F-1 1 d850602df1.htm FORM F-1 Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on September 8, 2020

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Yalla Group Limited

(Exact name of Registrant as specified in its charter)

 

 

 

Cayman Islands   7370   Not Applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

#238, Building 16, Dubai Internet City

Dubai, United Arab Emirates

+971-4-587-7388

(Address and Telephone Number of Registrant’s Principal Executive Offices)

 

 

Cogency Global Inc.

122 East 42nd Street, 18th Floor

New York, N.Y. 10168

+1 (800) 221-0102

(Name, address and telephone number of agent for service)

 

 

Copies to:

 

Yi Gao, Esq.

Simpson Thacher & Bartlett LLP

c/o 35th Floor, ICBC Tower

3 Garden Road

Central, Hong Kong

+852-2514-7600

 

Shuang Zhao, Esq.

Cleary Gottlieb Steen & Hamilton LLP

c/o 37th Floor, Hysan Place

500 Hennessy Road

Causeway Bay, Hong Kong

+852 2521-4122

 

Gamal M. Abouali, Esq.

Cleary Gottlieb Steen & Hamilton LLP

Al Sila Tower, 27th floor

Abu Dhabi Global Market Square

Al Maryah Island, PO Box 29920

Abu Dhabi, United Arab Emirates

+971 2-412-1700

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered(1)

 

Proposed

Maximum

Aggregate

Offering Price(2)(3)

 

Amount of

Registration Fee

Class A ordinary shares, par value US$0.0001 per share

  US$100,000,000   US$12,980.00

 

 

(1)

American depositary shares, or ADSs, issuable upon deposit of the Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-            ). Each ADS represents              Class A ordinary shares.

(2)

Includes (a) Class A ordinary shares represented by ADSs that may be purchased by the underwriters pursuant to their over-allotment option and (b) all Class A ordinary shares represented by ADSs initially offered and sold outside the United States that may be resold from time to time in the United States either as part of the distribution or within 40 days after the later of the effective date of this registration statement and the date the securities are first bona fide offered to the public.

(3)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the United States Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated             , 2020.

American Depositary Shares

 

LOGO

Yalla Group Limited

Representing                  Class A Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, representing Class A ordinary shares of Yalla Group Limited.

We are offering                  ADSs, and the selling shareholder named in this prospectus is offering                  ADSs to be sold in this offering. Each ADS represents                  Class A ordinary shares, US$0.0001 par value per share. We anticipate the initial public offering price per ADS will be between US$                 and US$                . We will not receive any proceeds from the sale of ADSs by the selling shareholder.

Prior to this offering, there has been no public market for the ADSs or our shares. We will apply to list the ADSs on the New York Stock Exchange, or the NYSE, under the symbol “YALA.”

We are an “emerging growth company” under applicable United States federal securities laws and are eligible for reduced public company reporting requirements.

 

 

See “Risk Factors” on page 13 to read about factors you should consider before buying the ADSs.

 

 

PRICE US$             PER ADS

 

 

 

      

Price to
Public

      

Underwriting
Discounts
and
Commissions(1)

      

Proceeds to Us

      

Proceeds to the
Selling
Shareholder

 

Per ADS

       US$                   US$                   US$                   US$           

Total

       US$                              US$                              US$                              US$                      

 

(1)   For additional information on underwriting compensation, see “Underwriting.”

To the extent that the underwriters sell more than                 ADSs in this offering, the underwriters have a 30-day option to purchase up to an aggregate of                  additional ADSs from us [and the selling shareholder] at the initial public offering price less the underwriting discounts and commissions.

Upon the completion of this offering,                 Class A ordinary shares and 24,734,013 Class B ordinary shares will be issued and outstanding. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Each Class A ordinary share will be entitled to one vote, and each Class B ordinary share will be entitled to 20 votes and will be convertible to one Class A ordinary share. We will be a “controlled company” as defined under the rules of the NYSE because Mr. Tao Yang, our Chairman and Chief Executive Officer, will hold a majority of the aggregate voting power of our company upon the completion of this offering.

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs against payment in New York, New York on                , 2020.

 

 

 

MORGAN STANLEY   HAITONG INTERNATIONAL

TIGER BROKERS

Prospectus dated                , 2020


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LOGO

 

 


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LOGO


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TABLE OF CONTENTS

 

Business

     83  

Regulations

     100  

Management

     117  

Principal and Selling Shareholder

     125  

Related Party Transactions

     128  

Description of Share Capital

     129  

Description of American Depositary Shares

     139  

Shares Eligible for Future Sale

     148  

Taxation

     150  

Underwriting

     157  

Expenses Related to this Offering

     169  

Legal Matters

     170  

Experts

     170  

Where You Can Find More Information

     171  

Index to the Consolidated Financial Statements

     F-1  
 

 

No dealer, salesperson or other person is authorized to give any information or to represent as to anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell, and we are seeking offers to buy, only the ADSs offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of the ADSs.

Neither we nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where other action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any free writing prospectus filed with the United States Securities and Exchange Commission, or SEC, must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Until                 , 2020 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in the ADSs. You should carefully read the entire prospectus, including “Risk Factors” and the financial statements, before making an investment decision. This prospectus contains information from an industry report commissioned by us and prepared by Frost & Sullivan, an independent market research firm, to provide information regarding our industry and our market position in MENA. We refer to this report as the Frost & Sullivan Report.

Mission

We aspire to build the most popular destination for online social networking and entertainment activities in MENA.

Overview

A Community Built on Voice

Voice connects us to our fellow humans.

Voice is unique, like a person’s signature, instantly recognizable by friends.

Voice is fun, stories, songs, jokes and gossips are among the oldest, as well as the most popular, forms of entertainment.

Voice is spontaneous, no need to look for a pen or a keyboard, just open the mouth.

Voice is powerful, it is an effective medium to convey ideas and emotions.

Voice is charming, few things are as beautiful as a loved one’s voice.

Social gatherings for group chatting and other casual entertainment have been a long-standing tradition in MENA. A common example is majlis, a gathering event of friends and neighbors to socialize, exchange gifts and play casual games. Majlis is deeply ingrained in the cultures of many countries in MENA and has remained popular for centuries. Since the founding of our business, we have been helping the local people in MENA to bring their traditions online and continue their social enjoyment in the mobile Internet era. Our products mirror what people enjoy doing in majlis, cafes and other offline leisure and entertainment settings and make social interactions more convenient. Leveraging our cultural insights, we identified voice chats to be uniquely suitable for online social networking and entertainment in MENA and pioneered the development of a voice-centric mobile social networking and entertainment platform in the region.

Today, we are the largest voice-centric social networking and entertainment platform in MENA as measured by revenue in 2019, according to the Frost & Sullivan Report. We have built a large and vibrant Yalla community. In the second quarter of 2020, approximately 12.5 million users visited our platform on average each month; they spent a total of 309.5 million hours in our live voice chat rooms, or Yalla rooms, and played a total of 407.2 million rounds of casual games on Yalla Ludo. The number of paying users on our platform was 5.4 million in the second quarter of 2020. On average, active users of Yalla and Yalla Ludo spent approximately 4.5 hours and 1.4 hours on our platform every day in the second quarter of 2020, respectively.

A Market Full of Opportunities

Comprised of 10 countries and with a total population of 247.0 million as of December 31, 2019, MENA is a predominantly Arabic-speaking region with a very unique culture. The region encompasses some of the more



 

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affluent countries in the world in terms of nominal GDP per capita, including Qatar, the UAE, Kuwait and Saudi Arabia, with nominal GDP per capita in 2019 at US$66,060, US$39,806, US$28,664 and US$23,187, respectively, compared to the global average at US$11,319 in 2019, according to the Frost & Sullivan Report. Given MENA’s stable economic development with relatively high nominal GDP per capita, high mobile Internet penetration rate and high standard of social welfare, especially in the Gulf countries, people in MENA generally favor a more balanced lifestyle, thus creating a positive environment for online social networking and entertainment market.

The MENA online social networking and entertainment landscape is characterized by favorable macroeconomic and demographic conditions, as illustrated by the following figures:

 

Stable Economic Development

  

Young Population

  

Stable Population Growth

  

High Mobile Internet
Penetration

3.3%

 

Expected Nominal GDP CAGR from 2019 to 2024

  

29.8

 

Median Age (years) in 2019

  

2.0%

 

Expected Population CAGR from 2019 to 2024

  

104.8%(1)

 

Mobile Internet Penetration Rate Expected by 2024

 

Source:

the Frost & Sullivan Report

(1)

Mobile Internet penetrate rate in MENA was 83.6% in 2019.

There also exists a significant imbalance between the supply of, and demand for, online social networking and entertainment options in MENA. In 2019, there were 137.0 million active online social networking and entertainment users in MENA with an average daily time spent of 230 minutes per user, substantially longer than many other countries and regions. However, the availability of Arabic online social networking and entertainment applications is limited, according to the Frost & Sullivan Report. In addition, very few online social networking and entertainment platforms have localized their Arabic user interfaces based on MENA culture. As such, the demand for online social networking and entertainment services from MENA is significantly underserved. Active online social networking and entertainment users in MENA only downloaded social networking and entertainment applications 3.4 times in 2019, below the numbers in the United States, Europe, Southeast Asia and China at 6.2, 4.0, 4.3 and 13.8 times, respectively. There is significant growth potential for the online social networking and entertainment market in MENA, as more online social networking and entertainment applications become available to users in the region.

The opportunity in online social networking and entertainment is further amplified by the relatively limited offline social networking and entertainment options in MENA as a result of local cultures and customs. Leisurely social gatherings among family members and friends are the main traditional social networking and entertainment activities in this region. By bringing such offline social interactions online, social networking and entertainment applications have made it easier for users to continue their social networking and entertainment activities anywhere and anytime.

As MENA becomes more affluent and experiences further mobile Internet penetration, and the size of the tech-savvy young generation grows, we believe the demand for online social networking and entertainment will continue to increase in this region. Moreover, as options for both online and offline social networking and entertainment are limited in MENA, its mobile users’ desire for online social networking and entertainment is still relatively overlooked compared to other countries and regions. As a result, we believe MENA is an attractive market for online social networking and entertainment, as the market is currently underserved and has not reached its full potential.



 

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Why Users Love Us

We believe “Yalla” has become synonymous with fun and enjoyable mobile social experience in MENA. Users love our platform for the following reasons:

 

   

Superior Social Experience

We provide a mobile platform for users to enjoy superior social experience online. Our mobile applications were inspired by offline social leisure activities in MENA. We bring such activities to the mobile Internet to make them more convenient. Our flagship mobile application, Yalla, primarily features Yalla rooms, which may be viewed as the online version of majlis or cafés, where people spend their leisure time in casual chats. On the other hand, Yalla Ludo resembles a family living room where family members and friends play simple board games that are highly popular in MENA, such as Ludo and Domino. We carefully preserve the traditional features and tastes of these popular games so that our users can easily apply their offline experience to our mobile platform.

Leisure is a mentally beneficial experience, and we believe that leisure activities should be done for their own sake. Our users gather on our platform for a relaxing social leisure experience. Whether their time is spent on an hour of casual chatting or a few rounds of casual games, social interactions and companionships are what our users cherish. We aim to provide our users with a pure social leisure experience. While our users may receive virtual gifts and accumulate virtual currencies on our platform, none of the virtual gifts and virtual currencies are convertible into real money under any circumstance and our users are unable to sell such virtual items to other users through our platform. Instead, users send virtual gifts to express their appreciation of contributions by other users or gain recognition within the community.

 

   

Localized Appeal

We have developed the leading social networking and entertainment platform tailored for the local cultures of our target markets, particularly MENA. We believe localizing is much more than using the local language in user interfaces. Leveraging our insights into MENA culture and local user preferences, we infuse our user interfaces with local cultural elements. For non-English versions of Yalla, we update the user interface with color themes and logos related to specific local holidays to celebrate with our users, and virtual gifts are typically designed based on local customs. As a result of our close attention to detail, our mobile applications deliver a seamless user experience and foster a strong sense of belonging among users. Such localized appeal resonates with users and allows us to build a highly loyal and engaging user community. Our ability to faithfully preserve the traditional flavors of local offline social life also differentiates us from other platforms.

 

   

Voice-Centric Interaction Preferred by Users

Our users mainly interact through real-time voice chats on our platform. Compared to other forms of online communication such as texts, graphics or video, users are able to communicate more comfortably and effortlessly by voice. Moreover, voice chats are more suitable to the cultural norms in MENA compared to video chats. We believe our voice-centric approach has been one of the key reasons for our success in MENA.

 

   

Highly Interactive User Community

Our platform is designed to maintain users’ equal status, thereby encouraging all of them to freely communicate and interact with each other. There are no differences of influencers and followers, or gurus and newbies. Instead of passively consuming content, users come to our platform in order to actively participate in the social leisure activities we offer. We believe these social interactions foster a sense of community among users and enable our platform to attract and retain users more effectively compared to other platforms.



 

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Our Financial Performance

We have experienced strong revenue growth in recent years. We primarily generate our revenues from users’ consumptions of virtual items and upgrade services. Virtual items primarily consist of various virtual gifts. Upgrade services primarily consist of VIP rights or premium membership on our platform. Our revenues increased by 49.8% from US$42.4 million in 2018 to US$63.5 million in 2019. Our revenues increased by 99.6% from US$26.4 million in the six months ended June 30, 2019 to US$52.8 million in the six months ended June 30, 2020.

Our innovative business model focuses on users’ interactions and social networking experience on our platform. Therefore, we do not incur significant content acquisition cost, such as incentive fees to key users or costs for acquiring media content. Our user acquisition channels have been cost-effective. As a result, we are able to achieve high profitability. Our net income was US$20.2 million and US$28.9 million in 2018 and 2019, respectively, and our net margin was 47.8% and 45.6% in 2018 and 2019, respectively. Our net income was US$11.4 million and US$25.2 million in the six months ended June 30, 2019 and 2020, respectively, and our net margin was 43.3% and 47.8% in the six months ended June 30, 2019 and 2020, respectively.

Our Strengths

We believe the following competitive strengths contribute to our continued success and will help us fulfill our mission:

 

   

leading position based on an innovative business model;

 

   

highly engaged and interactive user community;

 

   

superior user experience;

 

   

strong monetization capabilities to capitalize on strong market opportunities;

 

   

“glocalized” and experienced management; and

 

   

proven track record in expanding product offerings and geographic coverage.

Our Strategies

To fulfill our mission, we plan to pursue the following strategies to grow our business:

 

   

expand user base;

 

   

enhance user experience;

 

   

enrich our platform with new products;

 

   

invest in technology; and

 

   

explore strategic partnerships.

