| Organization and Principal Activities | 1.
Organization and principal activities
(a)
Organization and principal activities
HUYA Inc. (“Huya” or the “Company”) is a
subsidiary of YY Inc. (the “Parent Company” or
“YY”, refer to YY Inc. or YY’s consolidated
operating entities, where appropriate). The Company is a holding
company incorporated in Cayman Islands on March 30, 2017 and
conducts its business through its subsidiaries, variable interest
entity (“VIE”) and VIE’s subsidiaries
(“VIEs”, also refer to VIE and its subsidiaries as a
whole, where appropriate) (collectively, the “Group”)
in the People’s Republic of China (the “PRC”).
The Group is principally engaged in operating its own live
streaming platforms, which enable broadcasters and viewers to
interact with each other during live streaming. The primary theme
of the Group’s platforms is game live streaming. At the same
time, the Group has also extended themes to life and entertainment
topics beyond games to cater to the Group’s users’
growing entertainment demands. In providing these services, the
Group has cooperated with talent agencies to assist the Group in
broadcaster recruitment, live streaming training and support,
promotion strategies development and content management and
discipline under the Group’s guidance and supervision. These
services are referred to as the “Business”. The Company
generates the majority of its revenue from sales of virtual items
in live streaming platforms as well as other services, which
substantially consist of advertising and online games-related
services.
(b)
Reorganization and Carve-out
The Business was founded by YY in 2014 and the Company has
undertaken the reorganization (“Reorganization”) as
detailed below. Prior to the completion of the Reorganization, the
operation of the Business was carried out by YY mainly through
Guangzhou Huaduo Network Technology Co., Ltd. (“Guangzhou
Huaduo” or “VIE of YY”) (the “Predecessor
Operations”).
Establishment of Guangzhou Huya Information Technology Co.,
Ltd. (“Guangzhou Huya” or “VIE of Huya”)
for the Carve-out
On August 10, 2016, Guangzhou Huya was incorporated in the
PRC, wholly owned by Guangzhou Huaduo, and received capital
contribution from Guangzhou Huaduo amounted to RMB100,000 in 2016
and RMB100,000 in 2017, respectively, as Guangzhou Huya’s
registered capital (Note 22). Subsequently, Guangzhou Huaduo
transferred 0.99% of the equity interest of Guangzhou Huya to
Guangzhou Qinlv Investment and Consulting Ltd, which is wholly
owned by Mr. Rongjie Dong, the CEO of Huya. Guangzhou Huya has
obtained the licenses to provide internet-related service in the
PRC.
Carve-out
Pursuant to the agreement entered into between Guangzhou Huya and
YY, all assets, including the trademarks, domain names, business
contracts, tangible assets and key employees, relating to the
Business as of December 31, 2016 have been transferred from
the Predecessor Operations to Guangzhou Huya
(the “Carve-out”).
Operation support services arrangement
Before the completion of Carve-out,
Establishment of the Group entities and contractual
arrangement
In 2017, the Group established Huya as the holding company, Huya
Limited (“Huya HK”), a wholly owned subsidiary of Huya
in Hong Kong and Guangzhou Huya Technology Co., Ltd. (“Huya
Technology”), a wholly foreign-owned enterprise
(“WFOE”) in the PRC, which is owned by Huya HK. On
July 10, 2017, Guangzhou Huya, its legal shareholders and Huya
Technology entered into a series of agreements as detailed in Note
1(e). Based on management assessment on the contractual
arrangement, the Company has determined that Guangzhou Huya is a
VIE of Huya Technology and the Company is the ultimate primary
beneficiary of Guangzhou Huya through Huya Technology. Accordingly,
the Company has consolidated Guangzhou Huya’s results of
operations, assets and liabilities in the Group’s financial
statements pursuant to the United States Generally Accepted
Accounting Principles (“U.S. GAAP”) for the years
presented. The agreements detailed in Note 1(e) were necessary to
comply with PRC laws and regulations which prohibit or restrict
foreign ownership of companies that provide internet content
services in the PRC where licenses are required.
Basis of presentation for the Reorganization
Immediately before and after the Reorganization on July 10,
2017, all the legal entities involved in the Reorganization are
ultimately controlled by YY. Since the Group and the Predecessor
Operations are under common control, the accompanying consolidated
financial statements include the assets, liabilities, revenue,
expenses and cash flows that are directly attributable to the
Predecessor Operations before the completion of Reorganization.
