and internet value added services
                 
Guangzhou Yilianyixing Investment Partnership (LP) (“Guangzhou Yilianyixing”)   PRC   June 28, 2017   99%  Investment
                 
Guangzhou BaiGuoYuan Network Technology Co., Ltd. (“Guangzhou BaiGuoYuan”)   PRC   March 4, 2019   100%  Holder of internet content provider licenses and internet value added services

  

 9 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

  1. Organization and principal activities (continued)

 

  (d) Variable Interest Entities

 

To comply with PRC laws and regulations that prohibit or restrict foreign ownership of companies that provide internet-content, the Group’s major operations in the PRC are conducted primarily through its principal VIEs Guangzhou Huaduo, Guangzhou Huya and Guangzhou BaiGuoYuan, which hold the internet value-added service license and approvals to provide such internet services in the PRC. VIE agreements amongst Beijing Huanju Shidai, Guangzhou Huaduo and its nominee shareholders and VIE agreements among of Huya Technology, Guangzhou Huya and its nominee shareholders have been disclosed in the audited financial statements for the year ended December 31,2018. The VIE agreements related to Bigo’s business is discussed below.

 

VIE agreements amongst BaiGuoYuan Technology, Guangzhou BaiGuoYuan and its nominee shareholders

 

The following is a summary of the contractual arrangements entered among BaiGuoYuan Technology, Guangzhou BaiGuoYuan and its nominee shareholders.

 

  Exclusive Business Cooperation Agreement

 

Under the exclusive business cooperation agreement between BaiGuoYuan Technology and Guangzhou BaiGuoYuan, BaiGuoYuan Technology has the exclusive right to provide Guangzhou BaiGuoYuan technology support, business support and consulting services related to the services provided by Guangzhou BaiGuoYuan, the scope of which is to be determined by BaiGuoYuan Technology from time to time. BaiGuoYuan Technology owns the exclusive intellectual property rights created as a result of the performance of this agreement. BaiGuoYuan Technology receives substantially all of the economic interest returns generated by Guangzhou BaiGuoYuan. The term of this agreement will not expire unless with BaiGuoYuan Technology’s written confirmation to terminate the agreement.

 

  Exclusive Option Agreement

 

The parties to the exclusive option agreement are BaiGuoYuan Technology, Guangzhou BaiGuoYuan and each of the shareholders of Guangzhou BaiGuoYuan. Under the exclusive option agreement, each of the shareholders of Guangzhou BaiGuoYuan irrevocably granted BaiGuoYuan Technology or its designated representative(s) an exclusive option to purchase, to the extent permitted under the PRC laws, all or part of his or its equity interests in Guangzhou BaiGuoYuan. BaiGuoYuan Technology or its designated representative(s) have sole discretion as to when to exercise such options, either in part or in full. Without BaiGuoYuan Technology’s prior written consent, Guangzhou BaiGuoYuan’s shareholders shall not sell, transfer, mortgage or otherwise dispose their equity interests in Guangzhou BaiGuoYuan. The term of this agreement is ten years and may be extended at BaiGuoYuan Technology’s sole discretion.

 

  Powers of Attorney

 

Pursuant to the irrevocable power of attorney executed by each shareholder of Guangzhou BaiGuoYuan, each such shareholder appointed BaiGuoYuan Technology as its attorney-in-fact to exercise such shareholders’ rights in Guangzhou BaiGuoYuan, including, without limitation, the power to vote on its behalf on all matters of Guangzhou BaiGuoYuan requiring shareholders’ approval under the PRC laws and regulations and the articles of association of Guangzhou BaiGuoYuan. Each power of attorney will remain in force until the shareholder ceases to hold any equity interest in Guangzhou BaiGuoYuan.

  

  Share Pledge Agreement

 

Pursuant to the share pledge agreement between BaiGuoYuan Technology and the shareholders of Guangzhou BaiGuoYuan, the shareholders of Guangzhou BaiGuoYuan have pledged all of their equity interests in Guangzhou BaiGuoYuan to BaiGuoYuan Technology to guarantee the performance by Guangzhou BaiGuoYuan and its shareholders’ performance of their respective obligations under the exclusive business cooperation agreement, exclusive option agreement and powers of attorney. If Guangzhou BaiGuoYuan and/or its shareholders breach their contractual obligations under those agreements, BaiGuoYuan Technology, as pledgee, will be entitled to voting right and the right to sell the pledged equity interests.

 

 10 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

  1. Organization and principal activities (continued)

 

  (d) Variable Interest Entities (continued)

 

Through the aforementioned contractual agreements, Guangzhou BaiGuoYuan is considered a VIE in accordance with Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) because the Company, through BaiGuoYuan Technology, has the ability to:

 

  exercise effective control over Guangzhou BaiGuoYuan;

 

  receive substantially all of the economic benefits and residual returns, and absorb substantially all the risks and expected losses from Guangzhou BaiGuoYuan as if it was its sole shareholder; and

 

  have an exclusive option to purchase all of the equity interests in Guangzhou BaiGuoYuan.

 

  2. Principal accounting policies

 

  (a) Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of December 31, 2018 and for the year ended December 31, 2018, except for the newly adopted leasing standard. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair statement of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period.

 

The preparation of the unaudited interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimate could result in a change to estimates and impact future operating results.

 

The unaudited interim condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the unaudited interim condensed consolidated financial statements have read or have access to the audited consolidated financial statements as of December 31, 2018 and for the year ended December 31, 2018. The condensed consolidated balance sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2018 and for the year ended December 31, 2018.

 

  (b) Consolidation

 

The Group’s unaudited interim condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs for which the Company or its subsidiary is the primary beneficiary. All transactions and balances among the Company, its subsidiaries and VIEs have been eliminated upon consolidation.

 

A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting powers; or has the power to appoint or remove the majority of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

 

A VIE is an entity in which the Company, or its subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity. In determining whether the Company or its subsidiaries are the primary beneficiary, the Company considered whether it has the power to direct activities that are significant to the VIEs economic performance, and also the Company’s obligation to absorb losses of the VIEs that could potentially be significant to the VIEs or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Beijing Huanju Shidai, Bilin Changxiang Information Technology Co., Ltd., Huya Technology, Guangzhou 100 Education Technology Co., Ltd., BaiGuoYuan Technology and ultimately the Company hold all the variable interests of the VIEs and have been determined to be the primary beneficiary of the VIEs.

 

 11 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

  2. Principal accounting policies (continued)

  

  (c) Convenience translation

 

Translations of amounts from RMB into US$ for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB 6.7112 on March 29, 2019 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate. 

 

  (d) Cash and cash equivalents

 

As of March 31, 2019, cash, cash equivalents and restricted cash presented in the unaudited interim condensed consolidated statement of cash flows is 9,837,268, including cash and cash equivalents of RMB8,936,229, restricted cash and cash equivalents of RMB263,132 and restricted short-term deposits of RMB637,907 on the unaudited interim condensed consolidated balance sheet, respectively.

 

  (e) Leasing

 

The Group leases facilities in the PRC under non-cancellable operating leases expiring on different dates. On January 1, 2019, the Company adopted ASU No. 2016-02 (Topic 842) “Leases” using the optional transition method. Results and disclosure requirements for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840. Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most leases. A contract is or contains a lease if the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. The Company determines whether a contract conveys the right to control the use of an identified asset for a period of time by assessing whether the Company has both the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset.