Our Challenges

Our business and the successful execution of our strategies are subject to certain challenges, risks and uncertainties including:

 

   

our ability to retain our users, keep them engaged and further grow our user base;

 

   

risks and uncertainties regarding the growth of the voice-centric social networking and entertainment industry;

 

   

our ability to effectively manage our growth and control our spending;

 

   

uncertainties regarding the implementation of our monetization strategies;



 

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our ability to maintain and enhance our brand;

 

   

our limited operating experience in new markets and limited operating history;

 

   

our ability to maintain our community culture;

 

   

our dependence on the proper functioning and improvement of our information technology systems and infrastructure;

 

   

our dependence on third-party services and technologies;

 

   

risks related to health epidemics, natural disasters and other outbreaks; and

 

   

risks related to global political and economic conditions.

In addition, we face risks and uncertainties related to the regulatory environment in MENA and other regions in which we operate. We also face other risks and uncertainties that may materially affect our business, financial conditions, results of operations and prospects. You should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in our ADSs.

Our Corporate Structure

We are a Cayman Islands holding company and conduct our operations through our operating subsidiaries in the United Arab Emirates and China. We currently operate our business through Yalla UAE, Hangzhou Yale and Shenzhen Moov. Yalla UAE functions as our primary business operation center and engages in sales, marketing, customer service and other business operations. Hangzhou Yale performs technology and product development functions. Shenzhen Moov primarily performs marketing and financial reporting functions.

The following diagram illustrates our corporate structure as of the date of this prospectus. Equity interests depicted in this diagram are held as to 100%.

 

LOGO

Our Corporate Information

Our principal executive offices are located at #238, Building 16, Dubai Internet City, Dubai, United Arab Emirates. Our telephone number at this address is +971-4-587-7388. Our registered office in the Cayman Islands



 

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is located at the offices of Vistra (Cayman) Limited, P. O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman, KYl -1205 Cayman Islands. Investors should submit any inquiries to the address and telephone number of our principal executive offices set forth above.

Our main website is yallatech.ae, and the information contained on this website is not a part of this prospectus. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, N.Y. 10168.

Implications of Being an Emerging Growth Company

As a company with less than US$1,070,000,000 in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, related to the assessment of the effectiveness of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We will take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.

We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Implications of Being a Foreign Private Issuer and a Controlled Company

We are a foreign private issuer within the meaning of the rules under the Exchange Act and, as such, we are permitted to follow the corporate governance practices of our home country, the Cayman Islands, in lieu of the corporate governance standards of the NYSE applicable to U.S. domestic companies. For example, we are not required to have a majority of the board consisting of independent directors nor have a compensation committee or a nominating and corporate governance committee consisting entirely of independent directors. We intend to continue to follow our home country’s corporate governance practices as long as we remain a foreign private issuer. As a result, you may not have the same protection afforded to shareholders of U.S. domestic companies that are subject to the NYSE corporate governance requirements. As a foreign private issuer, we are also subject to reduced disclosure requirements and are exempt from certain provisions of the U.S. securities rules and regulations applicable to U.S. domestic issuers such as the rules regulating solicitation of proxies and certain insider reporting and short-swing profit rules.

Upon the completion of this offering, we will be a “controlled company” as defined under the rules of the NYSE, because Mr. Tao Yang, our Chairman and Chief Executive Officer, will be able to exercise             % of the aggregate voting power of our total issued and outstanding shares, assuming the underwriters do not exercise



 

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their option to purchase additional ADSs. Under the rules of the NYSE, a “controlled company” may elect not to comply with certain corporate governance requirements. Currently, we do not plan to utilize the “controlled company” exemptions with respect to our corporate governance practice after we complete this offering.

Conventions That Apply to This Prospectus

Unless we indicate otherwise, references in this prospectus to:

 

   

“active users” are to registered users who accessed any of our mobile applications at least once during a given period;

 

   

“ADSs” are to American depositary shares, each of which represents                Class A ordinary shares;

 

   

“AED” are to the United Arab Emirates dirham, the legal currency of the United Arab Emirates;

 

   

“ARPPU” are to average revenues per paying user in a given period, which is calculated by dividing (i) revenues for such period, by (ii) the number of paying users for such period;

 

   

“average MAUs” are to the average monthly active users in a given period calculated by dividing (i) the sum of active users for each month of such period, by (ii) the number of months in such period;

 

   

“CAGR” are to compound annual growth rate;

 

   

“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan, the Hong Kong Special Administrative Region and the Macao Special Administrative Region;

 

   

“MENA” are to the Middle East and North Africa region, including, for the purposes of this prospectus only, Algeria, Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar, Saudi Arabia and the United Arab Emirates;

 

   

“Net margin” are to net income as a percentage of revenues;

 

   

“paying users” are to registered users who purchased our virtual items or upgrade services using virtual currencies on our platform at least once in a given period, except for users who receive all of their virtual currencies directly or indirectly from us for free;

 

   

“registered users” are to users who have registered accounts on our platform as of a given time; a registered user is not necessarily a unique user, however, as an individual may register multiple accounts on our platform, and consequently, the number of registered users we present in this prospectus may not equal the number of unique users who have registered on our platform as of a given time;

 

   

“UAE” are to the United Arab Emirates;

 

   

“US$,” “U.S. dollars,” or “dollars” are to the legal currency of the United States; and

 

   

“we,” “us,” “our company” and “our” are to Yalla Group Limited (formerly known as FYXTECH CORPORATION) and its subsidiaries, as the context requires.

Unless specifically indicated otherwise or unless the context otherwise requires, all references to our ordinary shares exclude (i) ordinary shares issuable upon the exercise of outstanding options with respect to our ordinary shares under the share incentive plan we adopted on June 22, 2018, which was amended and restated on November 19, 2019 and was further amended in June 2020, or the 2018 Plan, and (ii) assumes that the underwriters will not exercise their over-allotment option to purchase additional ADSs.

The translations from AED to U.S. dollars in this prospectus were made at a rate of AED3.6725 to US$1.00, the exchange rate at which AED has been pegged to U.S. dollars since November 1997. We make no representation that AED amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all.



 

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The Offering

 

Price per ADS

We currently estimate that the initial public offering price will be between US$             and US$             per ADS.

 

ADSs Offered by Us

            ADSs

 

ADSs Offered by the Selling Shareholder, Mr. Jianfeng Xu, our Director and Chief Operating Officer

             ADSs

 

ADSs Outstanding Immediately After This Offering

            ADSs (or             ADSs if the underwriters exercise in full the over-allotment option).

 

Ordinary Shares Outstanding Immediately After This Offering

            Class A ordinary shares and 24,734,013 Class B ordinary shares (or             Class A ordinary shares and 24,734,013 Class B ordinary shares if the underwriters exercise in full the over-allotment option).

 

The ADSs

Each ADS represents                 Class A ordinary shares.

 

  The depositary will be the holder of the Class A ordinary shares underlying the ADSs and you will have the rights of an ADS holder as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

  You may surrender your ADSs to the depositary to withdraw the Class A ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

 

  We and the depositary may amend or terminate the deposit agreement for any reason without your consent. Any amendment that imposes or increases fees or charges or which materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

 

  To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.

 

Ordinary Shares

Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares upon the completion of this offering. In respect of all matters subject to a shareholders’ vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to 20 votes, voting together as one class. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.



 

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Upon any transfer of Class B ordinary shares by a holder to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of Class A ordinary shares. See “Description of Share Capital” for more information.

 

Over-Allotment Option

We [and the selling shareholder] have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of             additional ADSs at the initial public offering price, less underwriting discounts and commissions, solely for the purpose of covering over-allotments.

 

Use of Proceeds

We estimate that we will receive net proceeds of approximately US$            million from this offering, assuming an initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us.

We anticipate using the net proceeds of this offering for (i) marketing activities, (ii) technology infrastructure and (iii) general corporate purposes.

We will not receive any of the proceeds from the sale of the ADSs by the selling shareholder.

See “Use of Proceeds” for more information.

 

Lock-up

[We, our officers and directors and our existing shareholders] have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus, subject to certain exceptions. See “Shares Eligible for Future Sale” and “Underwriting.”

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of the risks relating to investing in the ADSs. You should carefully consider these risks before deciding to invest in the ADSs.

 

Directed ADS Program

At our request, the underwriters have reserved up to             % of the ADSs being offered by this prospectus for sale at the initial public offering price to our directors, officers, employees, business associates and related persons. The sales will be made by             , an underwriter of this offering, through a directed ADS program. We do not know if these persons will choose to purchase all or any portion of these reserved ADSs, but any purchases they do make will reduce the number of ADSs available to the general public. Any reserved ADSs not so purchased will be offered by the underwriters to the general public on the same basis as the other ADSs. Certain participants may be subject to the lock-up agreements as described in “Underwriting—Directed ADS Program” elsewhere in this prospectus.


 

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Listing

We have applied to list the ADSs on the NYSE. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

 

Proposed NYSE Trading Symbol

YALA

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment on             , 2020, through the facilities of The Depository Trust Company, or DTC.

 

Depositary

The Bank of New York Mellon

The total number of ordinary shares that will be outstanding immediately after this offering will be             Class A ordinary shares and 24,734,013 Class B ordinary shares, which is based upon (i) the designation of 24,734,013 ordinary shares beneficially owned by Mr. Tao Yang into 24,734,013 Class B ordinary shares on a one-for-one-basis upon the completion of this offering; (ii) the designation of all of the remaining outstanding ordinary shares and the automatic conversion of all our outstanding convertible redeemable preferred shares into 99,896,117 Class A ordinary shares on a one-for-one-basis upon the completion of this offering; and (iii)            Class A ordinary shares issued in connection with this offering (assuming the underwriters do not exercise their option to purchase additional ADSs), but exclude:

 

   

41,733,506 ordinary shares issuable upon the exercise of outstanding share options under the 2018 Plan; and

 

   

2,492,603 ordinary shares initially reserved for future issuance under the 2020 equity incentive plan we adopted on August 31, 2020, or the 2020 Plan.



 

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Summary Consolidated Financial and Operating Data

The following summary consolidated statements of operations data and summary consolidated statements of cash flows data for the years ended December 31, 2018 and 2019 and summary consolidated balance sheets data as of December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of operations data and summary consolidated statements of cash flows data for the six months ended June 30, 2019 and 2020 and summary consolidated balance sheet data as of June 30, 2020 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

Our consolidated financial statements are prepared and presented in accordance with the generally accepted accounting principles in the United States, or the U.S. GAAP. Our historical results are not necessarily indicative of results to be expected for any future period. The following summary consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.

Summary Consolidated Statements of Operations Data

 

     For the Year Ended December 31,     For the Six Months Ended June 30,  
     2018     2019     2019     2020  
     (US$ in thousands, except share and per share data)  

Revenues

     42,371       63,465       26,430       52,758  

Costs and expenses:

        

Cost of revenues

     (13,848     (20,553     (9,277     (17,233

Selling and marketing expenses

     (5,686     (8,250     (3,420     (5,547

General and administrative expenses

     (1,630     (4,121     (1,563     (2,734

Technology and product development expenses

     (853     (1,598     (722     (1,888
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     (22,017     (34,522     (14,982     (27,402
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     20,354       28,943       11,448       25,356  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     145       390       170       167  

Government grant

                       85  

Investment income

     6       28       6       8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     20,505       29,361       11,624       25,616  

Income tax expense

     (263     (436     (183     (421
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     20,242       28,925       11,441       25,195  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per ordinary share

        

—Basic and diluted

     (0.12     0.22       0.08       0.19  

Weighted average number of shares outstanding used in computing earnings (loss) per ordinary share

        

—Basic and diluted

     73,393,941       73,393,941       73,393,941       73,393,941  


 

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Summary Consolidated Balance Sheets Data

 

     As of December 31,      As of June 30,  
     2018     2019      2020  
     (US$ in thousands)  

Cash and cash equivalents

     17,017       45,303        58,540  

Term deposits

     1,311       2,723         

Short-term investments

     494       1,507        547  

Prepayments and other current assets

     2,295       3,930        15,303  

Total current assets

     21,117       53,463        74,390  

Total assets

     21,318       54,117        76,089  

Accounts payable

     433       724        731  

Deferred revenue

     3,439       6,011        8,986  

Accrued expenses and other current liabilities

     601       1,577        4,404  

Total current liabilities

     4,473       8,312        14,121  

Total liabilities

     4,473       8,312        14,121  

Total mezzanine equity

     23,963       25,903        26,938  

Total shareholders’ equity (deficit)

     (7,118     19,902        35,030  

Summary Consolidated Statements of Cash Flows Data

 

     For the Year Ended December 31,     For the Six Months Ended June 30,  
     2018     2019     2019      2020  
     (US$ in thousands)  

Net cash provided by operating activities

     23,378       31,281       13,483        19,701  

Net cash provided by/(used in) investing activities

     (1,905     (2,833     25        3,363  

Net cash used in financing activities

     (6,369     (200            (9,831

Effect of foreign currency exchange rate changes on cash and cash equivalents

     8       38       44        4  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in cash and cash equivalents

     15,112       28,286       13,552        13,237  
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at the beginning of the period

     1,905       17,017       17,017        45,303  
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at the end of the period

     17,017       45,303       30,569        58,540  
  

 

 

   

 

 

   

 

 

    

 

 

 

Key Operating Metrics

We regularly review a number of operating metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.

The following table sets forth our average MAUs, paying users and ARPPU for the periods indicated:

 

    Three Months Ended  
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
 

Average MAUs (in thousands)

    2,046       2,174       2,272       2,557       3,109       4,151       6,127       12,460  

Yalla (in thousands)

    2,046       2,173       2,250       2,428       2,716       3,286       4,016       4,835  

Yalla Ludo (in thousands)

          1       22       129       393       865       2,111       7,625  

Paying users (in thousands)

    417       451       547       790       510       723       1,620       5,360  

Yalla (in thousands)

    417       451       547       789       493       549       759       1,080  

Yalla Ludo (in thousands)

                0.1       1       17       174       861       4,280  

ARPPU (US$)

    33.4       27.8       22.2       18.0       34.8       26.6       13.0       5.9  

Yalla (US$)

    33.4       27.8       22.3       18.1       36.1       35.0       27.6       26.9  

Yalla Ludo (US$)

                0.2       0.5       0.1       0.1       0.1       0.6  

For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics.”



 

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RISK FACTORS

An investment in the ADSs involves significant risks. You should carefully consider all the information in this prospectus, including the risks and uncertainties described below, before making an investment in the ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of the ADSs could decline, and you may lose all or part of your investment.

