DouYu(DOYU) - 2022 Q4 - Annual Report

PART I ITEM 3. KEY INFORMATION The company's operations rely on a VIE structure, facing significant PRC and US regulatory risks - DouYu operates in China through a VIE structure due to foreign investment restrictions, controlling its operating entities via contractual arrangements[15][16][20] - In 2022, revenues from the VIEs accounted for 99% of the company's total net revenues, highlighting the structure's critical importance[15] - The company faces significant regulatory risks from the PRC government, including the Cybersecurity Review Measures and the Overseas Listing Trial Measures[34][38] - Under the HFCAA, the company's immediate delisting risk was reduced after the PCAOB was able to conduct inspections in China in December 2022[61][156] Condensed Consolidating Statement of Operations (RMB in thousands) | Indicator | Year | Our Company & Subsidiaries | VIEs & VIEs' Subsidiaries | Eliminations | Consolidated | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Revenues | 2022 | 534,948 | 7,022,079 | (448,789) | 7,108,238 | | | 2021 | 1,824,996 | 8,965,084 | (1,624,749) | 9,165,331 | | | 2020 | 2,305,426 | 8,697,485 | (1,401,037) | 9,601,874 | | Net (Loss) Income | 2022 | (246,380) | (9,847) | 165,812 | (90,415) | | | 2021 | (1,087,055) | 388,119 | 78,687 | (620,249) | | | 2020 | 908,837 | 432,731 | (936,833) | 404,735 | Condensed Consolidating Balance Sheet (RMB in thousands) | Indicator | As of Dec 31, 2022 | Our Company & Subsidiaries | VIEs & VIEs' Subsidiaries | Eliminations | Consolidated | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | 2022 | 8,476,271 | 1,974,379 | (5,353,319) | 8,145,365 | | | 2021 | 11,359,074 | 2,196,884 | (5,399,055) | 8,156,903 | | Total Liabilities | 2022 | 3,741,437 | 1,250,336 | (3,406,966) | 1,584,807 | | | 2021 | 3,942,444 | 1,672,807 | (3,716,937) | 1,898,314 | Risk Factors The company faces significant risks related to its VIE structure, Chinese regulations, business operations, and ADSs - The PRC government may exert more control over overseas offerings, with new regulations like the Overseas Listing Trial Measures potentially impacting operations[83][86] - The business is subject to complex Chinese laws on data privacy, such as the Cybersecurity Review Measures for companies with over one million users[105][108] - The company's success is highly dependent on its ability to retain its user base and top streamers to drive revenue from virtual gifts and advertising[163][166] - There are substantial uncertainties regarding the legality of the VIE structure under PRC law, which could lead to severe penalties if deemed non-compliant[308][333] - The company was likely a Passive Foreign Investment Company (PFIC) for 2022 and faces a significant risk of being a PFIC for 2023, which could harm U.S. investors[370][372] INFORMATION ON THE COMPANY The company is a leading game-centric livestreaming platform in China with a monetization model based on virtual gifts - DouYu operates a leading game-centric livestreaming platform in China, focusing on eSports, with 471.8 million registered users as of December 31, 2022[378][379] - The company's monetization is driven by livestreaming and advertising, with livestreaming accounting for 95.6% of total net revenues in 2022[411] - DouYu employs a comprehensive content monitoring system using AI-backed detection and manual review to filter inappropriate content and protect minors[437][440] - Tencent is a key strategic partner and major shareholder, holding approximately 37.7% of the company's total voting power as of March 31, 2023[441] Key Operating Metrics (Q4) | Metric | Q4 2021 | Q4 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Average Mobile MAUs | 62.4 million | 57.4 million | -7.9% | | Average Mobile eSports MAUs | 37.1 million | 28.3 million | -23.7% | | Quarterly Average Paying Users | 7.3 million | 5.6 million | -23.3% | OPERATING AND FINANCIAL REVIEW AND PROSPECTS The company saw decreased revenue but a narrowed net loss in 2022 due to cost controls and operational adjustments - The 20.9% decrease in livestreaming revenue in 2022 was mainly due to a drop in paying users from 17.5 million to 15.5 million[650] - Cost of revenues decreased by 24.2% in 2022, driven by lower revenue sharing fees and reduced copyright procurement costs[651][652] - Total operating expenses fell by 31.6% in 2022, reflecting improved cost control across sales, R&D, and G&A functions[653] Consolidated Financial Performance (RMB in millions) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net Revenues | 9,601.9 | 9,165.3 | 7,108.2 | | YoY Change | - | -4.5% | -22.5% | | Gross Profit | 1,560.3 | 1,089.9 | 990.1 | | Gross Margin | 16.3% | 11.9% | 13.9% | | (Loss) Income from Operations | 262.1 | (648.7) | (198.9) | | Net Income (Loss) | 404.7 | (620.2) | (90.4) | | Adjusted Net Income (Loss) | 541.5 | (439.3) | (7.6) | Consolidated Cash Flow Summary (RMB in millions) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | 667.6 | (586.3) | (67.8) | | Net cash used in investing activities | (2,612.6) | (19.1) | (608.6) | | Net cash used in financing activities | (479.2) | (107.2) | (109.0) | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES The section details board composition, executive compensation, share incentive plans, and employee demographics - The board consists of ten members and relies on home country practice exemptions, thus not having a majority of independent directors[708][737] - For fiscal year 2022, total cash compensation paid to all directors and executive officers was approximately RMB 15.9 million (US$2.3 million)[718] - The company maintains two share incentive plans, with 2,075,858 RSUs granted and vested under the 2018 scheme as of March 31, 2023[722][728] - As of December 31, 2022, the company had 1,973 employees, with the largest functions being general & administration and R&D[748] MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS Tencent is the largest shareholder, and the company engages in significant related party transactions with it - The company engages in significant