 

The only major impact of the adoption of the standard is that assets and liabilities amounting to RMB145.2 million and RMB141.2 million, respectively, are recognized beginning January 1, 2019 for leased office space with terms of more than 12 months. The Company accounts for short-term leases with terms less than 12 months in accordance with ASC 842-20-25-2 to recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

 

Operating leases are included in operating lease right-of-use assets, current lease liabilities and non-current lease liabilities on the unaudited interim condensed consolidated balance sheets.

 

(i) Right-of-use assets

 

Right-of-use assets are initially measured at the present value of the lease payments. Amortization of the right-of-use assets is made over the lease term on a generally straight-line basis. The weighted average lease terms of the right-of-use assets was 3.22 years.

 

(ii) Lease liabilities

 

Lease liabilities are lessees’ obligations to make the lease payments arising from a lease, measured on a discounted basis.

 

As a lessee, the discount rate for the lease is the rate implicit in the lease unless that rate cannot be readily determined. In that case, the lessee is required to use its incremental borrowing rate. A weighted average incremental borrowing rate of 4.94% was adopted at commencement date in determining the present value of lease payments.

 

For the three months ended March 31, 2019, operating lease cost and short-term lease cost were RMB16,838 and RMB818, respectively. There were no other lease cost other than operating lease cost and short-term lease cost for the three months ended March 31, 2019. For the 3 months ended March 31, 2019, cash paid for operating leases included in operating cash flows was RMB26,349.

 

 12 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

  2. Principal accounting policies (continued)

 

  (e) Leasing (continued)

 

A maturity analysis of the Company's operating lease liabilities and reconciliation of the undiscounted cash flows to the operating lease liabilities recognized on the unaudited interim condensed consolidated balance sheet was as below:

 

    Office rental 
    RMB 
      
The remainder of 2019    84,011 
2020    98,106 
2021    66,460 
2022    35,450 
2023 and after    20,252 
Total undiscounted cash flows    304,279 
Less: imputed interest    (28,791)
Present value of lease liabilities    275,488 

 

  (f) Share-based compensation

 

The Group grants stock-based award, such as, but not limited to, share options, restricted shares, restricted share units of the Company, share option, restricted share units and ordinary shares of the Company’s subsidiaries to eligible employees, officers, directors, and non-employee consultants.

 

The Group’s share-based awards mainly include share-based awards of YY as well as share-based awards of Huya.

 

Upon the acquisition of Bigo, Class A common shares are issued for the replacement awards to Bigo’s employees to replace their original share-based awards, namely restricted shares. In determining the fair value of restricted share granted to Bigo’s employees, the fair value of the underlying shares of YY on the grant dates is applied. The grant date fair value of restricted share is based on stock price of YY in the NASDAQ Global Market.

 

 13 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

  2. Principal accounting policies (continued)

 

  (g) Statutory reserves

 

The Group did not make any appropriation to its general reserve fund, statutory surpluses fund, discretionary surplus fund, and the staff bonus and welfare fund for the three months ended March 31, 2018 and 2019, respectively.  

 

  (h) Segment reporting

 

Operating segments are defined as components of an enterprise engaging in businesses activities for which separate financial information is available that is regularly evaluated by the Group’s chief operating decision makers (“CODM”) in deciding how to allocate resources and assess performance. The Group’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews segment results when making decisions about allocating resources and assessing performance of the Group.

 

  (i) Recently issued accounting pronouncements

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13: Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04: Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness. ASU 2018-13 will be effective for the Group’s fiscal year beginning January 1, 2020, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The Company does not expect ASU 2018-13 to have a material impact to the Company’s consolidated financial statements.

 

 14 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

  3. Business combination

 

Acquisition of Bigo

 

Immediately prior to this acquisition, the Company held 31.7% of equity interest of Bigo, a company which is primarily engaged in the video and audio broadcast business through its live-streaming applications and platforms all over the world. The Company had a contingent redemption right on its investment in Bigo, therefore the interest held by the Company did not meet the definition of in-substance common stock under ASC 323. As the investment in Bigo did not have readily determinable fair value, it was accounted for as an investment at cost less impairments, adjusted by observable price changes.

 

In February 2019, the Group entered into a share purchase agreement with Bigo and its shareholders. Under the agreement, the Group agreed to purchase all outstanding shares of Bigo that were not already owned by the Group. Pursuant to the agreement, the Company paid US$343.1 million in cash and issued 305,127,046 Class A common shares and 38,326,579 Class B common shares of the Company to Bigo’s other shareholders. In addition, the Company has also issued 8,761,450 Class A common shares for future grants to employees as share-based awards. The acquisition was completed on March 4, 2019. The Group believed that the acquisition of Bigo helped the Group create enhanced live streaming content, expand global footprint and offer world-class user experiences for global user community. Upon the completion of the acquisition, Bigo became a wholly-owned subsidiary of the Group.

 

The following table summarizes the components of the purchase consideration transferred based on the closing price of the Company’s common share as of the acquisition date:

 

   As of acquisition date 
   RMB 
     
Cash    2,300,196 
Fair value of common shares issued    7,704,420 
Fair value of previously held equity interest in Bigo   5,697,154 
Elimination of preexisting amounts due from Bigo   323,002 
Total consideration    16,024,772 

 

The fair value of common shares issued above does not include post-acquisition share-based compensation amounting to RMB590,346. Out of the 305,127,046 Class A common shares issued, 38,042,760 shares are for the replacement awards to Bigo’s employees to replace their original share-based awards. The post-acquisition share-based compensation of RMB590,346 are share-based compensation subject to continuous employment and will be recognized as share-based compensation expenses over the remaining required service period.

 

Immediately before the acquisition, the amounts due from Bigo to the Company amounted to RMB323,002. This amount due from Bigo was effectively eliminated upon the acquisition. The amount of the preexisting amounts due from Bigo of RMB323,002 was included as part of the consideration.

 

In accordance with ASC 805, the Company’s previously held equity interest in Bigo was remeasured to fair value on the acquisition date, and a re-measurement gain of RMB2,669,334 was recognized as gain on fair value changes of investments. Acquisition-related costs of RMB27,162 was recognized as general and administrative expenses.

 

 15 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

  3. Business combination (continued)

 

Acquisition of Bigo (continued)

 

The acquisition was accounted for as a business combination. The Group made estimates and judgements in determining the fair value of the assets acquired and liabilities assumed with the assistance from an independent valuation firm. The consideration was allocated on the acquisition date as follows:

 

   As of acquisition date   Amortization period 
   RMB     
           
Net tangible assets acquired:          
-Cash and cash equivalents, restricted cash and cash equivalents and restricted short-term deposits   912,356      
-Accounts receivables   386,517      
-Other current assets   52,432      
-Property and equipment, net   294,030      
-Other non-current assets   174,837      
Identifiable intangible assets acquired:          
-Trademark   2,400,354    10 years 
-User Base   1,027,191    3 years 
-Non-compete agreement   81,129    1 year  
-Others   6,195      
Accrued liabilities and other liabilities   (1,425,777)     
Deferred tax liabilities   (316,859)     
Goodwill   12,432,367      
Total   16,024,772      

 

The goodwill was mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under U.S. GAAP, and mainly comprised (a) the assembled work force and (b) the expected future growth, enhancing world-class user experiences and expansion in global markets as a result of the synergy resulting from the acquisition. The goodwill recognized was not expected to be deductible for income tax purpose.