Risks Relating to Our Business and Industry

If we fail to retain our existing users, keep them engaged or further grow our user base, our business, operation, profitability and prospects may be materially and adversely affected.

The size of our user base and the level of our user engagement are critical to our success. Our voice-centric social networking and entertainment platform depends on our ability to maintain and increase the size of our user base and user engagement level. We may be unable to attract and retain users or convert non-paying users into paying users. A decline in our user base may also adversely affect the engagement level of our users and vibrancy of the Yalla community, which may in turn reduce attractiveness of our platform and reduce our monetization opportunities. Any of these factors could have a material and adverse effect on our business, financial condition and results of operations.

Maintaining and improving the size of our user base and level of user engagement is critical to our continued success. To maintain and improve the size of our user base and high level of user engagement, we would have to ensure that we adequately and timely respond to changes in user preferences, adapt to cultural differences in our target markets, and offer new features that may attract new users, among others. There is no guarantee that we could meet any or all of these goals. A number of factors could negatively affect user retention, growth and engagement, including if:

 

   

we suffer from negative publicity, fail to maintain our brand or if our reputation is damaged because we are unable to combat inappropriate, illegal or abusive use of our platform, or because we fail to comply with regulatory requirements on user privacy and data collection, or due to other reasons;

 

   

technical or other problems prevent us from delivering our services in a rapid and reliable manner or otherwise adversely affect the user experience;

 

   

we fail to innovate the features, virtual gifts and functions of our mobile applications that keep our users interested and eager to return to our platform on a regular basis;

 

   

we fail to adapt to the local cultures and regulatory environment of existing or new markets that we enter into;

 

   

we fail to address user concerns related to privacy and communication, safety, security or other factors;

 

   

we fail to continuously develop and offer attractive products and services to users;

 

   

users change their social networking habits or spending patterns; or

 

   

there are adverse changes in our services that are mandated by, or that we elect to make to address concerns about, legislation, regulations or government policies.

If we cannot retain our existing users and expand our user base, the network effect provided by the social nature of our platform will diminish and the popularity of our platform and its profitability may be materially and adversely affected. As a result, our results of operations and financial conditions may be material and adversely affected.

 

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We face risks and uncertainties regarding the growth of the voice-centric social networking and entertainment industry and market acceptance of our platform and services.

The voice-centric social networking and entertainment industry is a relatively new and evolving industry. The growth of the voice-centric social networking and entertainment industry and the level of demand and market acceptance of our platform and services are subject to a high degree of uncertainty. Our future operating results will depend on a number of factors, some of which are beyond our control. These factors include:

 

   

the growth of Internet and mobile Internet user base in our target markets;

 

   

whether the voice-centric social networking and entertainment industry in our target markets continues to grow;

 

   

user consumption behavior in the voice-centric social networking and entertainment industry;

 

   

user acceptance of the “many-to-many” mobile voice-based interaction model, as compared to other forms of online interaction;

 

   

general economic conditions, which would affect discretionary spending on entertainment;

 

   

our ability to timely update our platform and services and introduce other new online entertainment products to attract existing and new users;

 

   

the availability and popularity of other forms of online and mobile entertainment which may compete with us; and

 

   

the growth of other markets that we may enter into from time to time.

If we fail to anticipate and effectively manage these risks and uncertainties, our market share may decrease, and our business, financial condition and results of operations may be materially and adversely affected.

If we fail to effectively manage our growth and control our spending to maintain such growth, our brand, business and results of operations may be materially and adversely affected.

We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our management and resources. However, given our limited operating history and the rapidly evolving markets in which we compete, we may encounter difficulties as we expand our operations, technology and product development, selling and marketing, and general and administrative capabilities. We cannot assure you that this level of growth will be sustainable in the future. We believe that our continued growth will depend on our ability to attract and retain users, develop an infrastructure to serve and support an expanding user base, increase user engagement levels, explore new monetization avenues, and convert non-paying users to paying users, among others. We cannot assure you that we will be successful with any of the above.

To manage our growth and maintain profitability, we expect our costs and expenses to continue to increase in the future as we anticipate that we will need to continue to implement, from time to time, a variety of new and upgraded operational and technology systems. We will also need to expand, train, manage and motivate our workforce and manage our relationships with users. All of these endeavors involve risks and will require substantial management efforts, skills and significant additional expenditures. We expect to continue to invest in our infrastructure in order to enable us to provide our services rapidly and reliably to users. Continued growth would put strains on our ability to maintain reliable service levels for all of our users. Managing our growth will require significant expenditures and involve the allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as we grow, our business, operating results and financial condition could be harmed.

 

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Our revenue model for voice-centric social networking and entertainment community may not remain effective and we cannot guarantee that our future monetization strategies will be successfully implemented or generate sustainable revenues and profit.

We operate our voice-centric social networking and entertainment platform using a revenue model whereby users can get free access to the basic functions on our platform but have the options to purchase virtual currencies. Users can spend virtual currencies to purchase virtual items or upgrade services, on our platform. We have generated, and expect to continue to generate, our revenues primarily from users’ consumptions of virtual items and upgrade services on our platform. Although our voice-centric social networking and entertainment business has experienced significant growth in recent years, we may not achieve a similar growth rate in the future, as the user demand for this service may change, decrease substantially or dissipate, or we may fail to anticipate and serve user demands effectively.

Although we design the virtual currency systems on our platform based on our knowledge about users’ preferences and behavior, there can be no assurance that users will continue to purchase and spend our virtual currencies. If users’ spending habits change and they choose to only access our platform for free without additional purchases, we may not be able to continue to successfully implement the virtual currency-based revenue model for our platform, in which case we may have to develop other value-added services or products to monetize our user base. We cannot guarantee that our attempts to monetize our user base will continue to be successful, profitable or widely accepted, and therefore the future revenue and income potential of our business are difficult to evaluate.

If we fail to maintain and enhance our brand or if we incur excessive expenses in this effort, our business, results of operations and prospects may be materially and adversely affected.

We believe that maintaining and enhancing our brand is of significant importance to the success of our business. A well-recognized brand is important to increasing the number of users and the level of engagement of our users. Since we operate in a highly competitive market, brand maintenance and enhancement directly affect our ability to maintain our market position.

We have developed our Yalla brand mostly through word of mouth referrals and advertisement on search engines, app stores and other social media platforms. As we expand, we may conduct various additional marketing and brand promotion activities using more methods and channels to continue promoting our brand. We cannot assure you, however, that these activities will be successful or that we will be able to achieve the brand promotion effect we expect.

In addition, any negative publicity in relation to our platform, services or operations, regardless of its veracity, could harm our brands and reputation. We have sometimes received, and expect to continue to receive, complaints from users regarding the quality of the services we offer. Negative publicity or public complaints may harm our reputation, and if complaints against us are not addressed to users’ satisfaction, our reputation and our market position could be significantly harmed, which may materially and adversely affect our business, results of operations and prospects.

We plan to continue expanding into additional markets where we have limited operating experience and may be subject to increased business, economic and other risks that could affect our operating results.

We are headquartered in the UAE, and MENA is our key market. As of June 30, 2020, our mobile platform was available in over 100 countries, with Yalla in eight languages and Yalla Ludo in three languages. We believe the sustainable growth of our business depends on our ability to increase the penetration of our products in both our existing and new markets. Our continued international operations and global expansion may result in increased costs and expose us to a number of challenges and risks, including:

 

   

challenges in developing successful products and implementing effective marketing strategies that respectively target users from various countries and with a diverse range of preferences and demands;

 

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difficulties in managing and overseeing global operations and in affording increased costs associated with doing business in multiple international locations;

 

   

challenges in tailoring our interfaces to our users’ diverse cultural backgrounds;

 

   

competition from global and local online social networking and entertainment industry players;

 

   

risks related to the regulatory environment in various jurisdictions in which our mobile applications are available, uncertainties and unexpected changes in applicable laws, regulations and enforcement;

 

   

burdens of complying with local laws and regulations, including in respect of Internet content control, social media content, virtual currencies and other virtual items, cyber security and data privacy, anti-corruption, payment and anti-money laundering, minors protection, licensing, approval or filing requirements, intellectual property protection, taxation, exchange controls, and economic sanctions;

 

   

political, social or economic instability in the relevant countries;

 

   

fluctuations in currency exchange rates; and

 

   

difficulties in integrating and managing potential acquisitions or investments.

In particular, we face significant challenges to ensure the content presented on our platform is in compliance with the different regulatory frameworks in the jurisdictions in which our platform is available. These jurisdictions may impose stringent restrictions on the content generated by users and onerous requirements for online platforms to monitor content, and our expansion into new markets could cause substantial increases in our compliance costs. Our experience in existing markets may be of limited value in new markets. The different and potentially more stringent regulatory environments in the new markets may increase our risk exposure in our operations. Any incidents related to our failure to comply with applicable laws and regulations or remove inappropriate content could materially and adversely affect our business operations and our reputation.

Our business, financial condition and results of operations may be materially and adversely affected by these challenges and risks associated with our global operations.

We face competition in several major aspects of our business. If we fail to compete effectively, we may lose users, which could in turn materially and adversely affect our business, financial condition and results of operations.

We face competition in several major aspects of our business. We directly compete with other voice-centric social networking and entertainment platforms for users. In addition, we compete with other social networking and entertainment platforms. Some of our competitors may have longer operating histories and significantly greater financial, technical and marketing resources than we do, and in turn may have an advantage in attracting and retaining users and potential business partners. In addition, our competitors may have significantly larger user bases and more established brand names and user stickiness than we do and therefore are able to more effectively leverage their user bases and brand names to provide online social network and other products and services, and thereby increase their respective market shares. In addition, as user preferences evolve, new forms of mobile entertainment may emerge in the future and compete with our platform.

If we are not able to compete effectively, our overall user base and level of user engagement may decrease, which could reduce the number of our paying users or make us less attractive to potential users and potential business partners. We may be required to devote additional resources to further increasing our brand recognition and promoting our platform and services, and such additional spending may adversely affect our profitability and may not generate the expected results cost-effectively, or at all. Furthermore, if we are involved in disputes with any of our competitors that result in negative publicity to us, such disputes, regardless of their veracity or outcome, may harm our reputation or brand image and in turn lead to a reduced number of users for our platform. Any legal proceedings or measures we take in response to such disputes may be expensive, time-consuming and disruptive to our operations and divert our management’s attention.

 

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Our limited operating history with a relatively new business model in a relatively new market makes it difficult to evaluate our business and growth prospects.

Our business operations commenced in April 2016, with commercialization beginning in the same year. We have experienced growth in the number of active users and total revenues in recent years. Our average MAUs increased from 2.2 million in the three months ended December 31, 2018 to 4.2 million in the same period of 2019, and further increased to 12.5 million in the second quarter of 2020. Our paying users experienced similar rapid growth during the period. Our revenues increased by 49.8% from US$42.4 million in 2018 to US$63.5 million in 2019, and increased by 99.6% from US$26.4 million in the six months ended June 30, 2019 to US$52.8 million in the same period in 2020. Our net income more than doubled from US$11.4 million in the six months ended June 30, 2019 to US$25.2 million in the six months ended June 30, 2020, representing net margins of 43.3% and 47.8%, respectively. However, our operational and financial growth in 2018, 2019 and the six months ended June 30, 2020 may not be indicative of our future performance, as our operating results represent a limited history and sample size and may be hard to repeat in the future. For example, since the COVID-19 outbreak, people in impacted regions, including MENA, have generally spent more time online and engaged in more online social networking and entertainment activities, which contributed to the significant increase in our MAU, paying users, revenues and net income in the six months ended June 30, 2020. We cannot assure you that we will be able to maintain such growth after quarantine measures and other restrictions due to COVID-19 pandemic are lifted and more offline activities are resumed in our target markets. Moreover, the PRC government exempted or reduced certain enterprises’ contributions to basic pension insurance, unemployment insurance, and work injury insurance due to the COVID-19 outbreak in 2020, and our PRC subsidiaries were exempted from contributions to certain social insurance between February 2020 and June 2020. Our costs and expenses will likely increase after these exemptions are removed.

Many elements of our business are evolving. The markets for our voice-centric social networking and entertainment platform and the related services are relatively new and rapidly developing and are subject to significant challenges, especially in terms of converting non-paying users to paying users, maintaining a stable paying user base and attracting new paying users. Our business plan relies heavily upon an expanding user base and the resulting increased revenues from users’ consumptions of virtual items and upgrade services, as well as our ability to capitalize on growth opportunities in the social networking and entertainment industry and explore other monetization avenues. We may not succeed in any of these aspects.

As the voice-centric social networking and entertainment industry in our target markets is relatively young, there are few proven methods of projecting user demand or available industry standards on which we can rely. Our current monetization method is also at a relatively preliminary stage. For example, if we fail to properly manage the volume and price of our virtual items or upgrade services, our users may be less likely to purchase them. We cannot assure you that our monetization attempts will be successful, profitable or accepted by users, and therefore it may be difficult to gauge the income potential of our business.

Addressing these risks and uncertainties will require significant capital expenditures and allocation of valuable management and employee resources. If we fail to successfully address any of the above risks and uncertainties, the size of our user base, our revenues and our operating margin may decline.

Our community culture is vital to our success. Our operations may be materially and adversely affected if we fail to maintain the culture of the Yalla community.

We have cultivated an interactive and vibrant online community centered on our voice-centric social networking and entertainment platform. We strive to provide premium user experience by continuously improving user interfaces and features of our platform to adapt to the relevant local cultures and by encouraging social interactions among users. We believe that maintaining and promoting such a vibrant community culture is critical to retaining and expanding our user base. We have taken multiple initiatives to preserve our community culture and values. Leveraging our insights into MENA culture and local user preferences, we infuse our user interfaces with local cultural elements. For non-English versions of Yalla, we update the user interface with color

 

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themes and logos related to specific local holidays to celebrate with our users, and virtual gifts are typically designed based on local customs. However, there can be no assurance that we will be able to maintain our community culture and remain as the preferred platform for our target users. For example, frictions among our users and inflammatory comments posted by Internet trolls and any inappropriate handling of these frictions may damage our community culture and brand image. Any failure to timely screen out and remove illegal or inappropriate content posted on our platform or to identify and close fake accounts of Internet trolls could also adversely affect users’ perception of and experience on our platform. Any damage to our community culture could materially and adversely affect our business prospects and results of operations.

Our business is highly dependent on the proper functioning and improvement of our information technology systems and infrastructure. Our business and operating results may be harmed by service disruptions, or by our failure to timely and effectively scale up and adjust our existing technology and infrastructure.