However, such presentation may not necessarily reflect the results
of operations, financial position and cash flows if the Group had
actually existed on a stand-alone basis during the years presented
before the completion of Reorganization.
The assets and liabilities have been stated at historical carrying
amounts. Only those assets and liabilities that are specifically
identifiable to the Business are included in the Group’s
consolidated balance sheets. The Group’s statements of
comprehensive loss consists all the revenues, costs and expenses of
the Business, including allocations to the cost of revenues, sales
and marketing expenses, research and development expenses, and
general and administrative expenses, which were incurred by YY but
related to the Business prior to the Carve-out.
These allocated costs and expenses primarily included:
i)
Salaries and welfares of employees of certain shared
functions, including research and development and operational
support departments and administrative departments supporting
different business lines. For salaries and welfares of employees in
research and development departments and operation support
departments, allocation was based on the proportion of the number
of active users of each business line. For salaries and welfare of
employees in administrative departments, allocation was based on
the proportion of number of staff in each business line.
ii)
Bandwidth and server custody costs of certain shared
functions. The allocation was based on the proportion of the number
of active users of each business line.
iii)
Depreciation and amortization. Depreciation and
amortization of assets of shared functions was allocated based on
the number of active users of each business line.
The following table sets forth the cost of revenues, sales and
marketing expenses, research and development expenses, and general
and administrative expenses allocated from YY for the year ended
December 31, 2016. After the completion of
the Carve-out,
For the year ended December 31, 2016
RMB
Cost of revenues 132,852
Research and development expenses 64,380
General and administrative expenses 40,110
Sales and marketing expenses 3,952
Total 241,294
The Business was operated within YY for the year ended
December 31, 2016 before the completion of
the Carve-out.
Income tax liability is calculated based on a separate return basis
as if the Group had filed separate tax returns before the
completion of the Carve-out. Carve-out
In 2014, a game publisher brought a lawsuit against YY, claiming
that YY infringed its copyright by facilitating broadcasters
streaming copyrighted content on YY’s game live streaming
platform, which is the predecessor of Huya platform. As of
April 20, 2017, the date YY issued its 2016 consolidated
financial statements, the case was in the early stage and the
liability could not be estimated reliably by YY, and therefore, no
amount was accrued by YY for the year ended December 31, 2016.
Under the arrangements between YY and Huya, YY will bear any
potential liability related to the Business prior to
the Carve-out
In November 2017, the local court passed a judgment ordering YY to
compensate such game publisher for its loss as a result of the
alleged copyright infringement. This judgment is not final and
didn’t take effect as YY appealed the case to the appellate
court. Based on its estimate as of December 31, 2017, YY
recorded an estimated loss contingency of RMB20 million in its
financial statements. As a result, under U.S. GAAP, Huya recorded
an expense relating to such loss contingency and recognized a
deemed contribution from YY.
(c)
Initial Public Offering
The Company was listed on May 11, 2018 on the New York Stock
Exchange (“NYSE”) and the underwriters subsequently
exercised their over-allotment option on May 15, 2018. The
Company issued and sold a total of 17,250,000 American Depositary
shares (“ADSs”) in these transactions, representing
17,250,000 Class A ordinary shares. Each ADS represents one
Class A ordinary share. Upon the completion of the IPO, the
Company’s (1) 17,647,058 outstanding
Series A-1 A-2 B-2
(d)
Principal subsidiaries and VIEs
As of December 31, 2018, the Company’s principal
subsidiaries and VIE are as follows:
Name Place of Date of % of direct Principal activities
Wholly owned subsidiaries
Huya HK Hong Kong January 4, 2017 100 % Investment holding
Huya Technology PRC June 16, 2017 100 % Software development
HUYA PTE. LTD. Singapore July 23, 2018 100 % Internet value added
VIE
Guangzhou Huya PRC August 10, 2016 100 % Internet value added
(e)
Variable interest entities
VIE agreements amongst Huanju Shidai Technology (Beijing) Co.,
Ltd. (“Beijing Huanju Shidai” or the WFOE of YY),
Guangzhou Huaduo and its nominee shareholders
Prior to the completion of the Carve-out,
The following is a summary of the contractual arrangements entered
among Beijing Huanju Shidai, Guangzhou Huaduo and its nominee
shareholders.