 

Pro forma information of the acquisition

 

The following unaudited pro forma information summarizes the results of operations for the three month ended March 31, 2019 of the Company as if the acquisition had occurred on January 1, 2018. The unaudited pro forma information includes: (i) amortization associated with estimates for the acquired intangible assets and corresponding deferred tax liability; (ii) recognition of the post-combination share-based compensation; (iii) removal of the transaction costs related to the acquisition; (iv) removal of the remeasurement gain of YY’s previously held interests in Bigo; (v) removal of fair value loss on derivative liabilities related to Bigo’s preferred shares; (vi) elimination of transaction between Bigo and the Company and (vii) the associated tax impact on these unaudited pro forma adjustments. The following pro forma financial information is presented for informational purpose only and is not necessarily indicative of the results that would have occurred had the acquisition been completed on January 1 2018, nor is it indicative of future operating results.

 

   For the three months ended March 31,
   2019
   RMB
      
Pro forma net revenues   5,441,913
Pro forma net income   215,994

 

The amounts of revenues and earnings of Bigo since the acquisition date are disclosed in Note 16 “Segment Reporting”. 

 

 16 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

  4. Prepayments and other current assets

 

   December 31,   March 31, 
   2018   2019 
   RMB   RMB 
           
Prepayments and deposits to vendors and content providers   183,293    188,900 
Loans to third parties   180,964    90,467 
Value added taxes to be deducted   69,563    86,586 
Receivables from payment platforms   112,061    64,725 
Interests receivable   218,553    48,581 
Rental and other deposits   22,457    32,246 
Employee advances   11,536    19,380 
Receivables from disposal of investments   59,255    17,790 
Amounts receivable from issuance of a subsidiary’s preferred shares   102,951    - 
Others   58,386    90,354 
           
Total   1,019,019    639,029 

 

  5. Intangible assets, net

 

The following table summarizes the Group’s intangible assets:

 

   December 31,   March 31, 
   2018   2019 
   RMB   RMB 
         
Gross carrying amount          
Trademark   -    2,410,593 
User base   -    1,031,572 
Non-compete agreement   -    81,475 
Operating rights   67,080    67,080 
Software   39,535    45,481 
License   32,000    32,000 
Domain names   26,819    26,855 
Technology   18,094    17,928 
           
Total of gross carrying amount   183,528    3,712,984 
           
Less: accumulated amortization          
Trademark   -    (20,086)
User base   -    (35,327)
Non-compete agreement   -    (6,787)
Operating rights   (48,451)   (53,205)
Software   (28,406)   (31,532)
License   (1,422)   (1,956)
Domain names   (11,213)   (11,474)
Technology   (11,856)   (11,787)
           
Total accumulated amortization   (101,348)   (172,154)
           
Less: accumulated impairment   (7,495)   (7,398)
           
Intangible assets, net   74,685    3,533,432 

 

Amortization expense for the three months ended March 31, 2018 and 2019 were RMB3,703 and RMB70,870, respectively.

 

 17 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

  5. Intangible assets, net (continued)

 

The estimated amortization expenses for each of the following five years as of March 31 are as follows:

 

    Amortization expense
of intangible assets
 
    RMB 
       
2020    761,344 
2021    644,132 
2022    307,245 
2023    306,832 
2024    301,670 

 

The weighted average amortization periods of intangible assets as of December 31, 2018 and March 31, 2019 are as below:

 

   December 31,   March 31, 
   2018    2019 
         
Trademark  Not applicable    10 years 
User base  Not applicable   3 years 
Non-compete agreement  Not applicable   1 year 
Operating rights   2 years    2 years 
Software   4 years    5 years 
License  15 years   15 years 
Domain names   15 years    15 years 

 

 18 

 

  

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

  

6.Accrued liabilities and other current liabilities

 

   December 31,   March 31, 
   2018   2019 
   RMB   RMB 
         
Revenue sharing fees   1,318,561    1,417,482 
Marketing and promotion expenses   213,216    597,085 
Salaries and welfare   329,169    260,149 
Bandwidth costs   131,252    238,106 
Consideration payables related to business acquisition   -    238,014 
Value added taxes and other taxes payable   109,040    149,276 
Deposits from third parties   82,771    100,004 
Payables to merchants   75,471    78,040 
Other payables to content providers   30,313    48,944 
Others   124,578    197,834 
           
Total   2,414,371    3,324,934 

 

7.Short-term loans

 

   December 31,   March 31, 
   2018   2019 
   RMB   RMB 
         
Short-term loans   -    1,282,516 

 

The Group entered into agreements with financial institutions, pursuant to which the Group borrowed three loans with total principal amount of US$149.7 million and HK$320 million in the first quarter of 2019. These loans were all with a maturity of less than one year and the annual interest rates of these loans ranged from 2.38% to 3.88%. Term deposits of RMB300 million and US$50 million were pledged as collaterals for the loans.

 

8.Cost of revenues

 

   For the three months ended March 31, 
   2018   2019 
   RMB   RMB 
         
Revenue sharing fees and content costs   1,620,959    2,524,715 
Bandwidth costs   225,423    297,402 
Salaries and welfare   70,871    119,330 
Payment handling costs   20,012    98,957 
Depreciation and amortization   29,885    37,785 
Other taxes and surcharges   10,099    19,943 
Share-based compensation   19,608    14,309 
Other costs   18,940    47,884 
           
Total   2,015,797    3,160,325 

 

 19 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

   

9.Income tax

 

(i) Cayman Islands

 

Under the current tax laws of Cayman Islands, the Company and its subsidiaries are not subject to tax on income or capital gains. Besides, upon payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.

 

(ii) BVI

 

Duowan BVI is exempted from income tax on its foreign-derived income in the BVI. There are no withholding taxes in the BVI.

 

(iii) Hong Kong profits tax

 

Under the current Hong Kong Inland Revenue Ordinance, the subsidiaries of the Group in Hong Kong are subject to 16.5% Hong Kong profit tax on its taxable income generated from operations in Hong Kong. Additionally, payments of dividends by the subsidiaries incorporated in Hong Kong to the Company are not subject to any Hong Kong withholding tax.

 

(iv) Singapore

 

The income tax provision of the Group in respect of its international operations in Singapore was calculated at the tax rate of 17% on the assessable profits, based on the existing legislation, interpretations and practices in respect thereof.

 

According to the Development and Expansion Incentive (the “Incentive”) pursuant to the provisions of Part IIIB of the Economic Expansion Incentives (Relief from Income Tax) Act, Chapter 86, corporations engaging in new high-value-added projects, expanding or upgrading their operations, or undertaking incremental activities after their pioneer period may apply for their profits to be taxed at a reduced rate of not less than 5% for an initial period of up to ten years. The total tax relief period for each qualifying project or activity is subject to a maximum of 40 years (inclusive of the post-pioneer relief period previously granted, if applicable).