The popularity of our platform and services and our ability to further monetize our user base depend on our ability to adapt to rapidly changing technologies as well as our ability to continually innovate in response to evolving consumer demands and expectations and market competition. Our ability to provide a superior user experience on our platform depends on the continuous and reliable operation of our IT systems.

We may not be able to procure sufficient bandwidth in a timely manner or on acceptable terms or at all. Failure to do so may significantly impair user experience on our platform and decrease the overall effectiveness of our platform to users. Our IT systems are vulnerable to damage or interruption as a result of fires, floods, earthquakes, power losses, telecommunications failures, undetected errors in software, computer viruses, hacking and other attempts to harm our IT systems. Disruptions, failures, unscheduled service interruptions or a decrease in connection speeds could damage our reputation and cause our users to migrate to our competitors’ platforms. If we experience frequent or constant service disruptions, whether caused by failures of our own IT systems or those of third-party service providers, our user experience may be negatively affected, which in turn may have a material and adverse effect on our reputation and business. We may not be successful in minimizing the frequency or duration of service interruptions. As the number of our users increases and our users generate more content on our platform, we may be required to expand and adjust our technology and infrastructure to continue to reliably store and monitor content generated by users on our platform. It may become increasingly difficult to maintain and improve the performance of our platform, particularly during peak usage times, as our services become more complex and as our user base increases.

We use third-party services and technologies in connection with our business, and any disruption to the provision of these services and technologies to us could result in negative publicity and a slowdown in the growth of our user base, which could materially and adversely affect our business, financial condition and results of operations.

Our business partially depends on services provided by, and relationships with, various third parties. For example, we source audio processing and multi-party real-time communication solutions from third parties to support all of our Yalla rooms and we use servers of a third party for data storage and processing. We also rely on third parties to provide software and other IT services to us. If such third parties terminate their services to us or if they encounter technological or other difficulties, we may not be able to find alternative solutions in a timely manner or on terms satisfactory to us. In particular, there are only a limited number of providers of high quality audio processing solutions in the market. In addition, certain third-party software we use in our operations is currently publicly available free of charge. If the provider of any such software decides to charge users or no longer makes the software publicly available, we may need to incur significant costs to obtain licensing, find replacement software or develop it on our own. If we are unable to obtain licensing, find or develop replacement software at a reasonable cost, or at all, our business and operations may be adversely affected.

 

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In addition, we process purchases of our virtual currencies through third-party payment platforms. If any of these third-party payment platforms suffer from security breaches or leakage of user information, users may lose confidence in such payment systems or channels and refrain from purchasing our virtual currencies, in which case our results of operations would be negatively impacted. See “—The security of operations of, and fees charged by, third-party payment platforms may have a material adverse effect on our business and results of operations.”

Certain of our customer service staff are employees of third-party service providers incorporated in Egypt and the UAE. If the third parties’ employees fail to provide satisfactory services to our users, we may not be able to rectify the deficiency in a timely manner, and our business could be adversely affected. Labor or contractual disputes could also arise among us, the third-party service providers and/or the relevant customer service staff, which could cause disturbance of services to our users.

We exercise no control over the third parties with whom we have business arrangements. If such third parties increase their prices, fail to provide their services effectively, terminate their services or agreements or discontinue their relationships with us, we could suffer service interruptions, reduced revenues or increased costs, any of which may have a material adverse effect on our business, financial condition and results of operations.

We face risks related to health epidemics, pandemics, natural disasters and other outbreaks, which could significantly disrupt our operations.

Our business could be adversely affected by the effects of epidemics or pandemics. In recent years, there have been outbreaks of epidemics in MENA, China and globally. Our business operations could be disrupted if any of our employees are suspected of having COVID-19, H1N1 flu, avian flu or another epidemic or pandemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that the outbreak harms the economy in our target markets in general and the mobile Internet industry in particular. In particular, COVID-19 has spread globally in the first quarter of 2020, including several countries in MENA. Government measures designed to control the spread of the virus, such as restrictions on travel and the closing-down of businesses to the public, may result in a decline of economic activities in our target markets. Such decline may have a material and adverse impact on our business, results of operations and financial condition. The extent of such impact will depend largely on future developments, which are highly uncertain, including the severity of the outbreak in our target markets and future government measures in response to the outbreak, among other things. In addition, we have implemented working-from-home arrangements for our employees as a result of the outbreak. While we have not experienced any disruption in our operations, such arrangements may adversely affect the efficiency of our workforce.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our ability to grow our user base and implement our monetization strategies.

We are also vulnerable to natural disasters and other calamities. It is possible that we may be unable to recover certain data in the event of a server failure. We cannot assure you that any backup systems will be adequate to protect us from the effects of fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events. Any of the foregoing events may give rise to server interruptions, breakdowns, system failures, technology platform failures or Internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide services on our platform.

 

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Our business is sensitive to global political and economic conditions. A severe or prolonged downturn in the global economy could materially and adversely affect our business, financial condition and results of operations.

The global macroeconomic environment is facing challenges. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States. There have been concerns over unrest and terrorist threats in MENA, Europe and Africa, which have resulted in volatility in oil and other markets, and concerns over the conflicts involving Ukraine, Syria and North Korea.

We are headquartered in the UAE. MENA is our key market. While the UAE is seen to have a relatively stable political environment, certain other jurisdictions in MENA are not. In particular, since early 2011 there have been increased political risks in several countries in the region, including Algeria, Bahrain, Egypt, Libya, Morocco, Oman, Saudi Arabia, Tunisia and Syria. These risks have ranged from public demonstrations to, in extreme cases, armed conflicts and civil war and have given rise to a number of regime changes and increased political uncertainty across the region. In particular, the armed conflicts in Syria, Iraq and Yemen have the potential to further destabilize the region, further increase uncertainty and have a material negative impact on the regional economy. In mid-2017, Bahrain, Saudi Arabia, the UAE and certain other countries imposed sanctions on Qatar, which remain in place. In January 2020, the United States conducted a drone strike that killed the Iranian general Qasem Soleimani, which escalated tensions between the United States and Iran and heightened the risk for a military conflict between the two countries. The fluctuations in oil price and the outbreak of COVID-19 in the first quarter of 2020 may materially and adversely affect the economic conditions in MENA. The financial, political and general economic conditions prevailing from time to time across MENA may affect mobile users’ willingness and ability to spend on the mobile Internet and have a material adverse impact on our performance and operating results. It is not possible to predict the occurrence of events or circumstances such as war or hostilities, or the impact of such occurrences, and no assurance can be given that we would be able to sustain our current profit levels if adverse political events or circumstances were to occur, particularly in MENA. A general downturn or instability in certain sectors of MENA’s economies could have an adverse effect on our business. In addition, we may be affected by unexpected changes in regulations and enforcement, nationalization of assets and other governmental actions by the host countries, government regulations that favor local competitors, changing taxation policies, restrictions on converting foreign currencies into U.S. dollars, most of which are beyond our control. Investors should also note that our business could be adversely affected by political, economic or related developments both within and outside MENA because of inter-relationships within the global financial markets.

Significant political, social and economic instability in one or more of our markets could have a material adverse effect on our business, financial condition and results of operations. Any severe or prolonged slowdown in the global economy may also materially and adversely affect our business, results of operations and financial condition. In addition, continued turbulence in the international markets may adversely affect our ability to access capital markets to meet liquidity needs.

We have not recognized any share-based compensation expense in the past but will recognize a substantial amount of share-based compensation expense upon the completion of this offering, which will have a significant impact on our results of operations.

On June 22, 2018, we adopted the 2018 Plan, which was amended and restated on November 19, 2019 and was further amended in June 2020. See “Management—Share Incentive Plans” for a detailed discussion. As of the date of this prospectus, we are authorized to grant share awards for issuance of up to a maximum of 41,733,506 ordinary shares under the 2018 Plan, and options to purchase 41,733,506 ordinary shares under the 2018 Plan have been granted and outstanding. We are required to recognize compensation expense for an equity award over the period in which the recipient is required to provide service in exchange for the equity award. Because the share options granted by us can only be exercised upon completion of this offering, we have not

 

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recognized share-based compensation expense relating to these share options granted by us yet. We will recognize compensation expenses relating to options vested cumulatively upon the completion of this offering. As of June 30, 2020, the total unrecognized compensation expense associated with share options amounted to US$137.5 million, of which US$32.2 million was based on the degree of service period that had been completed as of June 30, 2020. Assuming that this offering is completed prior to October 31, 2020, we would recognize share-based compensation expenses in the amount of US$60.9 million for the options outstanding as of the date of this prospectus in the three months ending December 31, 2020. On August 31, 2020, we adopted the 2020 Plan. See “Management—Share Incentive Plans” for a detailed discussion. As of the date of this prospectus, we are authorized to grant share awards for issuance of up to a maximum of 2,492,603 ordinary shares under the 2020 Plan, and no share awards have been granted under the 2020 Plan. If additional share options or other equity incentives are granted to our employees, directors or consultants in the future, we will incur additional share-based compensation expense and our results of operations will be further adversely affected.

User growth and engagement depend upon effective interoperation with mobile operating systems, networks, devices and standards that we do not control.

We make our mobile applications available across a variety of mobile operating systems and devices. We are dependent on the effective interoperation of our mobile applications with mobile operating systems, such as Android and iOS, networks, devices and standards, which we do not control. Any changes in such mobile operating systems, networks, devices or standards that degrade the functionality of our mobile applications or give preferential treatment to competitive products could adversely affect usage of our mobile applications and our ability to deliver high quality user experience. We may not be successful in developing relationships with key participants in the mobile industry or in developing mobile applications that operate effectively with these mobile operating systems, networks, devices and standards. In the event that it is difficult for our users to access and use our mobile applications, particularly on their mobile devices, our user growth and user engagement could be harmed, and our business and operating results could be adversely affected.

User misconduct and misuse of our platform may adversely impact our brand image, and we may be held liable for information or content displayed on, retrieved from or linked to our platform, or distributed to our users, and the relevant local authorities may impose restrictions on access to our platform.

Our voice-centric social networking and entertainment platform enables users to chat, play games and engage in various forms of other online communications in real time. We also allow users to share texts, images and other content with each other through our platform. However, our platform does not require real-name registration and identity verification of our users. In addition, because all of the audio and text communications on our platform are conducted in real time, we are unable to examine the content generated by our users on air before they are streamed on our platform. We require all users to agree to our terms of service upon account registration. Our terms of service set out types of content strictly prohibited on our platform, and we have also developed a content monitoring system that utilizes primarily automation, as well as manual screening, to filter inappropriate content. We also encourage users to report any noncompliance of our terms of service. However, due to the immense quantity of user-generated content on our platform, we may not be able to detect all violations of our terms of service or inappropriate or illegal content streamed, displayed or exchanged over our platform, or determine the type of content or actions that may result in liability to us. Our automated screening system may fail to timely screen out and remove inappropriate or illegal content. As such, relevant government authorities could identify inappropriate or illegal content on our platform, which could lead to restrictions on access to our platform in the relevant jurisdictions. Even if we manage to identify and remove offensive content, we may still be held liable. Negative publicity of incidents related to inappropriate or illegal content on our platform or any misuse of our platform by users could also adversely affect our brand image. As a result, our ability to retain or increase our user base and user engagement may be adversely affected, we may not be able to maintain or grow our revenues as anticipated, and our business prospects and financial results could be adversely affected.

Additionally, it is possible that our users may engage in illegal, obscene or incendiary conversations or activities on or through our platform that may be deemed illegal under the relevant local laws and regulations or inappropriate under local cultures or customs, for which we may be subject to potential liability. Content

 

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generated, including text and images posted, by our users may infringe on rights of others. In addition, because we offer our mobile applications in a large number of jurisdictions, and we have not implemented any user screening procedures, we cannot ensure that our provision of online social networking and entertainment services to all users is in compliance with all applicable laws. The jurisdictions in which our mobile applications are available may have regulations governing the distribution of information over the Internet. These regulations may prohibit the display of content that, among other things, impairs the public interest, or is obscene, superstitious, fraudulent or defamatory. For example, the regulations in some countries in MENA and Southeast Asia prohibit online social networking platforms from being used for dating, pornographic or gambling purposes. While we do not believe our mobile applications are provided to users for any of these purposes, we cannot control how users interact online or offline other than through content monitoring on our mobile applications. We may be subject to fines or other disciplinary actions as prescribed under the relevant local laws and regulations. We may also face claims for defamation, libel, negligence, aiding-and-abetting liability, infringement of copyright, patent, trademark or other intellectual property or third-party rights, other unlawful activities or other theories and claims based on the nature and content of the information delivered on or otherwise accessed through our platform. For example, if any of our users suffers or alleges to have suffered physical, financial or emotional harm as a result of content posted on or conduct initiated from our platform, we may face legal actions initiated by the affected user. In response to such lawsuits, government authorities may take regulatory actions against us based on alleged non-compliance with applicable laws and regulations, such as prohibitions of illegal or inappropriate content on mobile platforms. Defending any such actions could be costly and involve significant time and attention of our management and other resources, which would materially and adversely affect our business and operations. Moreover, the costs of compliance with these regulations may increase as a result of the expansion of our platform, which may adversely affect our results of operations. We may also be required to restrict, discontinue or make other changes to certain features and services provided on our mobile applications, and we may even be prohibited from providing our mobile applications to users in certain jurisdictions. As a result, our business may suffer, our user base, revenue growth and profitability may be materially and adversely affected, and the price of our ADSs may decline.

Malicious software and applications may affect user experience, which could reduce our ability to attract users and materially and adversely affect our business, financial condition and results of operations.

Malicious software and applications may interrupt the operations of our platform and pass on such malware to our users which could adversely hinder user experience. We cannot guarantee that we will be able to successfully block these attacks. If users experience a malware attack by using our platform, our users may associate the malware with our platform. As a result, our reputation, business, and results of operations could be materially and adversely affected.

The security of operations of, and fees charged by, third-party payment platforms may have a material adverse effect on our business and results of operations.

Currently, we process purchases of our virtual currencies through third-party payment platforms. In all of these payment transactions, secured transmission of confidential information such as the users’ credit card numbers and personal information over public networks and through the payment platforms is essential to maintaining consumer confidence.

We do not have control over the security measures of our third-party payment platforms. Any security breaches of a payment platform that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could, among other things, damage our reputation and the perceived security of the other payment platforms that we use. If a well-publicized Internet or mobile network security breach were to occur, users may become reluctant to purchase our virtual currencies, even if such breach did not involve payment systems or methods used by us. In addition, there may be billing software errors that would damage customer confidence in these payment platforms. If any of the above were to occur and damage our reputation or the perceived security of the payment platforms we use, we may lose paying users and users may be discouraged from spending on our platform, which may have a material adverse effect on our business.