•
Exclusive Technology Support and Technology Services
Agreement
Under the exclusive technology support and technology services
agreement between Beijing Huanju Shidai and Guangzhou Huaduo,
Beijing Huanju Shidai has the exclusive right to provide to
Guangzhou Huaduo technology support and technology services related
to all technologies needed for its business. Beijing Huanju Shidai
owns the exclusive intellectual property rights created as a result
of the performance of this agreement. The service fee payable by
Guangzhou Huaduo to Beijing Huanju Shidai is determined by various
factors, including the expenses Beijing Huanju Shidai incurs for
providing such services and Guangzhou Huaduo’s revenues. The
term of this agreement will expire in 2028 and may be extended with
Beijing Huanju Shidai’s written confirmation prior to the
expiration date. Beijing Huanju Shidai is entitled to terminate the
agreement at any time by providing 30 days’ prior written
notice to Guangzhou Huaduo.
•
Exclusive Business Cooperation Agreement
Under the exclusive business cooperation agreement between Beijing
Huanju Shidai and Guangzhou Huaduo, Beijing Huanju Shidai has the
exclusive right to provide to Guangzhou Huaduo technology support,
business support and consulting services related to the services
provided by Guangzhou Huaduo, the scope of which is to be
determined by Beijing Huanju Shidai from time to time. Beijing
Huanju Shidai owns the exclusive intellectual property rights
created as a result of the performance of this agreement. The
service fee payable by Guangzhou Huaduo to Beijing Huanju Shidai is
a certain percentage of its earnings. The term of this agreement
will expire in 2039 and may be extended with Beijing Huanju
Shidai’s written confirmation prior to the expiration date.
Beijing Huanju Shidai is entitled to terminate the agreement at any
time by providing 30 days’ prior written notice to Guangzhou
Huaduo.
•
Exclusive Option Agreement
The parties to the exclusive option agreement are Beijing Huanju
Shidai, Guangzhou Huaduo and each of the nominee shareholders of
Guangzhou Huaduo. Under the exclusive option agreement, each of the
nominee shareholders of Guangzhou Huaduo irrevocably granted
Beijing Huanju Shidai or its designated representative(s) an
exclusive option to purchase, to the extent permitted under PRC
law, all or part of his or its equity interests in Guangzhou
Huaduo. Beijing Huanju Shidai or its designated representative(s)
have sole discretion as to when to exercise such options, either in
part or in full. Without Beijing Huanju Shidai’s prior
written consent, Guangzhou Huaduo’s nominee shareholders
shall not sell, transfer, mortgage or otherwise dispose their
equity interests in Guangzhou Huaduo. The term of this agreement is
ten years and may be extended at Beijing Huanju Shidai’s sole
discretion.
•
Power of Attorney
Pursuant to the irrevocable power of attorney executed by each
nominee shareholder of Guangzhou Huaduo, each such nominee
shareholder appointed Beijing Huanju Shidai as
its attorney-in-fact
•
Share Pledge Agreement
Pursuant to the share pledge agreement between Beijing Huanju
Shidai and the nominee shareholders of Guangzhou Huaduo, the
nominee shareholders of Guangzhou Huaduo have pledged all of their
equity interests in Guangzhou Huaduo to Beijing Huanju Shidai to
guarantee the performance by Guangzhou Huaduo and its nominee
shareholders’ performance of their respective obligations
under the exclusive business cooperation agreement, exclusive
option agreement, exclusive technology support and technology
services agreement and powers of attorney. If Guangzhou Huaduo
and/or its nominee shareholders breach their contractual
obligations under those agreements, Beijing Huanju Shidai, as
pledgee, will be entitled to certain rights, including the right to
sell the pledged equity interests.