 

The Group’s Singapore entities provided for income tax are as follows:

 

•      Bigo Singapore applied for the Incentive and received approval in October 2018. Bigo Singapore is entitled to enjoy the beneficial tax rate of 5% as the Incentive for the years 2018 through 2022, and will need to re-apply for the Incentive qualification renewal in 2023.

 

•      Other Singapore entities were subject to 17% income tax for the periods reported.

 

(v) PRC

 

The Company’s subsidiaries and VIEs in China are governed by the Enterprise Income Tax Law (“EIT Law”), which became effective on January 1, 2008. Pursuant to the EIT Law and its implementation rules, enterprises in China are generally subject to tax at a statutory rate of 25%. Certified High and New Technology Enterprises (“HNTE”) are entitled to a favorable statutory tax rate of 15%, but need to re-apply every three years. During this three-year period, an HNTE must conduct a qualification self-review each year to ensure it meets the HNTE criteria and is eligible for the 15% preferential tax rate for that year. If an HNTE fails to meet the criteria for qualification as an HNTE in any year, the enterprise cannot enjoy the 15% preferential tax rate in that year, and must instead use the regular 25% EIT rate.

 

Enterprises qualified as software enterprises can enjoy an income tax exemption for two years beginning with their first profitable year and a 50% tax reduction to the applicable tax rate for the subsequent three years. An entity that qualifies as a “Key National Software Enterprise” (a “KNSE”) is entitled to a further reduced preferential income tax rate of 10%. Enterprises wishing to enjoy the status of a Software Enterprise or a KNSE must perform a self-assessment each year to ensure they meet the criteria for qualification. These enterprises will be subject to the tax authorities’ assessment each year as to whether they are entitled to use the relevant preferential EIT treatments. If at any time during the preferential tax treatment years an enterprise uses the preferential EIT rates but the relevant authorities determine that it fails to meet applicable criteria for qualification, the relevant authorities may revoke the enterprise’s Software Enterprise/KNSE status.

 

 20 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

9.Income tax (continued)

 

(v) PRC (continued)

 

The EIT Law also provides that an enterprise established under the laws of a foreign country or region but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purposes and consequently be subject to the PRC income tax at the rate of 25% for its global income. The Implementing Rules of the EIT Law merely define the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located”. Based on a review of surrounding facts and circumstances, the Group does not believe that it is likely that its entities registered outside of the PRC should be considered as resident enterprises for the PRC tax purposes.

 

The Group’s PRC entities provided for enterprise income tax are as follows:

 

·Guangzhou Huaduo applied for the renewal of HNTE qualification and received approval in December 2016. Guangzhou Huaduo is entitled to continue to enjoy the beneficial tax rate of 15% as an HNTE for the years 2016 through 2018, and will need to re-apply for HNTE qualification renewal in 2019. In 2019, Guangzhou Huaduo is expected to enjoy the beneficial tax rate of 15% based on its self-assessment.

 

·In 2018, Guangzhou Huanju Shidai was qualified as a KNSE after the relevant government authorities’ assessment and was entitled to a preferential income tax rate of 10%. In 2019, Guangzhou Huanju Shidai is expected to enjoy a reduced tax rate of 10% based on its self-assessment.

 

·In June 2017, Guangzhou Juhui Information Technology Co., Ltd. was qualified as a Software Enterprise, and started to enjoy the zero preferential tax rate beginning from 2016 and 12.5% preferential tax rate beginning from 2018.

 

·Huya Technology was qualified as a Software Enterprise, and started to enjoy the zero preferential tax rate starting from 2017 and 12.5% preferential tax rate starting from 2019.

 

·Guangzhou Huya applied for the HNTE qualification and received approval in November 2018. Guangzhou Huya is entitled to enjoy the preferential tax rate of 15% as an HNTE for three years starting from 2018, and will need to apply for HNTE qualification renewal in 2021.

 

·Guangzhou BaiGuoYuan applied for the HNTE and received approval in December 2016. Guangzhou BaiGuoYuan is entitled to enjoy the beneficial tax rate of 15% as an HNTE for the years 2016 through 2018, and will need to re-apply for HNTE qualification renewal in 2019. In 2019, Guangzhou BaiGuoYuan is expected to enjoy the beneficial tax rate of 15% based on its self-assessment.

 

·BaiGuoYuan Technology applied for the HNTE and received approval in 2018. BaiGuoYuan Technology are entitled to enjoy the beneficial tax rate of 15% as HNTEs for the years 2018 through 2020, and will need to re-apply for HNTE qualification renewal in 2021.

 

·Other PRC subsidiaries and VIEs were subject to 25% EIT for the periods reported.

 

According to a policy promulgated by the State Tax Bureau of the PRC and effective from 2008 onwards, enterprises engaged in research and development activities are entitled to claim an additional tax deduction amounting to 50% of the qualified research and development expenses incurred in determining its tax assessable profits for that year. The additional tax deducting amount of the qualified research and development expenses have been increased from 50% to 75%, effective from 2018 to 2020, according to a new tax incentives policy promulgated by the State Tax Bureau of the PRC in September 2018 (“Super Deduction”).

 

Certain subsidiaries and VIEs of the Group successfully claimed the Super Deduction in ascertaining the tax assessable profits for the periods reported.

 

 21 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

9.Income tax (continued)

 

(v) PRC (continued)

 

The EIT Law also imposes a withholding income tax of 10% on dividends distributed by an FIE to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. The Cayman Islands, where the Company incorporated, does not have such tax treaty with China. According to the arrangement between the mainland China and Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion in August 2006, dividends paid by an FIE in China to its immediate holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25% of the shares of the FIE). In accordance with accounting guidance, all undistributed earnings are presumed to be transferred to the parent company and are subject to the withholding taxes. All FIEs are subject to the withholding tax from January 1, 2008. The presumption may be overcome if the Group has sufficient evidence to demonstrate that the undistributed dividends will be re-invested and the remittance of the dividends will be postponed indefinitely.

 

Aggregate undistributed earnings and reserves of the Group entities located in the PRC that are available for distribution to the Company as of December 31, 2018 and March 31, 2019 are approximately RMB11,519,699 and RMB12,635,662, respectively.

 

The Group has a plan to indefinitely reinvest its funds and any future earnings for use in the operation and expansion of its business. Accordingly, no deferred tax liability on 10% withholding tax of aggregate undistributed earnings and reserves of the Company’s subsidiaries located in the PRC has been accrued that would be payable upon the distribution of those amounts to the Company as of December 31, 2018 and March 31, 2019.

