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 | Statutory reserves | Retained earnings | Accumulated other comprehensive | Total YY Inc.’s shareholders’ equity | Non- controlling interests | Total shareholders’ | ||||||||||||||||||||||||||||||||||
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 grant-date | |||||||
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 |