 

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In addition, there are currently only a limited number of reputable third-party payment systems in our target markets. If any of these major payment systems decides to cease to provide services to us, or significantly increases the fee rates it charges us for using its payment systems for our virtual currencies, our results of operations may be materially and adversely affected.

Users’ payments to purchase and use of virtual currencies on our mobile applications could expose us to additional regulatory requirements and other risks that could be costly or difficult to comply with.

We may be subject to a variety of laws and regulations in the various jurisdictions where our users are located in respect of the users’ payments to purchase virtual currencies on our applications through third-party payment platforms, including those governing money transmission, gift cards and other prepaid access instruments, electronic funds transfers, anti-money laundering, counter-terrorist financing, gambling, banking and lending. In some jurisdictions, the application or interpretation of these laws and regulations may be unclear. Our efforts to comply with these laws and regulations could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties, or we may be required to make product or marketing practice changes, any of which could have an adverse effect on our business and financial results. In addition, we may be subject to a variety of additional risks as a result of these payments by users, including potential fraudulent or otherwise illegal activity by users, employees, or third parties.

Changes in laws and regulations related to the Internet and mobile Internet, perceptions toward the use of social media and changes in Internet infrastructure itself may diminish the demand for our platform or products and could adversely affect our business and results of operations.

The success of our business depends upon the continued use of the Internet or mobile Internet and social media. Relevant government regulatory authorities, including those in MENA, may adopt laws or regulations that restrict the use of the Internet, mobile Internet or social media in the future. In addition, government agencies or private organizations may impose additional taxes, fees or other charges for accessing the Internet. These laws, taxes, fees or charges could limit the use of the Internet or mobile Internet or decrease the demand for online social media.

In addition, the performance of our platform could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility and quality of services. The performance of the Internet and mobile Internet has been adversely affected by “viruses,” “worms” and similar malicious programs, as well as the risks associated with other types of security breaches. If the use of the Internet or mobile Internet is reduced as a result of these or other issues, then demand for our platform could decline, which could adversely affect our revenue, business, results of operations and financial condition.

Concerns about collection, use, retention, transfer, disclosure, processing and security of personal data could damage our reputation and deter current and potential users from using our platform and services, or subject us to significant compliance costs or penalties, which could materially and adversely affect our business, financial condition and results of operations.

Concerns about our practices with regard to the collection, use, retention, transfer, disclosure, processing and security of personal information or other privacy-related matters, such as cybersecurity breaches, misuse of personal data and data sharing without necessary safeguards, even if unfounded, could damage our reputation and operating results. MENA is our key market, and the two data centers with servers that collect and process our user data are located in Germany and Hong Kong. As of June 30, 2020, our platform was available in over 100 countries. The regulatory frameworks regarding privacy issues in many jurisdictions are constantly evolving and can be subject to significant changes from time to time, and therefore we may not be able to comprehensively assess the scope and extent of our compliance responsibility at a global level. Furthermore, the developing

 

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requirements relating to clear and prominent privacy notices (including in the context of obtaining informed and specific consents to the collection and processing of personal data, where applicable) may potentially deter users from consenting to certain uses of their personal information. In general, negative publicity of us or our industry regarding actual or perceived violations of our users’ privacy-related rights, including fines and enforcement actions against us or other similarly placed businesses, may also impair users’ trust in our privacy practices and make them reluctant to give their consent to share their data with us.

This risk is enhanced in certain jurisdictions with stringent, extra-territorial data protection laws, and the two regulations that have significant impacts on our industry are the General Data Protection Regulation (EU) 2016/679 that became applicable on May 25, 2018, or the GDPR, and the California Consumer Privacy Act that became effective on January 1, 2020, or the CCPA. The GDPR places stringent obligations and operational requirements on processors and controllers of personal data, including, for example, requiring expanded disclosures to data subjects about how their personal data is to be used, limitations on retention of information, mandatory data breach notification requirements, and higher standards for data controllers to demonstrate that they have obtained either valid consent or have another legal basis in place to justify their data processing activities. The GDPR also enhances the rights of data subjects, who may, for example, request access to their personal data, the deletion and amendment of their personal data, or to have their personal data transferred to another service provider. Data subjects also have the right to be compensated for any material or non-material damage suffered as a result of a controller or processor’s non-compliance with the GDPR. Under the GDPR, data protection supervisory authorities are also given various enforcement powers, including that they can levy fines of up to Euro 20 million or up to 4% of an organization’s total worldwide annual turnover for the preceding financial year, whichever is higher, for non-compliance, which significantly increases our potential financial exposure for non-compliance. While the GDPR provides a more harmonized approach to data protection regulation across the EU member states, it also gives EU member states certain areas of discretion and therefore laws and regulations in relation to certain data processing activities may differ on a member state by member state basis, which could further limit our ability to use and share personal data and could require localized changes to our operating model. The EU has also released a proposed Regulation on Privacy and Electronic Communications 2002, or the ePrivacy Regulation, to replace the EU’s current Privacy and Electronic Communications Directive, or the ePrivacy Directive, to, among other things, achieve a greater harmonization among EU member states and better align the rules governing online tracking technologies and electronic communications (for example, in relation to the use of cookies and similar technologies and protection against email spam) with the requirements of the GDPR. While the ePrivacy Regulation was originally intended to be adopted on May 25, 2018 (alongside the GDPR), it is currently going through the European legislative process, and commentators now expect it to be adopted by the end of 2020. The current draft of the ePrivacy Regulation significantly increases fining powers to the same levels as GDPR and may lead to broader restrictions on our online activities, including efforts to understand followers’ Internet usage and promote ourselves to them. Outside of the EU, many jurisdictions have adopted or are adopting new data privacy and data protection laws, which may result in additional expenses to us and increase the risk of non-compliance. For example, the CCPA creates new data privacy rights for users and new operational requirements for businesses. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing (and sales of personal data) and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. Furthermore, we may need to comply with regulations in other territories that may impose further onerous compliance requirements, such as data localization, which prohibits companies from storing data relating to resident individuals in data centers outside the jurisdiction. The proliferation of such laws within jurisdictions and countries in which we operate may result in conflicting and contradictory requirements.

While we strive to comply with our data privacy guidelines as well as all applicable data protection laws and regulations or contract obligations, any failure or perceived failure to comply, including in relation to lawful basis of data processing and providing users with sufficient information with respect to our use of their personal data, may result in proceedings or actions against us, including fines and penalties on us, by government entities

 

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or proceedings or actions against us by our business partners or others (including enforcement orders requiring us to cease collecting or processing data in a certain way), and could damage our reputation and discourage current and future users from using our mobile applications. In addition, compliance with applicable laws on data privacy requires substantial expenditure and resources, including to continually evaluate our policies and processes and adapt to new requirements that are or become applicable to us on a jurisdiction-by-jurisdiction basis, which would impose significant burdens and costs on our operations or may require us to alter our business practices. Concerns about the security of personal data could also lead to a decline in general Internet usage, which could lead to lower registered, active or paying user numbers on our platform. Furthermore, if the local government authorities in our target markets require real-name registration for users of our platform, the growth of our user numbers may slow down and our business, financial condition and results of operations may be adversely affected. A significant reduction in registered, active or paying user numbers could lead to lower revenues, which could have a material and adverse effect on our business, financial condition and results of operations.

If we fail to prevent security breaches, cyber-attacks or other unauthorized access to our systems or our users’ data, we may be exposed to significant consequences, including legal and financial exposure and loss of users, and our reputation, business and operating results may be materially and adversely affected.

We collect, store, transmit and process personal and other sensitive data generated by our users through their interactions with our apps. We may be exposed to risks of security breaches or unauthorized access to or cyber-attacks on our systems or the data we store. Our efforts to protect our data may be unsuccessful due to software “bugs,” system errors or other technical deficiencies, mistakes or malfeasance of our employees or contractors, vulnerabilities of our vendors and service providers, or other cybersecurity-related vulnerabilities. Although we have developed systems and processes that are designed to prevent and detect security breaches and protect our users’ data, we cannot guarantee that such measures will be sufficient defenses against the evolving techniques used to obtain unauthorized access, disable or degrade services or sabotage systems. Any failure to prevent, detect, or mitigate security breaches, cyber-attacks or other unauthorized access to our systems, theft of users’ accounts or disclosure of our users’ data, including personal information, could result in loss or misuse of such data, interruptions to the services we provide, diminished user experience, loss of user confidence and trust in our products, impairment of our network and technological infrastructure, and harm to our reputation and business, significant legal and financial exposure and potential lawsuits brought by private individuals or regulators. In addition, as we have servers in data centers in Hong Kong and Germany, we may incur significant costs in protecting them against, or remediating, security breaches and cyber-attacks.

We may be required to obtain and maintain licenses and approvals relating to Internet or telecommunications services in certain jurisdictions.

Our platform is available in over 100 countries, and some of these countries may require us to obtain certain licenses, permits or approvals or conduct certain registrations or filings with local authorities in relation to our mobile applications. Considerable uncertainties exist in the interpretation and implementation of laws and regulations governing our business activities in certain jurisdictions, including MENA.

Our mobile applications enable voice-based, real time communications on the Internet. As a result, we may be deemed to offer regulated Internet or telecommunications services that require licenses in certain jurisdictions. For example, the law of Saudi Arabia is unclear about whether we are required or eligible to obtain licenses for our provision of audio social media services, including the Voice Over Internet Protocol, or VoIP, license. It is also unclear whether our mobile applications fall into regulated telecommunications services or violate any other local telecommunication requirements in the jurisdictions in which our mobile applications are available.

In addition, we may be found by regulators and/or licensed telecommunications service providers in the UAE to be providing VoIP services without the requisite licenses. VoIP services are specifically regulated under

 

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Voice over Internet Protocol Policy, or VoIP Policy, issued by the UAE Telecommunications Regulatory Authority, or the TRA, on December 30, 2009. “VoIP Services” are defined for the purposes of the VoIP Policy as “all of the services and technologies that allow transmitting, receiving, delivering and routing of voice telecommunications by means of Internet Protocol (IP).” Yalla apps’ free voice chat function may be deemed VoIP services, as such chat function delivers voice communications and multimedia content over the Internet.

Based on a strict interpretation of laws and regulations, VoIP services can only be used in the UAE in limited circumstances where:

 

   

the VoIP service is provided between users of a “Closed Group Network” where the relevant calls originate and terminate in the UAE in accordance with the TRA’s VoIP Policy; or

 

   

the VoIP service is a paid service provided through the local public telecommunications service providers licensed by the TRA under Federal Law No 3 of 2003 Regarding The Organization of The Telecommunications Sector, as amended, or the Telecoms Law.

Under the Telecoms Law, it is a criminal offense that may be penalized by a fine between AED50,000 (US$13,615) and AED1,000,000 (US$272,294) and/or imprisonment of up to two years to provide regulated telecommunication services without being licensed to do so. It is the supplier, rather than the user, that commits this offense. In practice, the main enforcement action taken against unlicensed VoIP service providers is for the licensed service providers to block the VoIP service in the UAE. To our knowledge, the TRA is not expected to issue any further licenses that would allow the holders of such licenses to provide VoIP services.

There are uncertainties in the UAE market regarding the use of VoIP services, as despite the apparently strict legal position concerning the use of VoIP services and the blocking of certain well-known international VoIP service brands in the UAE, many users in the UAE can in fact use various other VoIP applications, such as certain online gaming platforms. Due to such uncertainties around the use of VoIP, there is no guarantee that the chat room features of our platform will remain available in the UAE in the future.

As of the date of this prospectus, we have not obtained any VoIP or other telecommunications license and we have not received any notification from regulators or licensed telecommunications service providers alleging that we provide unlicensed VoIP or telecommunications services. We are nonetheless subject to uncertainties in laws and regulations, including those in MENA. We cannot assure you that we are exempt from the licensing requirements relating to Internet or telecommunications services in the relevant jurisdictions. If our mobile applications were found by a regulatory authority to be in violation of any applicable laws or regulations, such as the lack of requisite approvals or licenses, we may no longer be able to offer our mobile applications in the relevant jurisdiction, and we may also be subject to other penalties. Any such penalties or enforcement actions may disrupt our business operations and materially and adversely affect our business, financial condition and results of operations.

Third parties may register trademarks or domain names or purchase Internet search engine keywords that are similar to our trademarks, brands or mobile applications, or misappropriate our data and copy our platform, all of which could cause confusion to our users, divert users away from our platform and services or harm our reputation.

Competitors and other third parties may (i) register trademarks or domain names or (ii) in Internet search engine advertising programs and in the header and text of the resulting sponsored links or advertisements, purchase keywords, which are confusingly similar to our trademarks, brands or mobile applications in order to divert potential customers from us to their websites or mobile applications. Preventing such infringing, inappropriate or damaging practices is inherently difficult. If we are unable to prevent such practices, competitors and other third parties may continue to drive potential online customers away from our platform to competing, irrelevant or potentially offensive platforms, which could harm our reputation and cause us to lose revenue.

 

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Third parties may attempt to misappropriate our data through scraping our platform, robots or other means and aggregate this data on their platforms with data from other companies. In addition, “copycat” platforms or applications may attempt to misappropriate data on our platform and imitate our brand or the functionality of our platform. We may not be able to detect all such platforms in a timely manner and, even if we could, technological and legal measures may be insufficient to stop their operations. In those cases, our available remedies may not be adequate to protect us against such platforms. Regardless of whether we can successfully enforce our rights against these platforms, any measures that we may take could require significant financial or other resources from us. Those platforms may also lure away some of our users or reduce our market share, causing material and adverse effects to our business operations.

We may be subject to intellectual property or other third-party rights infringement claims, which could be time-consuming and costly to defend and may result in diversion of our financial and management resources.

We may be subject to intellectual property or other third-party rights infringement claims, particularly in relation to content generated by our users on our mobile applications. We seek to ensure that our audio streaming and other technologies, as well as the design of our platform and other intellectual properties, are original and do not infringe upon patents, trademarks, copyrights or other intellectual property or other rights held by third parties. However, companies in the Internet, technology and media industries are frequently involved in litigations based on allegations of infringement of intellectual property rights, unfair competition, invasion of privacy, defamation or violations of other rights. There is no guarantee that third-party right holders will not assert intellectual property infringement or other claims against us in the future for our own intellectual property rights or intellectual property or other rights of third parties. Furthermore, content generated by our users through our platform, including real-time content such as text and images, may potentially infringe on copyrights, images or other intellectual property or other rights of third parties, which could adversely affect our business operations or reputation. Users who generate content that may infringe on copyrights or other rights of third parties may not be easily identifiable, if at all, by a plaintiff, who may then choose to file a claim against us, and these users may not have resources to fully indemnify us, if at all, for any such claims.