 

Composition of income tax expense

 

The current and deferred portions of income tax expense included in the unaudited interim condensed consolidated statements of comprehensive income are as follows:

 

   For the three months ended March 31, 
   2018   2019 
   RMB   RMB 
         
Income before income tax expenses          
PRC entities   675,595    911,441 
Non-PRC entities (a)   432,384    2,355,356 
Total   1,107,979    3,266,797 
           
Current income tax expenses          
PRC entities   (102,731)   (158,392)
Non-PRC entities   -    (2,911)
Total   (102,731)   (161,303)
           
Deferred income tax (expenses) benefit          
PRC entities   4,968    33,100 
Non-PRC entities   (50,482)   4,232 
Total   (45,514)   37,332 
           
Income tax expenses          
PRC entities   (97,763)   (125,292)
Non-PRC entities   (50,482)   1,321 
Total   (148,245)   (123,971)

 

(a) The income before tax incurred by non-PRC entities for the three months ended March 31, 2019 was mainly due the Company’s previously held equity interest in Bigo which was re-measured to fair value on the acquisition date, and a re-measurement gain of RMB2,669,334 was recognized as gain on fair value changes of investments. This fair value gain was incurred by Duowan BVI whose applicable tax rate is zero.

 

 22 

 

  

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

10.Share-based compensation

 

Under the Company’s 2011 Share Incentive Scheme, the Company granted restricted share units and share options to its employees. Besides, Huya granted restricted share units and share options to its employees under Huya’s 2017 Share Incentive Plan, details of which were disclosed in the company’s audited consolidated financial statements for the year ended December 31, 2018. For the three month ended March 31, 2019, the new grants of share-based awards under the Company’s 2011 Share Incentive Scheme and Huya’s 2017 Share Incentive Plan were immaterial. For the three months ended March 31, 2019, the Company recorded share-based compensation of RMB139,788 using the graded-vesting attribution method for the Company’s share-based awards other than those granted to Bigo’s employees, which is discussed below.

 

In connection with the acquisition of Bigo in March 2019, the Group granted replacement awards to Bigo’s employees covering Bigo’s original share incentive scheme. These awards are included in the Company‘s 2011 Share Incentive Scheme.

 

There are mainly three types of vesting schedule under Bigo’s original share incentive scheme, which are: i) 50% of the share-based awards will be vested after 24 months of the grant date and the remaining 50% will be vested in two equal installments over the following 24 months, ii) share-based awards will be vested in four equal installments over the following 48 months, and iii). share-based awards will be vested in three equal installments over the following 36 months. After the acquisition, Bigo’s original share incentive scheme are replaced by YY’s restricted shares without change in vesting terms. The post-acquisition share-based compensation expenses are recognized over the remaining vesting period after the acquisition date.

 

The following table summarizes the restricted shares activity for the three months ended March 31, 2019:

 

   Number of
restricted
shares
  

Weighted
average

grant-date
fair value (US$)

 
         
Outstanding, December 31, 2018   -    - 
           
Granted   38,042,760    3.6020 
Forfeited   (1,485,159)   3.6020 
Vested   (288,815)   3.6020 
           
Outstanding, March 31, 2019   36,268,786    3.6103 
           
Expected to vest at March 31, 2019   31,459,321    3.6116 

 

For the three months ended March 31, 2019, the Company recorded share-based compensation for restricted shares granted to Bigo’s employees of RMB41,981 using the graded-vesting attribution method. As of March 31, 2019, total unrecognized compensation expense relating to the restricted shares granted to Bigo’s employees was RMB501,774. The expense is expected to be recognized over a weighted average period of 1.83 years using the graded-vesting attribution method.

 

 23 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

11.Basic and diluted net income per share

 

Basic and diluted net income per share for the three months ended March 31, 2018 and 2019 are calculated as follows:

 

   For the three months ended March 31, 
   2018   2019 
   RMB   RMB 
         
Numerator:          
Net income attributable to common shareholders of YY Inc.   444,138    3,104,338 
Interest expenses of convertible notes   36    38 
Incremental dilution from Huya(1)   -    (2,217)
Numerator for diluted income per share   444,174    3,102,159 
           
Denominator:          
Denominator for basic calculation—weighted average number of Class A and Class B common shares outstanding   1,273,890,701    1,381,941,802 
Dilutive effect of share options   154,347    - 
Dilutive effect of restricted share   -    1,395,656 
Dilutive effect of restricted share units   20,042,706    9,299,569 
Dilutive effect of convertible bonds   180,668    180,668 
Denominator for diluted calculation   1,294,268,422    1,392,817,695 
           
Basic net income per Class A and Class B common share   0.35    2.25 
Diluted net income per Class A and Class B common share   0.34    2.23 
Basic net income per ADS*   6.97    44.93 
Diluted net income per ADS*   6.86    44.55 

 

*Each ADS represents 20 common shares.

 

(1) In calculation of diluted net income per share, assuming a dilutive effect, all of Huya’s existing unvested restricted share units and unexercised share options are treated as vested and exercised by Huya under the treasury stock method, causing the decrease percentage of the weighted average number of shares held by YY in Huya. As a result, Huya’s net income (loss) attributable to YY on a diluted basis decreased accordingly, which is presented as “incremental dilution from Huya” in the table.

 

 24 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

12.Related party transactions

 

The table below sets forth the major related parties and their relationships with the Group:

 

Major related parties  Relationship with the Group
    
Guangzhou Sunhongs Corp., Ltd. (“Guangzhou Sunhongs”)  Significant influence exercised by a principal shareholder of the Company
Kingsoft Corporation Limited (“Kingsoft Group”)  Significant influence exercised by a principal shareholder of the Company
Xiaomi Corporation(“Xiaomi Group”)  Controlled by a principal shareholder of the Company
Bigo*  Investment with significant influence
Shanghai Ansha Network Technology Co., Ltd.(“Shanghai Ansha”)  Investment with significant influence
Guangzhou Kuyou Information Technology Co., Ltd.(“Guangzhou Kuyou”)  Investment with significant influence

 

*Bigo became a subsidiary of the Group on March 4, 2019. Therefore, Bigo ceased to be a related party of the Group since March 4, 2019.

 

 25 

 

  

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

12.Related party transactions (continued)

 

During the three months ended March 31, 2018 and 2019, significant related party transactions are as follows:

 

   For the three months ended March 31, 
   2018   2019 
   RMB   RMB 
         
Loans to a related party   20,000    170,000 
Bandwidth service provided by Guangzhou Sunhongs   23,506    27,290 
Bandwidth service provided by Kingsoft Group   2    11,906 
Live streaming revenue sharing from Xiaomi Group   -    4,128 
Online games revenue shared from related parties   12,135    1,222 
Payments on behalf of related parties, net of repayments   423    (1,944)
Repayment of loans from a related party   20,000    - 
Others   1,746    6,776 

 

As of December 31, 2018 and March 31, 2019, the amounts due from/to related parties are as follows:

 

   December 31,   March 31, 
   2018   2019 
   RMB   RMB 
         
Amounts due from related parties          
Due from Xiaomi Group   1,652    4,124 
Due from Bigo(1)   191,800    - 
Others   107    6,206 
           
Total   193,559    10,330 
           
Amounts due to related parties          
Due to Guangzhou Sunhongs   11,062    9,969 
Due to Kingsoft Group   5,239    8,506 
Due to Shanghai Ansha   5,364    5,342 
Due to Guangzhou Kuyou   4,144    3,852 
Due to Xiaomi Group   -    3,349 
Others   2,527    2,727 
           
Total   28,336    33,745 

 

(1)The amounts due from Bigo mainly consisted of unsecured loans provided to Bigo. The maturities of the loans were all within one year.