business with talent agencies in which it holds equity method investments, paying them revenue sharing fees of RMB 181.6 million in 2022[760] Principal Shareholders (as of March 31, 2023) | Shareholder | Ordinary Shares Beneficially Owned | Percentage of Total Ordinary Shares | | :--- | :--- | :--- | | Entities affiliated with Tencent | 12,070,080 | 37.7% | | Shaojie Chen (via Warrior Ace Holding Limited) | 5,441,949 | 17.0% | Transactions with Tencent Group (RMB in millions) | Transaction Type | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Services provided to Tencent | 9.0 | 42.8 | 20.4 | | Services received from Tencent | 330.6 | 868.7 | 398.1 | FINANCIAL INFORMATION The company settled class action lawsuits in 2022 and does not plan to pay dividends in the near future - The company was involved in securities class action lawsuits filed in 2020, which were settled with final approval on December 1, 2022[764][767] - The company has no plan to declare or pay any dividends in the near future, intending to retain earnings to expand the business[769] ADDITIONAL INFORMATION The company details its Cayman Islands legal framework, PRC tax exposure, and significant PFIC risk for U.S. investors - The company is an exempted company incorporated in the Cayman Islands with an authorized share capital of 500 million ordinary shares[773][777] - Each ordinary share is entitled to one vote, and a quorum for shareholder meetings requires holders of at least one-third of the votes[779][780] - The company is subject to a 25% PRC enterprise income tax rate and risks its holding company being classified as a PRC "resident enterprise"[800][802] - For U.S. tax purposes, the company was likely a Passive Foreign Investment Company (PFIC) for 2022 and faces a significant risk of being a PFIC for 2023[809] QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary market risk is foreign exchange exposure from holding U.S. dollars while earning revenue in RMB - The company's primary market risk is foreign exchange risk, as most revenues are in RMB while significant cash is held in U.S. dollars[830][831] - As of December 31, 2022, a hypothetical 10% depreciation of the U.S. dollar against the RMB would decrease the cash balance by RMB 361.8 million[832] - Inflation in China has not materially impacted the company's results of operations to date[833] PART II CONTROLS AND PROCEDURES Management and the independent auditor concluded that internal controls were effective as of year-end 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[845][846] - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[847] - The independent auditor issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[850][852] AUDIT COMMITTEE FINANCIAL EXPERT The board has identified Mr. Zhaoming Chen as the audit committee financial expert - The Board of Directors has determined that Mr. Zhaoming Chen qualifies as an "audit committee financial expert" and meets SEC and Nasdaq independence standards[853] PRINCIPAL ACCOUNTANT FEES AND SERVICES Total auditor fees were RMB 8.62 million in 2022, entirely for audit services - The audit committee's policy is to pre-approve all audit and non-audit services provided by the principal accountant[857] Auditor Fees (RMB in thousands) | Service Type | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Audit Fees | 8,483 | 8,284 | 8,622 | | Audit-Related Fees | 1,958 | 997 | — | | Tax Fees | 2,175 | 45 | — | | Total | 12,616 | 9,326 | 8,622 | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS No shares were repurchased under the US$100 million program between March 2022 and March 2023 - The company authorized a US$100 million share repurchase program on August 30, 2021, for a 12-month period[860] - No ADSs were repurchased under the 2021 Share Repurchase Program in the period from March 31, 2022, to March 31, 2023[860] CORPORATE GOVERNANCE The company follows home country practices, exempting it from certain Nasdaq governance requirements - As a foreign private issuer, the company follows home country (Cayman Islands) corporate governance practices, exempting it from certain Nasdaq rules[863] - Key exemptions taken include not having a majority of independent directors on the board or fully independent board committees[863] - The company also relied on a home country exemption to not hold an annual shareholder meeting in 2022[864] DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS The company no longer expects to be identified under the HFCAA following the PCAOB's successful 2022 inspections - The company was previously identified under the HFCAA due to the PCAOB's inability to inspect its China-based auditor[866] - On December 15, 2022, the PCAOB vacated its 2021 determination after conducting complete inspections, so DouYu does not expect to be identified for fiscal 2022[867] - The company states that no governmental entities in China own its shares or have a controlling financial interest[866] PART III FINANCIAL STATEMENTS This section presents the audited consolidated financial statements prepared in accordance with U.S. GAAP - The independent auditor's report identified the impairment assessment of investments as a critical audit matter due to significant management judgments[885][886] - The company has provided a full valuation allowance for its deferred tax assets as their future realization is not more likely than not[703][1016] Consolidated Balance Sheet Data (RMB) | Metric | As of Dec 31, 2021 | As of Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | 4,456,405,874 | 4,041,602,800 | | Total Assets | 8,156,902,381 | 8,145,366,409 | | Total Liabilities | 1,898,314,269 | 1,584,806,262 | | Total Shareholders' Equity | 6,258,588,112 | 6,560,560,147 | Consolidated Statement of Comprehensive Income (Loss) Data (RMB) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Net Revenues | 9,601,873,937 | 9,165,330,760 | 7,108,238,352 | | Gross Profit | 1,560,345,352 | 1,089,910,236 | 990,110,052 | | Net Income (Loss) | 404,735,526 | (620,248,897) | (90,414,597) | | Net Income (Loss) per ADS (Basic) | 1.52 | (1.79) | (0.24) |