If we are found to have violated the intellectual property or other rights of third parties, including failure to remove or block or disconnect links to any infringing content upon receipt of the copyright holder’s notice, we may be enjoined from using such intellectual properties and be forced to pay fines and damages. In addition, we may incur substantial expenses and diversion of our financial and management resources in defending against these third-party infringement claims. Successful infringement or other intellectual property or other third-party rights claims against us may result in substantial monetary liabilities, which may disrupt our operations and materially adversely affect our business, results of operations, financial condition and growth prospects. Any infringement claim, whether with merits or not, generates negative publicity which could harm our brand reputation.

Our intellectual property may not provide adequate protection to us, and we may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

We regard our trademarks, patents, software copyrights, copyrights, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our success. We rely on a combination of patent, software copyright, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We have invested significant resources to develop our own intellectual property. Failure to maintain or protect these rights could harm our business. For example, we have not registered our “Yalla” or “Yalla Ludo” words or logos as trademarks in certain jurisdictions in which our mobile applications are available. In certain other jurisdictions, our trademark registrations did not cover our main activities such as software and entertainment services. While we are in the process of applying for relevant trademark registrations in the UAE and certain other jurisdictions in MENA, we cannot guarantee that the trademark offices in these

 

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jurisdictions will grant our trademark applications or that third parties will not oppose our trademark applications. If our trademarks are not granted or successfully challenged, we could be forced to rebrand our products and services, which could result in loss of brand recognition and require us to devote resources to advertising and marketing new brands. In addition, any unauthorized use of our intellectual property by third parties may adversely affect our current and future revenues and our reputation.

Implementation and enforcement of intellectual property-related laws in certain jurisdictions, including those in MENA and the PRC, is still evolving. We have registered software copyrights, patents and trademarks in certain jurisdictions, including in MENA and the PRC. Protection of intellectual property rights in such jurisdictions may not be as effective as in the United States or other developed countries. Furthermore, policing unauthorized use of proprietary technology is difficult and expensive. Despite our efforts to protect our proprietary rights, third parties may attempt to copy or otherwise obtain and use our intellectual property or seek court declarations that they do not infringe upon our intellectual property rights. Monitoring unauthorized use of our intellectual property is difficult and costly, and we cannot assure you that the steps we have taken will prevent misappropriation of our intellectual property. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources.

Our platform contains open source software, which may pose particular risk to our proprietary software and services in a manner that negatively affects our business.

We use open source software on our platform and will continue to use open source software in the future. There is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our services. Additionally, we may face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional technology and product development resources, and we may not be able to complete it successfully.

Our business depends substantially on the continuing efforts of our executive officers, key employees and qualified personnel, and our business operations may be severely disrupted if we lose their services or if they are subject to litigation or regulatory investigations and proceedings.

Our future success depends substantially on the continued efforts of our executive officers and key employees. If one or more of our executive officers or key employees were unable or unwilling to continue their services with us, we might not be able to replace them easily, in a timely manner, or at all. Since the Internet industry is characterized by high demand and intense competition for talents, we cannot assure you that we will be able to attract or retain qualified staff or other highly skilled employees. In addition, as our company is relatively young, our ability to train and integrate new employees into our operations may not meet the growing demands of our business which may materially and adversely affect our ability to grow our business and hence our results of operations.

If any of our executive officers and key employees terminates their services with us, our business may be severely disrupted, our financial condition and results of operations may be materially and adversely affected and we may incur additional expenses to recruit, train and retain qualified personnel. If any of our executive officers or key employees joins a competitor or forms a competing company, we may lose know-how and key professionals and staff members. Each of our executive officers and key employees has entered into a non-compete agreement with us. However, we cannot assure you that we would be able to enforce these non-compete agreements.

In addition, our executive officers and key employees may from time to time be subject to litigations and regulatory investigations and proceedings or otherwise face potential civil, criminal or other liabilities in relation

 

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to commercial, labor, securities or other matters due to past or future conduct of themselves or third parties, which could adversely affect our reputation and these personnel’s ability to continue contributing to our success. These events could also divert management time and attention away from our business and force us to find appropriate replacements for these personnel, which may not be readily available. As a result, our business, reputation, financial condition and results of operations could be materially and adversely affected.

Our results of operations are subject to substantial quarterly and annual fluctuations due to a number of factors that could adversely affect our business and the trading price of the ADSs.

We experience seasonality in our business, reflecting seasonal fluctuations in Internet usage. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In particular, we may experience a decrease in active users during Ramadan, the Islamic holy month of fasting. The Islamic calendar is a lunar calendar, and the month of Ramadan migrates throughout the seasons. For example, while Ramadan falls within the second quarter of each year from 2018 to 2022, it will start in the first quarter and end in the second quarter of 2023. Due to the foregoing factors, our operating results in one or more future quarters or years may fluctuate. In such event, the trading price of the ADSs would likely be materially and adversely affected.

If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.

Prior to this offering, we are a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In the course of preparing the consolidated financial statements for the years ended December 31, 2018 and 2019, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as of December 31, 2019, in accordance with the standards established by the Public Company Accounting Oversight Board of the United States, or the PCAOB.

The material weakness that has been identified relates to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to properly address complex U.S. GAAP accounting issues, and related presentation and disclosure in accordance with U.S. GAAP and SEC financial reporting requirements. We are in the process of implementing a number of measures to address the material weakness that have been identified. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” However, we cannot assure you that we will be able to continue implementing these measures in the future, or that we will not identify additional material weaknesses or significant deficiencies in the future. The audit of our financial statements performed by our independent registered public accounting firm was not designed to provide assurance on internal control over financial reporting or to identify internal control deficiencies, and therefore, we may have other material weaknesses or significant deficiencies that are not yet identified.

Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2021. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is

 

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not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

Generally, if we fail to achieve and maintain an effective internal control environment, such failure could result in material misstatements in our financial statements and compromise our ability to meet our reporting obligations, which would cause investors to lose confidence in our reported financial information. Any such material misstatement could in turn limit our access to capital markets and lead to a decline in the trading price of the ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations, civil or criminal sanctions and lawsuits. In addition, our internal controls over financial reporting will not prevent or detect all errors or fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If that were to happen, the market price of the ADSs could decline and we could be subject to sanctions or investigations by the NYSE, SEC or other regulatory authorities.

We may need additional capital, and we may be unable to obtain such capital in a timely manner or on acceptable terms, or at all. Furthermore, our future capital needs may require us to sell additional equity or debt securities that may dilute our shareholders or introduce covenants that may restrict our operations or our ability to pay dividends.

To grow our business and remain competitive, we may require additional capital from time to time. Our ability to obtain additional capital is subject to a variety of uncertainties, including:

 

   

our market position and competitiveness in the social networking and entertainment industry, in particular, the voice-centric social networking and entertainment segment;

 

   

our ability to expand our user base, increase our paying users, develop and maintain products and services appealing to users, penetrate into additional markets, and monetize our user base;

 

   

our future profitability, overall financial condition, results of operations and cash flows;

 

   

general market conditions for capital raising activities by social networking and entertainment platforms and other Internet companies; and

 

   

economic, political, regulatory and other conditions internationally and in our target markets, particularly MENA.

We may be unable to obtain additional capital in a timely manner or on acceptable terms or at all. In addition, we may sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could dilute our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations or our ability to pay dividends to our shareholders.

 

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We have limited business insurance coverage, so that any uninsured occurrence of business disruption may result in substantial costs to us and the diversion of our resources, which could have an adverse effect on our results of operations and financial condition.

Insurance companies in the UAE and China currently do not offer as extensive an array of insurance products as insurance companies do in more developed economies. We do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured occurrence may disrupt our business operations, require us to incur substantial costs and divert our resources, which could have an adverse effect on our results of operations and financial condition.

Future strategic alliances or acquisitions may have a material and adverse effect on our business, reputation and results of operations.

We may enter into strategic alliances, including joint ventures or equity investments, with various third parties to further our business purpose from time to time. These alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance by the third parties, increased expenses in establishing new strategic alliances, any of which may materially and adversely affect our business. We may have limited ability to monitor or control the actions of these third parties and, to the extent any of these strategic third parties suffers negative publicity or harm to their reputation from events relating to their business, we may also suffer negative publicity or harm to our reputation by virtue of our association with any such third party.

In addition, when appropriate opportunities arise, we may acquire additional technologies, businesses or assets that are complementary to our existing business. In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from relevant government authorities for the acquisitions and to comply with any applicable laws and regulations in the relevant jurisdictions, which could result in increased delay and costs, and may derail our business strategy if we fail to do so. Furthermore, past and future acquisitions and the subsequent integration of new assets and businesses into our own require significant attention from our management and could result in a diversion of resources from our existing business and subject us to additional costs and business uncertainties, which in turn could have an adverse effect on our business operations. Acquired assets or businesses may not generate the financial results we expect. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may be significant.

Risks Relating to Doing Business in Certain Countries and Regions

Investments in emerging markets are subject to greater risks than those in more developed markets.

You should also be aware that investments in emerging markets, such as MENA, are subject to greater risks than those in more developed markets, including risks such as:

 

   

political, social and economic instability;

 

   

exposure to local economic and social conditions, including cultural and communication challenges;

 

   

exposure to local political conditions, including political disputes, requirements to expend a portion of funds locally, and government-imposed industrial cooperation requirements, as well as increased risks of fraud and political corruption;

 

   

exposure to potentially undeveloped legal systems which make it difficult to enforce contractual rights and to potentially adverse changes in laws and regulatory practices, including licensing, approvals, grants, adjudications, and concessions, among others;

 

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war, terrorism, rebellion, coup, revolution or similar events;

 

   

drought, famine, epidemics, pandemics and other complications due to natural or manmade disasters;

 

   

governments’ actions or interventions, including tariffs, protectionism, subsidies, various forms of exchange controls, expropriation of assets and cancellation of contractual rights;

 

   

boycotts and embargoes that may be imposed by the international community on countries in which we offer our mobile applications;

 

   

ambiguities, uncertainties and changes in taxation, licensing and other laws and regulations;

 

   

arbitrary or inconsistent government action, including capricious application of tax laws and selective tax audits;

 

   

controls on the repatriation of profits and/or dividends, including the imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries;

 

   

difficulties and delays in obtaining new permits, licenses and consents for business operations or renewing existing ones;

 

   

difficulties or an inability to obtain legal remedies in a timely manner;

 

   

compliance with a variety of US and other foreign laws, including (i) compliance (historical and future) with the requirements of applicable anti-bribery laws, including the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act of 1977; and (ii) compliance (historical and future) with sanctions and export control provisions (including the US Export Administration Regulations) in several jurisdictions, including the European Union, the United Kingdom and the United States; and

 

   

potential lack of reliability as to title to real property in certain jurisdictions.

Although MENA has enjoyed significant economic growth over the last several years, there can be no assurance that such growth will continue. Moreover, while certain governments’ policies have generally resulted in improved economic performance, there can be no assurance that such level of performance can be sustained.

Accordingly, you should exercise particular care in evaluating the risks involved and must decide whether, in the light of those risks, your investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved.

The economies of a number of our markets in MENA are highly dependent upon the oil and gas industry.

The UAE’s economy as well as a number of other economies within MENA are highly dependent upon the oil and gas industry. Oil and gas prices fluctuate in response to changes in many factors, including, but not limited to:

 

   

economic and political developments in oil producing regions;

 

   

global and regional supply and demand, and expectations regarding future supply and demand, for oil and gas products;

 

   

the ability of members of OPEC and other crude oil producing nations to agree upon and maintain specified global production levels and prices;

 

   

the impact of international environmental regulations designed to reduce carbon emissions;

 

   

actions taken by major crude oil and gas producing or consuming countries;

 

   

prices and availability of alternative fuels;

 

   

global economic and political conditions;

 

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development of new technologies; and

 

   

global weather and environmental conditions.

Oil prices declined significantly beginning in June 2014, and although prices have recovered in 2018, they have remained volatile with periodic declines since October 2018, including during the first quarter of 2020. If oil prices decline again, this is likely to have an adverse effect on the GDP and other economic indicators of oil producing markets, such as the UAE and Saudi Arabia, and may also negatively impact consumer confidence and purchasing power, resulting in lower overall expenditure by mobile users, which could have a material adverse effect on our business, financial condition and results of operations.

Our business may be adversely affected by changes in government policies, laws and regulations in the UAE.

Our operating subsidiary in the UAE, Yalla Technology FZ-LLC, functions as our primary business operation center and engages in sales, customer service and other business operations. As such, our business may be adversely affected by changes in government policies, laws and regulations in the UAE. For example, although the UAE currently does not have any corporate tax, there have been periodic discussions about the introduction of corporate tax in the UAE. Moreover, value added tax, or VAT, was introduced in the UAE on January 1, 2018 at a rate of 5%. The relevant legislation provides that electronic services that are automatically delivered over the Internet, over an electronic network or over an electronic marketplace are not subject to VAT in the UAE, if such electronic services are used or enjoyed outside of the UAE. The introduction of VAT in the UAE has not had a material impact on our business. However, any further change in VAT in the UAE could increase the costs for users to purchase our virtual currencies and may reduce user spending as a result, which could adversely affect our revenues.

In addition, the AED, which is the legal currency of the UAE, has been pegged to the US dollar at 3.6725 AEDs per U.S. dollar since November 1997. However, there can be no assurance that the AED will not be de-pegged in the future or that the existing peg will not be adjusted in a manner that negatively impacts the level of economic activities in the UAE or negatively impacts the attractiveness of the UAE as a tourist destination, both of which are important factors that drive the level of payments by users from the UAE. Any such de-pegging or adjustment could have a material adverse effect on our business, financial condition and results of operations.

The economic, political and social conditions in MENA and China, as well as government policies, laws and regulations, could affect our business, financial condition and results of operations.

We are headquartered in the UAE. MENA is our key market, and we must comply with the applicable laws and regulations in the jurisdictions of MENA. The regulatory bodies in MENA may not be as fully matured and as established as those of Western Europe and the United States. Existing laws and regulations may be applied inconsistently with anomalies in their interpretation or implementation. Inconsistent interpretation or implementation in relation to existing laws and regulations could restrict our ability to offer our mobile platform in the relevant jurisdictions, which could materially and adversely affect our business, financial condition and results of operations.