 

Other receivables and payables from/to related parties are unsecured and payable on demand.

 

 26 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

13.Fair value measurements

 

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

 

The Group applies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This guidance specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

 

Level 1—Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

 

Level 2—Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

 

Level 3—Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Group’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The fair value guidance describes three main approaches to measure the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates.

 

The Group did not have any other financial instruments that were required to be measured at fair value on a recurring basis as of March 31, 2019 except for short-term investments and equity investment with readily determinable fair values.

 

 27 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

13.Fair value measurements (continued)

 

The following table summarizes the Company’s assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy as of December 31, 2018 and March 31, 2019:

 

   As of December 31, 2018 
   Level 1   Level 2   Level 3   Total 
                 
Assets                    
Short-term investments (i)   78,605    900,448    -    979,053 
Equity investment with readily determinable fair values (ii)   238,915    -    -    238,915 
    317,520    900,448    -    1,217,968 

 

   As of March 31, 2019 
   Level 1   Level 2   Level 3   Total 
                 
Assets                    
Short-term investments (i)   134,846    1,267,832    -    1,402,678 
Equity investment with readily determinable fair values (ii)   71,785    -    -    71,785 
    206,631    1,267,832    -    1,474,463 

 

  (i)

Short-term investments represented the investments issued by commercial banks or other financial institutions with a variable interest rate indexed to the performance of underlying assets within one year. For the instruments whose fair value is provided by banks at the end of each period, the Company classifies the valuation techniques that use these inputs as Level 1 of fair value measurements. For the instruments whose fair value is estimated based on quoted prices of similar products provided by banks at the end of each period, the Company classifies the valuation techniques that use these inputs as Level 2 of fair value measurements.

 

  (ii)

Equity investments with readily determinable fair values are valued using the market approach based on the quoted prices in active markets at the reporting date. The Group classifies the valuation techniques that use these inputs as Level 1 of fair value measurements.

 

 28 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

13.Fair value measurements (continued)

 

Fair value measurement on a non-recurring basis

 

The Company measures investments without readily determinable fair value on a nonrecurring basis when impairment charges and fair value change due to observable price change are recognized. These nonrecurring fair value measurements use significant unobservable inputs (Level 3). The Company uses a combination of valuation methodologies, including market and income approaches based on the Company’s best estimate to determine the fair value of these investments. An observable price change is usually resulting from new rounds of financing of the investees. The Company determines whether the securities offered in new rounds of financing are similar to the equity securities held by the Company by comparing the rights and obligations of the securities. When the securities offered in new rounds of financing are determined to be similar to the securities held by the Company, the Company adjusts the observable price of the similar security to determine the amount that should be recorded as an adjustment in the carrying value of the security to reflect the current fair value of the security held by the Company by using the back-solve method based on the equity allocation model with adoption of some key parameters such as risk-free rate and equity volatility. Inputs used in these methodologies primarily include discount rate, the selection of comparable companies operating in similar businesses and etc. For the three months ended March 31, 2019, the Company’s previously held equity interest in Bigo was re-measured to fair value on the acquisition date, and a re-measurement gain of RMB2,669,334 was recognized as gain on fair value changes of investments.

 

Apart from the short-term investments, equity investment measured at fair value through earnings, the Company’s other financial instruments principally consist of cash and cash equivalent, short-term deposits, long-term deposits, accounts receivable, financing receivables, other receivables, amounts due to/from related parties, accounts payable, certain accrued expenses and convertible bonds. The recorded values of cash, short-term deposits, long-term deposits, accounts receivable, financing receivables, other receivables, amounts due to/from related parties, accounts payable, certain accrued expenses and convertible bonds are recorded at cost which approximates fair value. The fair value of convertible bonds is within Level 2 of the fair value hierarchy.

 

 29 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

14.Commitments and contingencies

 

(a)Operating lease commitments

 

As of December 31, 2018, future minimum payments under non-cancellable operating leases commitments consist of the following:

 

   Office rental 
   RMB 
     
2019   84,689 
2020   53,609 
2021   35,871 
2022 and after   47,726 
    221,895 

  

As of March 31, 2019, future minimum payments under non-cancellable operating leases commitments consist of the following:

 

   Office rental 
   RMB 
     
2020   17,592 
2021   9,567 
2022   8,765 
2023 and after   8,574 
    44,498 

 

The operating lease commitments as of March 31, 2019, presented above mainly consist of the short-term lease commitments and leases that have not yet commenced but that create significant rights and obligations for the Company, which are not included in operating lease right-of–use assets and lease liabilities.

 

(b)Capital commitments

 

As of March 31, 2019, the Group had outstanding capital commitments totaling RMB94,815 which consisted of capital expenditures related to properties and additional investments in equity investments.

 

(c)Litigation

 

(i) In October 2014, Guangzhou NetEase Computer System Co., Ltd. (“Guangzhou NetEase”) brought a copyright infringement claim against the Group in the Intermediate People’s Court of Guangzhou, alleging that the Group’s live game broadcasting program has infringed the copyright of one of their online games called Fantasy Westward Journey. The claimant is seeking RMB100 million for their potential damages, requesting YY to cease the copyright infringement practices and apologize publicly.

 

In November 2017, the local court passed a judgment requesting the Company to compensate such game publisher for its loss amounting to RMB20 million, as a result of the alleged copyright infringement. Based on its estimate as of December 31, 2017, the Company recorded an estimated loss contingency of RMB20 million in its financial statements. Up to the date of this report, there has been no judgment from the appellate court yet and the Group’s estimate on the loss contingency remained the same as last year.

 

(ii) A majority of the Group’s corporate loan business was in the form of sale-and-leaseback arrangements, under which the Group purchases equipment from third party companies and lease back the equipment to the third party companies. In January 2019, one of the lessees was unable to repay the principal amount of around RMB15 million due in January 2019. The total financing receivable due from this lessee was RMB195 million as of March 31, 2019. The Group has brought a lawsuit against this lessee to the court, claiming the lessee to repay all the outstanding amount due to the Group. The court session has not been open up to the date of this report. Pursuant to the finance lease agreement, the legal titles of the equipment purchased by the Group have been transferred to the Group and the fair value of the equipment exceeds the total financing receivable due from the lessee. The Group also pledged or applied to the court to preserve certain assets of the lessee or the lessee’s related entity. The Group believed that the financing receivable due from the lessee can be recovered based on the measures taken and therefore no loss allowance was provided against the receivable. The financing receivable was placed on non-accrual status after the lessee was unable to repay the principal due in January 2019.

 

 30 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

15.Subsequent events

 

Huya completed a follow-on public offering of ADSs on April 12, 2019. As a result of these transactions, Huya issued and sold an aggregate of 13,600,000 ADSs and the Company, as selling shareholder, sold an aggregate of 4,800,000 Huya’s ADSs it held at a price of US$24.00 per ADS.

 

The net proceeds received by Huya, after deducting underwriter commissions and estimated offering expenses, amounted to approximately US$313.8 million. The net proceeds received by the Company, after deducting underwriter commissions, amounted to approximately US$111.2 million.