VIE agreements amongst Huya Technology, Guangzhou Huya and its
nominee shareholders
In connection with the Reorganization completed on July 10,
2017, similar contractual arrangements have been entered into among
the Company’s wholly owned subsidiary, Huya Technology, and
Guangzhou Huya and its nominee shareholders. The Company obtained
control over Guangzhou Huya through Huya Technology, which is a
wholly owned subsidiary of the Company, by entering into a series
of contractual arrangements with Guangzhou Huya and its nominee
shareholders. To comply with PRC laws and regulations which
prohibit or restrict foreign ownership of internet content, the
nominee shareholders are legal owners of an entity. However, the
rights of those nominee shareholders have been transferred to Huya
Technology through such contractual arrangements. These contractual
arrangements include exclusive purchase option agreements,
exclusive business cooperation agreements, equity pledge agreements
and powers of attorney. These contractual arrangements can be
extended at the option of Huya Technology, prior to the expiration
date. Management concluded that Huya Technology, through the
contractual arrangements, has the power to direct the activities
that most significantly impact Guangzhou Huya’s economic
performance, bears the risks of and enjoys the rewards normally
associated with ownership of Guangzhou Huya, and therefore
Guangzhou Huya is a VIE of Huya Technology, of which the Company is
the ultimate primary beneficiary. Accordingly, the Company
consolidates Guangzhou Huya’s results of operations, assets
and liabilities in the Group’s consolidated financial
statements pursuant to U.S. GAAP since the establishment of
Guangzhou Huya. Refer to Note 2(b) to the consolidated financial
statements for the principles of consolidation.
The following is a summary of the contractual arrangements entered
among Huya Technology, Guangzhou Huya and its nominee
shareholders.
•
Exclusive Business Cooperation Agreement
Huya Technology and Guangzhou Huya entered into exclusive business
cooperation agreement under which Guangzhou Huya engages Huya
Technology as its exclusive provider of technology support,
business support and consulting services. Guangzhou Huya shall pay
to Huya Technology service fees, which is determined by Huya
Technology at its sole discretion. Huya Technology shall have
exclusive and proprietary rights and interests in all rights,
ownership, interests and intellectual properties arising from the
performance of the agreement. During the term of the agreement,
Guangzhou Huya shall not accept any consultations and/or services
provided by any third party and shall not cooperate with any third
party for the provision of identical or similar services without
prior consent of Huya Technology. The term of this agreement is ten
years and will be extended for ten years automatically after
expiration, unless otherwise agreed by both parties in a written
agreement. Huya Technology is entitled to terminate the agreement
at any time by providing 30 days’ prior written notice to
Guangzhou Huya. The service fees that the Company’s WFOE
charged to the VIE amounted to nil, RMB8,547, and RMB420,165,
respectively, for the fiscal years ended December 31, 2016,
2017 and 2018, respectively.
•
Exclusive Purchase Option Agreement
Under the exclusive purchase option agreement, the nominee
shareholders of Guangzhou Huya have granted Huya Technology or its
designated representative(s) irrevocably an exclusive option to
purchase, to the extent permitted under PRC law, all or part of
their equity interests in Guangzhou Huya at the lowest price
permitted by the laws of the PRC applicable at the time of
exercise. Huya Technology or its designated representative(s) have
sole discretion as to when to exercise such options, either in part
or in full. Without Huya Technology’s prior written consent,
the nominee shareholders shall not sell, transfer, mortgage or
otherwise dispose their equity interests in Guangzhou Huya. The
term of this agreement is ten years and may be extended for another
ten years at Huya Technology’s sole discretion. Huya
Technology is entitled to terminate the agreement at any time by
providing 30 days’ prior written notice to Guangzhou
Huya.
•
Equity Pledge Agreement
Pursuant to the equity pledge agreement, the nominee shareholders
of Guangzhou Huya have pledged all of their equity interests in
Guangzhou Huya to Huya Technology to guarantee the performance by
Guangzhou Huya and its nominee shareholders’ performance of
their respective obligations under the exclusive business
cooperation agreement, exclusive purchase option agreement, and
powers of attorney. The nominee shareholders shall not transfer or
assign the equity interests, the rights and obligations in the
equity pledge agreement or create or permit to create any pledges
which may have an adverse effect on the rights or benefits of Huya
Technology without Huya Technology’s written consent. If
Guangzhou Huya and/or its nominee shareholders breach their
contractual obligations under those agreements, Huya Technology, as
pledgee, will be entitled to certain rights, including the right to
sell the pledged equity interests.