Our technology and product development team and certain members of our management are located in the PRC, and two of our operating subsidiaries are incorporated under and governed by the laws of the PRC. Accordingly, our results of operations and prospects are, to a certain degree, subject to economic, political and legal developments in China. The economy of China differs from the economies of most developed countries in many respects, including the extent of government involvement, its level of development, its growth rate and its control over foreign exchange. The PRC government plays a significant role in regulating industrial development. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policies and providing preferential treatments to particular industries or companies. All of these factors could affect the economic conditions in China and, in turn, our business.

 

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Since the PRC legal system continues to evolve rapidly, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. For example, we have been subject to stricter regulatory requirements in terms of our labor contracts with our employees and paying various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance for the benefit of our employees. We cannot assure you that our employment practices have complied or will be able to comply with all labor-related laws and regulations in the PRC. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.

Our failure to obtain, maintain or renew licenses, approvals, permits, registrations or filings necessary to conduct our operations could have a material adverse impact on our business, financial condition and results of operations.

Regulatory authorities in various jurisdictions oversee different aspects of our business operations. We are required to obtain a number of licenses, approvals, permits, registrations and filings and are subject to certain reporting obligations required for maintaining our subsidiaries and personnel in such jurisdictions. We cannot assure you that we have obtained all of these licenses, approvals, permits, registrations and filings or will continue to maintain or renew all of them or that we have complied with these requirements in full. If we fail to obtain necessary authorizations, we may be subject to various penalties, such as confiscation of illegal revenues, fines and discontinuation or restriction of business operations, which may materially and adversely affect our business, financial condition and results of operations. In addition, there can be no assurance that we will be able to maintain our existing licenses, approvals, registrations or permits in the relevant jurisdictions, renew any of them when their current term expires, or update existing licenses or obtain additional licenses, approvals, permits, registrations or filings necessary for our business expansion from time to time. If we fail to do so, our business, financial conditions and operational results may be materially and adversely affected.

PRC regulations relating to offshore investment activities by PRC residents and entities may limit our overseas investments or otherwise expose us to liability and penalties under PRC law.

PRC enterprises’ overseas direct investment is under the supervision of the Ministry of Commerce, or the MOFCOM, the National Development and Reform Commission, or the NDRC and the State Administration of Foreign Exchange, or the SAFE, and shall be subject to relevant governing rules. Where PRC enterprises make overseas direct investment, they shall file with or obtain the approval from the MOFCOM and NDRC, or their local counterparts, and register with the banks as well.

The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

Certain of our directors and officers have completed initial SAFE registration in connection with our financings in accordance with SAFE under SAFE Circular 37. However, we cannot assure you that they will continue to make required filings or updates upon any subsequent change in a timely manner, or at all. Moreover, we may not at all times be fully aware or informed of the identities of all our shareholders or beneficial owners that are required to make or update such registrations, and we cannot compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any

 

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applicable registrations or approvals required by, SAFE regulations and outbound investment related regulations, and there is no assurance that such registration, approval, and any subsequent amendment will be completed in a timely manner, or will be completed at all. Certain of our beneficial shareholders who are PRC residents and hold an insignificant number of our shares have not completed their SAFE Circular 37 registration. Failure by these and other shareholders or beneficial owners to comply with SAFE regulations or outbound investment related regulations, could subject such shareholders or beneficial owners to fines or legal sanctions from the relevant PRC authorities, and may result in adverse impact on us, such as restrictions on our overseas or cross-border investment activities or our ability to distribute dividends, or influence on our ownership structure.

Furthermore, as these foreign exchange and outbound investment related regulations are relatively new and their interpretation and implementation have been constantly evolving, it is uncertain how these regulations, and any future regulations concerning offshore or cross-border investments and transactions, will be interpreted, amended and implemented by the relevant government authorities. We cannot assure you that we have complied or will be able to comply with all applicable foreign exchange and outbound investment related regulations.

We may be classified as a “resident enterprise” for PRC enterprise income tax purposes, which could result in unfavorable tax consequences to us and our non-PRC shareholders.

The Enterprise Income Tax Law, or EIT Law, provides that enterprises established outside of the PRC whose “de facto management bodies” are located in the PRC are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate on their worldwide income. In addition, a circular issued by the State Administration of Taxation, or the SAT, on April 22, 2009, and amended on January 29, 2014 clarified that dividends and other income paid by such “resident enterprises” will be considered to be PRC-source income, subject to PRC withholding tax, currently at a rate of 10%, when recognized by non-PRC enterprise shareholders. This circular also subjects such “resident enterprises” to various reporting requirements with PRC tax authorities. However, it remains unclear how the tax authorities will determine the location of “de facto management bodies” of overseas incorporated enterprises that are controlled by foreign enterprises or individuals. Therefore, although several members of our management are currently located in the PRC, it remains unclear whether the PRC tax authorities would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not consider our company to be a PRC resident enterprise. However, if PRC tax authorities disagree with our assessment and determine that we are a “resident enterprise,” we may be subject to enterprise income tax at a rate of 25% on our worldwide income and dividends paid by us to our non-PRC shareholders as well as capital gains recognized by them with respect to the sale of our shares or ADSs may be subject to a PRC withholding tax. A determination that we are a PRC resident enterprise would have an impact on our effective tax rate, a material adverse effect on our net income and results of operations, and may require us to withhold tax on dividends to our non-PRC shareholders.

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the SAT in 2009, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise this Indirect Transfer.

In February 2015, the SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Circular 7. SAT Circular 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market.

 

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Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company is the transferor in such transactions, and may be subject to withholding obligations if our company is the transferee or payer in such transactions. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under the SAT circulars. As a result, we may be required to expend valuable resources to comply with the SAT circulars, to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, any of which may have a material adverse effect on our financial condition and results of operations.

It may be difficult to effect service of process upon us or our directors or executive officers who reside in China, to enforce against them in China any judgments obtained from non-PRC courts or to bring actions in China against us or our management.

Certain of our directors and executive officers reside within China, and a portion of our assets and the assets of those persons are located within China. It may not be possible for investors to effect service of process upon us or those persons inside China or to enforce against us or them in China any judgments obtained from non-PRC courts. China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts in the United States, the United Kingdom, Japan or most other western countries. However, judgments rendered by Hong Kong courts may be recognized and enforced in China if the requirements set forth by the Arrangement on Mutual Recognition and Enforcement of Judgments in Civil and Commercial Matters by Courts of Mainland and of the Hong Kong Special Administrative Region Pursuant to Agreed Jurisdiction by Parties Concerned are met. Therefore, recognition and enforcement in China of judgments of a court in any of these jurisdictions other than Hong Kong in relation to any matter not subject to binding arbitration provisions may be difficult or impossible.

Shareholder claims that are common in the United States, including securities law class actions and fraud claims, generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the local authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of other country or region to implement cross-border oversight and regulation, such regulatory cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. According to Article 177 of the PRC Securities Law which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC and no entities or individuals may provide documents or materials in connection with its securities activities to the overseas without proper authorization. While detailed interpretation of or implementation rules under Article 177 have yet to be available, the inability for overseas securities regulators to directly conduct investigation or collect evidence within China may further increase difficulties faced by investors in protecting your interests.

 

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The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit report included in this prospectus, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditors’ audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

In May 2020, the U.S. senate passed the Holding Foreign Companies Accountable Act, or the Kennedy Bill. If passed by the U.S. House of Representatives and signed by the U.S. President, the Kennedy Bill would require the SEC to identify issuers whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate because of restrictions imposed by non-U.S. authorities. The Kennedy Bill would also require the SEC to prohibit securities of any U.S. listed companies from being traded on any of the U.S. national securities exchanges, such as the NYSE, or in the U.S. “over-the-counter” markets, if the auditor of the U.S. listed companies’ financial statements is not subject to PCAOB inspections for three consecutive years after the law becomes effective. Furthermore, in August 2020, the President’s Working Group on Financial Markets, or the PWG, released the Report on Protecting United States Investors from Significant Risks from Chinese Companies. The PWG recommends that the SEC take steps to implement the recommendations outlined in the report. In particular, to address companies from non-cooperating jurisdictions, or NCJs, such as China, that do not provide the PCAOB with sufficient access to fulfill its statutory mandate, the PWG recommends enhanced listing standards on U.S. securities exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. To reduce market disruption, the new listing standards could provide for a transition period until January 1, 2022 for currently listed companies. The other recommendations in the report include, among other things, requiring enhanced and prominent issuer disclosures of the risks of investing in certain NCJs such as China.

Enactment of any of such legislation or other efforts to increase the U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of the ADSs could be adversely affected. In addition, enactment of these legislations may result in prohibitions on the trading of the ADSs on the NYSE, if our auditors fail to meet the PCAOB inspection requirement in time. It is unclear if and when any of the proposed legislation and regulation will be enacted.

 

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Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that, under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission, or the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our common stock may be adversely affected.

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Failure to comply with PRC regulations regarding the registration requirements for employee share ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed

 

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Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC residents who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures.

In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees granted options who are PRC residents will be subject to these regulations when our company becomes an overseas-listed company upon the completion of this offering. We will make efforts to comply with these requirements upon completion of our initial public offering. However, there can be no assurance that they can successfully register with SAFE in full compliance with the rules. Failure to complete SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to make payment under our equity incentive plans or receive dividends or sales proceeds related thereto, to contribute additional capital into our PRC subsidiaries or to conduct other foreign exchange activities, and may further limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law.

Risks Relating to This Offering and the American Depositary Shares

There has been no public market for our shares or the ADSs prior to this offering, and you may not be able to resell the ADSs at or above the price you paid, or at all.

Prior to this offering, there has been no public market for our shares or the ADSs. We will apply for approval of the ADSs representing Class A ordinary shares for listing on the NYSE. Our Class A ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for the ADSs does not develop after this offering, the market price and liquidity of the ADSs will be materially and adversely affected.

Negotiations with the underwriters will determine the initial public offering price for the ADSs which may bear no relationship to their market price after the initial public offering. An active trading market for the ADSs may not develop and the market price of the ADSs may decline below the initial public offering price.

The trading price of the ADSs may be volatile, which could result in substantial losses to you.

The trading prices of the ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other listed companies from emerging markets. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of the securities of other companies from emerging markets after their offerings, including technology companies and transaction service platforms, may affect the attitudes of investors toward companies from emerging markets listed in the U.S., which consequently may impact the trading performance of the ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other companies from emerging markets may also negatively affect the attitudes of investors towards companies from emerging markets in general, including us, regardless of whether we have conducted any inappropriate activities. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the U.S., China and other jurisdictions in late 2008, early 2009, the second half of 2011, 2015 and the first quarter of 2020, which may have a material and adverse effect on the trading price of the ADSs. In particular, concerns about the economic impact of the COVID-19 pandemic have triggered significant price fluctuations in the U.S. stock market.

 

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In addition to the above factors, the price and trading volume of the ADSs may be highly volatile due to multiple factors, including the following:

 

   

regulatory developments affecting us or our industry;

 

   

announcements of studies and reports relating to the quality of our platform or those of our competitors;

 

   

changes in the economic performance or market valuations of other social networking and entertainment platforms;

 

   

actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

   

changes in financial estimates by securities research analysts;

 

   

negative publicity about us or our industry;

 

   

announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments;

 

   

additions to or departures of our senior management;

 

   

release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs; and

 

   

sales or perceived potential sales of additional Class A ordinary shares or ADSs.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for the ADSs and trading volume could decline.

The trading market for the ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades the ADSs or publishes inaccurate or unfavorable research about our business, the market price for the ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for the ADSs to decline.

As our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$                per ADS (assuming no exercise of outstanding options to acquire ordinary shares and no exercise of the underwriters’ option to purchase additional ADSs), representing the difference between our pro forma net tangible book value per ADS of US$                , as of                , 2019, after giving effect to this offering, and the assumed initial public offering price of US$                per ADS. In addition, you will experience further dilution to the extent that our Class A ordinary shares are issued upon the exercise of share options under our share incentive plans. Class A ordinary shares issuable under our share incentive plans may be issued at a purchase price on a per ADS basis that is less than the public offering price per ADS in this offering. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon completion of this offering.

Because we do not expect to pay cash dividends in the foreseeable future after this offering, you may not receive any return on your investment unless you sell your Class A ordinary shares or ADSs for a price greater than that which you paid for them.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. See “Dividend Policy.” Therefore, you should not rely on an investment in the ADSs as a source for any future dividend income.

 

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Subject to compliance with the applicable Cayman Islands legal requirements, our board of directors has discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.

Substantial future sales or perceived potential sales of the ADSs in the public market could cause the price of the ADSs to decline.

Sales of the ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of the ADSs to decline significantly. Upon completion of this offering, we will have                  Class A ordinary shares and 24,734,013 Class B ordinary shares outstanding, including                  Class A ordinary shares represented by ADSs newly issued in connection with this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. We, our directors, executive officers and all of our existing shareholders have agreed not to sell any Class A ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the representatives on behalf of the underwriters, subject to certain exceptions. All ADSs representing our Class A ordinary shares sold in this offering are expected to be freely transferable by persons other than our “affiliates” without restriction or additional registration under the U.S. Securities Act of 1933, as amended, or the Securities Act. All of the other ordinary shares outstanding after this offering will be available for sale, upon the expiration of the lock-up periods described above, subject to volume and other restrictions as applicable under Rule 144 and Rule 701 under the Securities Act. Any or all of these ordinary shares may be released prior to the expiration of the applicable lock-up period at the discretion of the designated representatives. To the extent shares are released before the expiration of the applicable lock-up period and sold into the market, the market price of the ADSs could decline significantly. See “Shares Eligible for Future Sale—Lock-up Agreements.”

Certain major holders of our ordinary shares after completion of this offering will have the right to cause us to register under the Securities Act the sale of their shares, subject to the applicable lock-up periods in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of ADSs representing these registered shares in the public market could cause the price of the ADSs to decline significantly.

You, as holders of ADSs, may have fewer rights than holders of our Class A ordinary shares and must act through the depositary to exercise those rights.

Holders of ADSs do not have the same rights as our shareholders and may only exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. Under our third amended and restated articles of association, the minimum notice period required to convene a general meeting will be ten clear days. Pursuant to such requirement, there needs to be at least 10 days between the notice of a general meeting being given and the general meeting, with neither the date on which the notice is, or is deemed to be, given nor the date of the general meeting being counted towards such 10-day notice period. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your Class A ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting materials to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but there can be no assurance that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its

 

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agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

The deposit agreement, which defines your rights as an ADS holder, may be amended or terminated without your consent.

We and the depositary may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended. See “Description of American Depositary Shares” for more information.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the U.S. unless we register both the distribution and sale of the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the distribution and sale of the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.