 

16.Segment Reporting

  

There are two segments in the Group, including YY Live and Huya for the three months ended March 31, 2018. Starting from the first quarter of 2019, the segment of “YY Live” was renamed as “YY”. The Company completed the acquisition of Bigo in March 2019, which is a separate segment of the Group. Therefore, there are three segments in the Group for the three months ended March 31, 2019.

 

The Group currently does not allocate assets to all of its segments, as its CODM does not use such information to allocate resources or evaluate the performance of the operating segments.

 

 31 

 

  

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

16.Segment Reporting (continued)

 

(a)The following table presents summary information by segment:

 

For the three months ended March 31, 2019:

 

   YY   Huya   Bigo   Elimination   Total 
   RMB   RMB   RMB   RMB   RMB 
                     
Net revenues                         
Live streaming   2,566,523    1,552,482    366,015    -    4,485,020 
Others   186,733    78,996    29,835    -    295,564 
                          
Total net revenues   2,753,256    1,631,478    395,850    -    4,780,584 
                          
Cost of revenues(1)   (1,548,046)   (1,358,105)   (254,174)   -    (3,160,325)
                          
Gross profit   1,205,210    273,373    141,676    -    1,620,259 
                          
Operating expenses(1)                         
Research and development expenses   (235,502)   (90,044)   (79,190)   -    (404,736)
Sales and marketing expenses   (266,317)   (78,164)   (189,755)   -    (534,236)
General and administrative expenses   (163,364)   (85,811)   (27,249)   -    (276,424)
                          
Total operating expenses   (665,183)   (254,019)   (296,194)   -    (1,215,396)
                          
Other income   58,066    8,864    1,758    -    68,688 
                          
Operating income (loss)   598,093    28,218    (152,760)   -    473,551 
                          
Interest expenses   (6,219)   -    (1,395)   1,395    (6,219)
Interest income and investment income   94,745    54,585    354    (1,395)   148,289 
Foreign currency exchange (losses) gains, net   (965)   (374)   2,672    -    1,333 
Gain on fair value changes of investments   2,649,843    -    -    -    2,649,843 
                          
Income (loss) before income tax expenses   3,335,497    82,429    (151,129)   -    3,266,797 
                          
Income tax (expenses) benefits   (110,380)   (18,968)   5,377    -    (123,971)
                          
Income (loss) before share of income (loss) in equity method investments, net of income taxes   3,225,117    63,461    (145,752)   -    3,142,826 
                          
Share of income (loss) in equity method investments, net of income taxes   7,157    (1)   -    -    7,156 
                          
Net income (loss)   3,232,274    63,460    (145,752)   -    3,149,982 

 

 32 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

16.Segment Reporting (continued)

 

(1) Share-based compensation was allocated in cost of revenues and operating expenses as follows:

 

   YY   Huya   Bigo   Total 
   RMB   RMB   RMB   RMB 
                 
Cost of revenues   7,224    4,020    3,065    14,309 
Research and development expenses   25,992    11,824    32,791    70,607 
Sales and marketing expenses   552    904    520    1,976 
General and administrative expenses   38,194    51,078    5,605    94,877 

 

 33 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

16.Segment Reporting (continued)

 

For the three months ended March 31, 2018:

 

   YY   Huya   Elimination   Total 
   RMB   RMB   RMB   RMB 
                 
Net revenues                    
Live streaming   2,239,251    792,784    -    3,032,035 
Others   168,053    50,798    (1,955)   216,896 
                     
Total net revenues   2,407,304    843,582    (1,955)   3,248,931 
                     
Cost of revenues(1)   (1,303,264)   (712,533)   -    (2,015,797)
                     
Gross profit   1,104,040    131,049    (1,955)   1,233,134 
Operating expenses(1)                    
Research and development expenses   (198,007)   (51,458)   -    (249,465)
Sales and marketing expenses   (211,673)   (25,940)   1,955    (235,658)
General and administrative expenses   (128,193)   (35,783)   -    (163,976)
                     
Total operating expenses   (537,873)   (113,181)   1,955    (649,099)
                     
Other income   2,091    10,283    -    12,374 
                     
Operating income   568,258    28,151    -    596,409 
                     
Interest expense   (2,019)   -    -    (2,019)
Interest income and investment income   81,607    10,584    -    92,191 
Foreign currency exchange gains,  net   6,719    -    -    6,719 
Gain on fair value changes of investments   426,547    -    -    426,547 
Fair value loss on derivative liabilities   -    (11,868)   -    (11,868)
                     
Income before income tax expenses   1,081,112    26,867    -    1,107,979 
                     
Income tax (expenses) benefits   (152,709)   4,464    -    (148,245)
                     
Income before share of income in equity method investments, net of income taxes   928,403    31,331    -    959,734 
                     
Share of income in equity method investments, net of income taxes   9,103    76    -    9,179 
                     
Net income   937,506    31,407    -    968,913 

 

 34 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

16.Segment Reporting (continued)

 

(1) Share-based compensation was allocated in cost of revenues and operating expenses as follows:

 

   YY   Huya   Total 
   RMB   RMB   RMB 
             
Cost of revenues   19,353    255    19,608 
Research and development expenses   52,677    1,790    54,467 
Sales and marketing expenses   1,451    418    1,869 
General and administrative expenses   14,659    21,904    36,563 

 

 35 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

16.Segment Reporting (continued)

 

(b)The following tables set forth revenues and property and equipment for of the Company’s geographic operations:

 

   For the three months ended March 31, 
   2018   2019 
Revenues:          
PRC   3,248,931    4,450,344 
Non- PRC   -    330,240 

 

   As of December 31,   As of March 31, 
    2018    2019 
Property and equipment, net:          
PRC   1,295,171    1,431,508 
Non- PRC   1,148    266,265 

 

 36 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

17.VIEs

 

The following unaudited interim condensed consolidated financial information of the Group’s VIEs excluding the intercompany items with the Group’s subsidiaries was included in the accompanying unaudited interim condensed consolidated financial statements:

 

   As of December 31,   As of March 31, 
   2018   2019 
   RMB   RMB 
Assets           
Current assets           
Cash and cash equivalents    4,665,938    6,278,016 
Restricted cash and cash equivalents   -    7,043 
Short-term deposits    2,100,000    1,300,000 
Restricted short-term deposits    -    300,000 
Short-term investments   979,052    1,387,645 
Accounts receivable, net    192,932    232,257 
Amounts due from related parties    172,258    8,636 
Financing receivables, net   725,336    664,606 
Prepayments and other current assets    663,437    471,456 
Total current assets    9,498,953    10,649,659 
           
Non-current assets           
Long-term deposits   1,000,000    - 
Deferred tax assets    70,834    103,338 
Investments    862,272    980,142 
Property and equipment, net    655,402    765,213 
Intangible assets, net    57,050    582,947 
Land use rights, net    1,784,639    1,772,615 
Right-of-use assets, net   -    72,052 
Other non-current assets    143,240    131,535 
Total non-current assets    4,573,437    4,407,842 
           
Total assets    14,072,390    15,057,501 
           
Liabilities           
Current liabilities           
Accounts payable    112,167    119,192 
Deferred revenue    950,816    1,167,246 
Advances from customers    101,690    90,516 
Income taxes payable    162,118    242,545 
Accrued liabilities and other current liabilities    2,207,138    2,195,200 
Lease liabilities due within one year   -    33,092 
Amounts due to related parties    28,336    30,327 
Total current liabilities    3,562,265    3,878,118 
           