•
Power of Attorney
Pursuant to the irrevocable power of attorney, Huya Technology is
authorized by each of the nominee shareholders as
its attorney-in-fact
Risks in relation to the VIE structure
Upon completion of the Reorganization on July 10, 2017, a
significant part of the Group’s business has been conducted
through Guangzhou Huya, or the VIE of Huya. The Company has become
the primary beneficiary of Guangzhou Huya through contractual
arrangements. In the opinion of management, the contractual
arrangements with the VIE and the nominee shareholders are in
compliance with PRC laws and regulations and are legally binding
and enforceable. However, there are substantial uncertainties
regarding the interpretation and application of PRC laws and
regulations including those that govern the contractual
arrangements, which could limit the Group’s ability to
enforce these contractual arrangements and if the nominee
shareholders of the VIE were to reduce their interests in the
Group, their interest may diverge from that of the Group and that
may potentially increase the risk that they would seek to act
contrary to the contractual arrangements. In March 2019, the
National People’s Congress enacted PRC Foreign Investment Law
which would be effective starting from January 1, 2020. The
Foreign Investment Law does not explicitly classify contractual
arrangements as a form of foreign investment, but it contains
a catch-all
•
revoke or refuse to grant or renew the Group’s
business and operating licenses;
•
restrict or prohibit related party transactions
between the wholly owned subsidiary of the Group and the VIE;
•
impose fines, confiscate income or other requirements
which the Group may find difficult or impossible to comply
with;
•
require the Group to alter, discontinue or restrict
its operations;
•
restrict or prohibit the Group’s ability to
finance its operations, and;
•
take other regulatory or enforcement actions against
the Group that could be harmful to the Group’s business.
The imposition of any of these restrictions or actions could result
in a material adverse effect on the Group’s ability to
conduct its business. In such case, the Group may not be able to
operate or control the VIE, which may result in deconsolidation of
the VIE in the Group’s consolidated financial statements. In
the opinion of management, the likelihood for the Group to lose
such ability is remote based on current facts and circumstances.
The Group’s operations depend on the VIE to honor their
contractual arrangements with the Group. These contractual
arrangements are governed by PRC law and disputes arising out of
these agreements are expected to be decided by arbitration in the
PRC. The management believes that each of the contractual
arrangements constitutes valid and legally binding obligations of
each party to such contractual arrangements under PRC laws.
However, the interpretation and implementation of the laws and
regulations in the PRC and their application to an effect on the
legality, binding effect and enforceability of contracts are
subject to the discretion of competent PRC authorities, and
therefore there is no assurance that relevant PRC authorities will
take the same position as the Group herein in respect of the
legality, binding effect and enforceability of each of the
contractual arrangements. Meanwhile, since the PRC legal system
continues to rapidly evolve, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of
these laws, regulations and rules involve uncertainties, which may
limit legal protections available to the Group to enforce the
contractual arrangements should the VIE or the nominee shareholders
of the VIE fail to perform their obligations under those
arrangements.
The following table sets forth the assets, liabilities, results of
operations and cash flows of the VIEs taken as a whole, including
the Predecessor Operations, which were included in the
Group’s consolidated balance sheets and consolidated
statements of comprehensive loss. Transactions between the VIEs and
the Group’s subsidiaries are eliminated in the financial
information presented below:
As of December 31,
As of December 31,
2017 2018
RMB RMB
Assets
Current assets
Cash and cash equivalents 399,945 668,531
Short-term deposits 150,000 100,000
Short-term investments
— 300,162
Accounts receivable, net 29,207 43,469
Amounts due from related parties 111,552 237,112
Prepayments and other current assets 62,547 195,381
Total current assets 753,251 1,544,655
Non-current
Deferred tax assets
— 30,945
Investments 10,299 219,827
Property and equipment, net 32,315 85,550
Intangible assets, net 5,620 51,979
Prepayments and other non-current 2,000 115,689
Total non-current 50,234 503,990
Total assets 803,485 2,048,645
Liabilities
Current liabilities
Accounts payable 5,796 9,221
Deferred revenue 243,419 469,378
Advances from customers 3,962 14,403
Accrued liabilities and other current liabilities 407,849 786,612
Amounts due to related parties 8,242 31,722
Total current liabilities 669,268 1,311,336
Non-current
Deferred revenue 45,024 80,734
Total non-current 45,024 80,734
Total liabilities 714,292 1,392,070
For the year ended
December 31,
2016 2017 2018
RMB RMB RMB
Net revenues 796,904 2,177,587 4,659,245
Net (loss) income (580,639 ) (74,390 ) 406,803
For the year ended
December 31,
2016 2017 2018
RMB RMB RMB
Net cash (used in) provided by operating activities (375,463 ) 237,654 601,022
Net cash used in investing activities (96,135 ) (110,809 ) (516,902 )
Net cash provided by (used in) financing activities 522,773 266,913 (3,647 ) |
