SEC Filing | JOYY Inc.

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

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

For the month of June 2019

Commission File Number: 001-35729

YY Inc.

Building B-1 North Block of Wanda Plaza

No. 79 Wanbo Er Road, Nancun Town

Panyu District, Guangzhou 511442

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

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

Form 20-F þ Form 40-F ¨

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

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

SIGNATURE

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

YY INC.

By:	/s/ Bing Jin
	Name:	Bing Jin
	Title:	Chief Financial Officer

Date: June 18, 2019

EXHIBIT INDEX

Exhibit No.		Description

Exhibit 99.1		Press Release

Exhibit 99.2		Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 2018 and 2019

Exhibit 99.3		Unaudited Interim Condensed Consolidated Financial Statements of YY Inc. as of and for the Three Months Ended March 31, 2018 and 2019

Exhibit 99.4		Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 2018 and the Three Months Ended March 31, 2019

Exhibit 99.5		Audited Financial Statements of Bigo Inc as of and for the Year Ended December 31, 2018

Exhibit 99.1

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

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

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

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

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

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

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

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

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

About YY Inc.

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

Safe Harbor Statement

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

Investor Relations Contact

YY Inc.

Matthew Zhao

Tel: +86 (20) 8212-0000

Email: IR@YY.com

ICR, Inc.

Jack Wang

Tel: +1 (646) 915-1611

Email: IR@YY.com

Exhibit 99.2

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

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

Overview

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

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

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

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

Discussion of Selected Statements of Operations Items

Revenues

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

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

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

(1)

Revenues are presented net of rebates and discounts.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cost of Revenues

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

Operating Expenses

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

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

Research and Development Expenses

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

Sales and Marketing Expenses

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

General and administrative expenses

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

Goodwill Impairment

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

Share-based Compensation Expenses

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

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

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

Operating Income

Gain on deconsolidation and disposal of subsidiaries

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

Other income

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

Results of Operations

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

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

(1)

Net of rebates and discounts.

(2)

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

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

Net revenues

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

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

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

Cost of revenues

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

Operating expenses

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

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

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

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

Other income

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

Interest income and investment income

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

Gain on fair value change of investments

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

Income tax expense

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

Net income

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Operating Activities

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

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

Investing Activities

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

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

Financing Activities

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

Capital Expenditures

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

Contractual Obligations

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

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

(1)

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

(2)

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

(3)

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

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

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

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.

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

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.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2019

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

	Class A common shares				Class B common shares
	Number of shares		Amount		Number of shares			Amount			Additional paid-in capital			Statutory reserves		Retained earnings			Accumulated other comprehensive loss			Total YY Inc.’s shareholders’ equity			Non- controlling interests			Total shareholders’ equity
			RMB					RMB			RMB			RMB		RMB			RMB			RMB			RMB			RMB

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

Balance as of March 31, 2018		965,928,668		58		297,982,976			22			5,828,395			62,718		5,750,050			(217,115	)		11,424,128			64,123			11,488,251

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.

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.

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

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

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

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)

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.

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)

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.

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.

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)

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.

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)

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.

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)

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.

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)

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.

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)

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”.

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)

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

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.

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)

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

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)

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

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.

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

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)

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.

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)

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.

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)

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.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

10.

Share-based compensation

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

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

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

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

	Number of restricted shares			Weighted average grant-date fair value (US$)

Outstanding, December 31, 2018		-			-

Granted		38,042,760			3.6020
Forfeited		(1,485,159	)		3.6020
Vested		(288,815	)		3.6020

Outstanding, March 31, 2019		36,268,786			3.6103

Expected to vest at March 31, 2019		31,459,321			3.6116

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

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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

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

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

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

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

Exhibit 99.4

UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

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

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

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

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

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

PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

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

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

	For the year ended December 31, 2018
	YY			Bigo			Pro Forma Adjustments			Note	Pro forma consolidated results
	RMB			RMB			RMB				RMB

Net revenues
Live streaming		14,877,667			3,018,591			-				17,896,258
Others		885,890			9,810			(5,950	)	(e)		889,750

Total net revenues		15,763,557			3,028,401			(5,950	)			18,786,008

Cost of revenues		(10,017,134	)		(1,872,875	)		(14,807	)	(c)		(11,904,816	)

Gross profit		5,746,423			1,155,526			(20,757	)			6,881,192

Operating expenses
Research and development expenses		(1,192,052	)		(446,948	)		(187,111	)	(c)		(1,826,111	)
Sales and marketing expenses		(1,149,316	)		(944,148	)		(654,651	)	(a)、(c)		(2,748,115	)
General and administrative expenses		(883,225	)		(135,147	)		(101,944	)	(a)、(c)、(e)		(1,120,316	)

Total operating expenses		(3,224,593	)		(1,526,243	)		(943,706	)			(5,694,542	)

Other income		117,860			4,792			-				122,652

Operating income (loss)		2,639,690			(365,925	)		(964,463	)			1,309,302

Interest expense		(8,616	)		(1,408	)		1,408		(e)		(8,616	)
Interest income and investment income		485,552			64,642			(1,408	)	(e)		548,786
Foreign currency exchange losses, net		(514	)		(13,525	)		-				(14,039	)
Gain on deemed disposal and disposal of investments		16,178			-			-				16,178
Gain on fair value changes of investments		1,689,404			-			(988,663	)	(b)		700,741
Fair value loss on derivative liabilities		(2,285,223	)		(626,729	)		626,729		(g)		(2,285,223	)
Other non-operating expenses		(2,000	)		-			-				(2,000	)

Income (loss) before income tax expenses		2,534,471			(942,945	)		(1,326,397	)			265,129

Income tax expenses		(477,707	)		(67,551	)		67,894		(f)		(477,364	)

Income (loss) before share of income in equity method investments, net of income taxes		2,056,764			(1,010,496	)		(1,258,503	)			(212,235	)

Share of income in equity method investments, net of income taxes		58,933			-			-				58,933

Net income (loss)		2,115,697			(1,010,496	)		(1,258,503	)			(153,302	)