Non-current liabilities           
Deferred revenue    86,977    123,976 
Lease liabilities   -    40,007 
Deferred tax liabilities    -    79,341 
Total non-current liabilities    86,977    243,324 
           
Total liabilities    3,649,242    4,121,442 

 

 37 

 

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All amount in thousands, except share, ADS, per share and per ADS data, unless otherwise stated)

 

17.VIEs (continued)

 

   For the three months ended March 31, 
   2018   2019 
   RMB   RMB 
         
Net revenues   3,245,356    4,448,582 
Net income   506,169    966,169 

 

   For the three months ended March 31, 
   2018   2019 
   RMB   RMB 
         
Net cash provided by operating activities   859,492    1,046,447 
Net cash provided by investing activities   291,504    1,385,494 
Net cash provided by financing activities   -    - 
    1,150,996    2,431,941 

 

 38 

 

Exhibit 99.4

 

UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

 

In June 2018, we invested US$272 million in the Series D round of financing of Bigo as the lead investor. We were then an existing shareholder of Bigo and had become its largest shareholder after the Series D financing.  In March 2019, we completed the acquisition of the remaining 68.3% of equity interest in Bigo from the other shareholders of Bigo, or the Acquisition, including Mr. David Xueling Li, our chairman of the board of directors and chief executive officer. Pursuant to the agreement, we paid US$343.1 million in cash and issued 38,326,579 Class B common shares and 305,127,046 Class A common shares to the selling shareholders of Bigo.

 

The following unaudited pro forma condensed consolidated financial statements, or the Pro Forma Financial Statements, are based on YY’s and Bigo’s historical consolidated financial statements as adjusted to give effect to the pro forma events that are (i) directly attributable to the Acquisition, (ii) expected to have a continuing impact on the unaudited pro forma condensed consolidated statements of operations, and (iii) factually supportable. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2018 and the three months ended March 31, 2019 give effect to the pro forma events as if it had been completed by January 1, 2018. The condensed consolidated statements of operations of Bigo for the period from January 1, 2019 to March 4, 2019 has not been audited or reviewed by PricewaterhouseCoopers Zhong Tian LLP. A pro forma consolidated balance sheet has not been provided as the acquisition has been reflected in YY’s consolidated balance sheet as of March 31, 2019.

 

The unaudited pro forma consolidated statement of income (i) is presented based on information currently available, (ii) is intended for informational purposes only, and (iii) does not reflect all actions that may be undertaken by us after the Acquisition.

 

While the Pro Forma Financial Statements are helpful in showing the financial characteristics of the consolidated companies, it is not intended to show how the consolidated companies would have actually performed if the events described above had in fact occurred on the dates acquired or to project the results of operations or financial position for any future date or period. We have included in the Pro Forma Financial Statements all adjustments, consisting of normal recurring adjustments, necessary of a fair presentation of the operating results in the historical periods. We believe that the assumptions utilized to prepare the pro forma adjustments provide a reasonable basis for presenting the significant effects of the transactions and that the Pro Forma Financial Statements are factually supportable, give appropriate effect to the impact of the events that are directly attributable to the transactions, and reflect those items expected to have a continuing impact on our financial condition.

 

The Pro Forma Financial Statements should be read in conjunction with the accompanying notes to the Pro Forma Financial Statements, our historical consolidated financial statements and the notes thereto of YY and Bigo included elsewhere in this offering memorandum and the 2018 Annual Report incorporated by reference herein, along with “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Result of Operations.”

 

 1 

 

 

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(All amounts in thousands, except share, ADS, per share and per ADS data)

 

The following table sets forth the pro forma unaudited condensed consolidated statement of operations for the year ended December 31, 2018.

 

   For the year ended December 31, 2018 
   YY   Bigo  

Pro Forma

Adjustments

  

Note

  Pro forma
consolidated results
 
   RMB   RMB   RMB      RMB 
                    
Net revenues                       
Live streaming   14,877,667    3,018,591    -       17,896,258 
Others   885,890    9,810    (5,950)  (e)   889,750 
                        
Total net revenues   15,763,557    3,028,401    (5,950)      18,786,008 
                        
Cost of revenues   (10,017,134)   (1,872,875)   (14,807)  (c)   (11,904,816)
                        
Gross profit   5,746,423    1,155,526    (20,757)      6,881,192 
                        
Operating expenses                       
Research and development expenses   (1,192,052)   (446,948)   (187,111)  (c)   (1,826,111)
Sales and marketing expenses   (1,149,316)   (944,148)   (654,651)  (a)、(c)   (2,748,115)
General and administrative expenses   (883,225)   (135,147)   (101,944)  (a)、(c)、(e)   (1,120,316)
                        
Total operating expenses   (3,224,593)   (1,526,243)   (943,706)      (5,694,542)
                        
Other income   117,860    4,792    -       122,652 
                        
Operating income (loss)   2,639,690    (365,925)   (964,463)      1,309,302 
                        
Interest expense   (8,616)   (1,408)   1,408   (e)   (8,616)
Interest income and investment income   485,552    64,642    (1,408)  (e)   548,786 
Foreign currency exchange losses, net   (514)   (13,525)   -       (14,039)
Gain on deemed disposal and disposal of investments   16,178    -    -       16,178 
Gain on fair value changes of investments   1,689,404    -    (988,663)  (b)   700,741 
Fair value loss on derivative liabilities   (2,285,223)   (626,729)   626,729   (g)   (2,285,223)
Other non-operating expenses   (2,000)   -    -       (2,000)
                        
Income (loss) before income tax expenses   2,534,471    (942,945)   (1,326,397)      265,129 
                        
Income tax expenses   (477,707)   (67,551)   67,894   (f)   (477,364)
                        
Income (loss) before share of income in equity method investments, net of income taxes   2,056,764    (1,010,496)   (1,258,503)      (212,235)
                        
Share of income in equity method investments, net of income taxes   58,933    -    -       58,933 
                        
Net income (loss)   2,115,697    (1,010,496)   (1,258,503)      (153,302)
                        
Less: Net loss attributable to the non-controlling interest shareholders and the mezzanine equity classified as non-controlling interest shareholders   (93,310)   -    -       (93,310)
                        
Net income (loss) attributable to controlling interest of YY Inc.   2,209,007    (1,010,496)   (1,258,503)      (59,992)
                        
Less: Accretion of subsidiaries'  redeemable convertible preferred shares to redemption value   73,159    151,720    (151,720)  (g)   73,159 
Deemed dividend to subsidiary’s Series A preferred shareholders   489,284    -    -       489,284 
Cumulative dividend on subsidiary’s Series A Preferred Shares   4,606    -    -       4,606 
                        
Net income (loss) attributable to common shareholders of YY Inc.   1,641,958    (1,162,216)   (1,106,783)      (627,041)

 

 2 

 

 

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(All amounts in thousands, except share, ADS, per share and per ADS data)

 

   For the year ended December 31, 2018 
   YY   Bigo  

Pro Forma

Adjustments

   Note 

Pro forma

consolidated results