You may not receive cash dividends or other distributions if the depositary determines it is illegal or impractical to make them available to you.

The depositary will pay cash distributions on the ADSs only to the extent that we decide to distribute dividends on our Class A ordinary shares or other deposited securities, and we do not have any present plan to pay any cash dividends in the foreseeable future. See “Dividend Policy.” To the extent that there is a distribution, the depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is illegal or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and NYSE, impose various requirements on the corporate governance practices of public companies.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal

 

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controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

As a company with less than US$1.07 billion in net revenues for our last financial year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. Once we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC.

In the past, shareholders of a public company often brought securities class action suits against companies following periods of instability in the market price of those companies’ securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

Our third amended and restated memorandum and articles of association contain anti-takeover provisions that could discourage a third party from acquiring us, which could limit our shareholders’ opportunity to sell their shares, including ordinary shares represented by the ADSs, at a premium.

We have adopted the third amended and restated articles of association to be effective immediately prior to the completion of this offering that contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or other rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our Class A ordinary shares, in the form of ADSs or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and ADSs may be materially and adversely affected. In addition, our third amended and restated memorandum and articles of association contain other provisions that could limit the ability of third parties to acquire control of our company or cause us to engage in a transaction resulting in a change of control, including a provision that entitles each Class B ordinary share to 20 votes in respect of all matters subject to a shareholders’ vote.

 

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Our third amended and restated articles of association provide that the courts of the Cayman Islands and the U.S. federal courts will be the exclusive forums for substantially all disputes between us and our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for complaints against us or our directors, officers or employees.

Our third amended and restated articles of association that will become effective immediately prior to the completion of this offering provide that, unless otherwise agreed by us, (i) the federal courts of the United States shall have exclusive jurisdiction to hear, settle and/or determine any proceeding, action, complaint, dispute, controversy or claim arising under the provisions of the Securities Act or the Exchange Act, which are referred to as the “US Actions;” and (ii) save for such US Actions, the courts of the Cayman Islands shall have exclusive jurisdiction to hear, settle and/or determine any dispute, controversy or claim whether arising out of or in connection with our articles of association or otherwise, including without limitation:

 

   

any derivative action or proceeding brought on behalf of our company,

 

   

any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to our company or our shareholders,

 

   

any action asserting a claim under any provision of the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands or our articles of association, or

 

   

any action asserting a claim against our company which if brought in the United States would be a claim arising under the internal affairs doctrine (as such concept is recognized under the laws of the United States).

These exclusive-forum provisions may increase a shareholder’s cost and limit the shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. Any person or entity purchasing or otherwise acquiring any of our shares or other security, such as the ADSs, whether by transfer, sale, operation of law or otherwise, shall be deemed to have notice of and have irrevocably agreed and consented to these provisions. There is uncertainty as to whether a court would enforce such provisions, and the enforceability of similar choice of forum provisions in other companies’ charter documents has been challenged in legal proceedings. It is possible that a court could find this type of provisions to be inapplicable or unenforceable, and if a court were to find this provision in our third amended and restated articles of association to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could have an adverse effect on our business and financial performance.

ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that holders and beneficial owners of ADSs irrevocably waive the right to a trial by jury in any legal proceeding arising out of or relating to the deposit agreement or the ADSs, including claims under federal securities laws, against us or the depositary to the fullest extent permitted by applicable law. The waiver continues to apply to claims that arise during the period when a holder holds the ADSs, even if the ADS holder subsequently withdraws the underlying ordinary shares. If this jury trial waiver provision is prohibited by applicable law, an action could nevertheless proceed under the terms of the deposit agreement with a jury trial. To our knowledge, the enforceability of a jury trial waiver under the federal securities laws has not been finally adjudicated by a federal court. However, we believe that a jury trial waiver provision is generally enforceable under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a jury trial waiver provision, New York courts will consider whether the visibility of the jury trial waiver provision within the agreement is sufficiently prominent such that a party has knowingly waived any right to trial by jury. We believe that this is the case with respect to the deposit agreement and the ADSs. In addition, New York courts will not enforce a jury trial waiver provision in order to bar a viable setoff or counterclaim sounding in fraud or

 

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one which is based upon a creditor’s negligence in failing to liquidate collateral upon a guarantor’s demand, or in the case of an intentional tort claim, none of which we believe are applicable in the case of the deposit agreement or the ADSs. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any provision of the federal securities laws. If you or any other holder or beneficial owner of ADSs brings a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and / or the depositary. If a lawsuit is brought against us and / or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action, depending on, among other things, the nature of the claims, the judge or justice hearing such claims and the venue of the hearing.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Certain judgments obtained against us by our shareholders may not be enforceable.

We are an exempted company incorporated under the laws of the Cayman Islands. Substantially all of our assets are located outside the United States. In addition, substantially all of our directors and executive officers and the experts named in this prospectus reside outside the United States, and most of their assets are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against them in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands, the UAE, China or other relevant jurisdiction may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands, the UAE and China, see “Enforcement of Civil Liabilities.”

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and the common law of the Cayman Islands.

The rights of shareholders to take action against our directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the U.S. In particular, the Cayman Islands have a less developed body of securities laws than the U.S. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

 

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Under Cayman Islands law, a list of the names of the current directors and alternate directors (if applicable) of Cayman Islands exempted companies is made available by the Cayman Islands Registrar of Companies for inspection by any person on payment of a fee. The register of mortgages of such companies is open to inspection by creditors and members.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors will have discretion under the third amended and restated memorandum and articles of association expected to be effective immediately prior to completion of this offering, to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the U.S. For a discussion of significant differences between the provisions of the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the U.S. that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

We are an emerging growth company and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply

 

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with such new or revised accounting standards. We will take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.

We may be or may become a passive foreign investment company, or PFIC, which could result in adverse United States tax consequences to United States investors.

Based on the past and projected composition of our income and assets, and the valuation of our assets, including goodwill, we do not believe we were a passive foreign investment company (a “PFIC”) for our most recent taxable year, and we do not expect to become a PFIC in the current taxable year or the foreseeable future, although there can be no assurance in this regard.

In general, we will be a PFIC for any taxable year in which:

 

   

at least 75% of our gross income is passive income, or

 

   

at least 50% of the value (determined based on a quarterly average) of our assets is attributable to assets that produce or are held for the production of passive income, which include cash, such as cash raised in this offering.

The determination of whether we are a PFIC is made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our asset or income composition. Because we have calculated the value of our goodwill by taking into account the expected market value of our ADSs, a decrease in the price of our ADSs may also result in our becoming a PFIC.

If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, our PFIC status could result in adverse United States federal income tax consequences to you if you are a United States Holder, as defined under “Taxation—Certain United States Federal Income Tax Considerations.” For example, if we are or become a PFIC, you may become subject to increased tax liabilities in respect of our ADSs or Class A ordinary shares under United States federal income tax laws and regulations, and will become subject to burdensome reporting requirements. See “Taxation—Certain United States Federal Income Tax Considerations—Passive Foreign Investment Company.” There can be no assurance that we will not be a PFIC for the current or any future taxable year.

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards.

We are a company incorporated in the Cayman Islands, and we have applied for listing of the ADSs on the NYSE. The NYSE market rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listing standards.

Among others, we are not required to: (i) have a majority of the board be independent; (ii) have a compensation committee or a nominating and corporate governance committee consisting entirely of independent directors; (iii) have a minimum of three members on the audit committee; (iv) obtain shareholders’ approval for issuance of securities in certain situations; or (v) have regularly scheduled executive sessions with only independent directors each year.

We intend to rely on the exemptions described above. As a result, you may not be provided with the benefits of certain corporate governance requirements of the NYSE.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about us and our industry. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry Overview” and “Business.” These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. The forward-looking statements included in this prospectus relate to, among others:

 

   

our goal and strategies;

 

   

our ability to maintain and strengthen our position as a leader among voice-centric social networking and entertainment platforms in MENA;

 

   

our expansion plans;

 

   

our future business development, financial condition and results of operations;

 

   

our expectations regarding demand for, and market acceptance of, our services;

 

   

our expectation regarding the use of proceeds from this offering;

 

   

laws, regulations and policies relating to voice-centric social networking and entertainment platforms;

 

   

general economic and business conditions; and

 

   

assumptions underlying or related to any of the foregoing.

This prospectus also contains market data relating to the global voice-centric social network industry, including market position, market size, and growth rates of the markets in which we participate, that are based on industry publications and reports. This prospectus contains statistical data and estimates published by Frost & Sullivan, including a report which we commissioned Frost & Sullivan to prepare and for which we paid a fee. This information involves a number of assumptions, estimates and limitations. These industry publications, surveys and forecasts generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Nothing in such data should be construed as advice. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The global voice-centric social network industry may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of the ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we have referred to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$                 million, or approximately US$                 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us and based upon an assumed initial offering price of US$                per ADS (the mid-point of the estimated public offering price range shown on the front cover of this prospectus). A US$1.00 increase (decrease) in the assumed initial public offering price of US$                per ADS would increase (decrease) the net proceeds to us from this offering by US$                 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus.

We will not receive any proceeds from the sale of ADSs by the selling shareholder.

The primary purposes of this offering are to create a public market for our ordinary shares represented by ADSs, retain talented employees by providing them with equity incentives and obtain additional equity capital. We plan to use the net proceeds of this offering for the following purposes:

 

   

up to approximately US$             million for marketing activities to promote our brand and increase our user base;

 

   

up to approximately US$             million for technology infrastructure to enhance user experience and operational efficiency; and

 

   

the balance for general corporate purposes, including working capital needs and potential acquisitions (although we are not currently negotiating any such acquisitions).

The foregoing represents our intentions as of the date of this prospectus with respect of the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of the offering. The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.

To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to invest our net proceeds in short-term, interest bearing, debt instruments or bank deposits.

 

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DIVIDEND POLICY

In May 2020, we declared and paid an aggregate of US$9.0 million, or US$0.07 per share, of cash dividend to holders of our ordinary shares and preferred shares. In addition, we distributed certain assets to shareholders of FYXTech Limited and Shenzhen Yale Technology Co., Ltd. in connection with our reorganization in 2018. For further information, see note 1 to our audited financial statements included elsewhere in this prospectus. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Any other future determination to pay dividends will be subject to certain requirements of Cayman Islands law and made at the discretion of our board of directors and may be based on a number of factors, including our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. If we pay any dividends, we will pay the depositary to the same extent as other holders of our Class A ordinary shares. See “Description of American Depositary Shares.” Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.

We are an exempted company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders, we may rely on dividends distributed by our operating subsidiary in the United Arab Emirates. As a matter of the laws regulating the subsidiary in the UAE, the subsidiary can pay dividends only to the extent it has profits available for the purpose. A company’s profits available for distribution are its accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made. Our ability to pay dividends to shareholders therefore depends on our future profitability, the ability to distribute or dividend profits from the operating subsidiaries up the structure to us, general economic conditions and other factors the directors deem significant.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2020 presented on:

 

   

an actual basis;

 

   

a pro forma basis to reflect (i) the designation of 24,734,013 ordinary shares beneficially owned by Mr. Tao Yang into 24,734,013 Class B ordinary shares on a one-for-one-basis upon the completion of this offering; (ii) the designation of all of the remaining outstanding ordinary shares and the automatic conversion of all our outstanding convertible redeemable preferred shares into 99,896,117 Class A ordinary shares on a one-for-one-basis upon the completion of this offering; and

 

   

a pro forma as adjusted basis to give effect to (i) the designation of 24,734,013 ordinary shares beneficially owned by Mr. Tao Yang into 24,734,013 Class B ordinary shares on a one-for-one-basis upon the completion of this offering; (ii) the designation of all of the remaining outstanding ordinary shares and the automatic conversion of all our outstanding convertible redeemable preferred shares into 99,896,117 Class A ordinary shares on a one-for-one-basis upon the completion of this offering; (iii) the issuance and sale of the Class A ordinary shares in the form of ADSs offered hereby at an assumed initial public offering price of US$            per ADS, the mid-point of the estimated public offering price range shown on the front cover of this prospectus, after deducting underwriting discounts, commissions and estimated offering expenses payable by us and assuming no exercise of the underwriters’ option to purchase additional ADSs.

 

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The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the closing of this offering is subject to adjustment based on the initial public offering price of the ADSs and other terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2020  
     Actual     Pro Forma     Pro Forma
as Adjusted
 
     (US$ in thousands)  

Total mezzanine equity

    
26,938
 
       

Shareholders’ equity:

      

Ordinary shares (US$0.0001 par value, 73,393,941 shares issued and outstanding on an actual basis, and none issued and outstanding on a pro forma basis or a pro forma as adjusted basis)

    
7
 
       

Class A ordinary shares (par value of US$0.0001; none authorized, issued and outstanding on an actual basis, 400,000,000 shares authorized, 99,896,117 shares issued and outstanding on a pro forma basis; 400,000,000 shares authorized,          shares issued and outstanding on a pro forma as adjusted basis)

           10    

Class B ordinary shares (par value of US$0.0001; none authorized, issued and outstanding on an actual basis, 100,000,000 shares authorized, 24,734,013 shares issued and outstanding on a pro forma basis; 100,000,000 shares authorized,          shares issued and outstanding on a pro forma as adjusted basis)

           2    

Additional paid-in capital

           26,933    

Subscription receivable

    
(7

    (7  

Accumulated other comprehensive loss

    
(16

    (16  

Retained earnings

    
35,046
 
    35,046    
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     35,030       61,968                     
  

 

 

   

 

 

   

 

 

 

Total capitalization(1)

     61,968       61,968    
  

 

 

   

 

 

   

 

 

 

 

(1)

Total capitalization equals total mezzanine equity plus total shareholders’ equity.

 

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DILUTION

If you invest in ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per Class A ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares and holders of our convertible redeemable preferred shares which will automatically convert into our Class A ordinary shares upon the completion of this offering.

Our net tangible book value as of June 30, 2020 was US$62.0 million, or US$0.84 per ordinary share as of that date, and US$                 per ADS. Net tangible book value represents the amount of our total consolidated assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share from our consolidated total assets, after giving effect to (i) the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares immediately upon the completion of this offering and (ii) the issuance and sale by us of shares represented by ADSs in this offering at an assumed initial public offering price of US$                per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after June 30, 2020, other than to give effect to (i) the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares immediately upon the completion of this offering and (ii) the issuance and sale by us of                Class A ordinary shares in the form of ADSs in this offering at an assumed initial public offering price of US$                per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2020 would have been US$                million, or US$                per outstanding ordinary share and US$                per ADS. This represents an immediate increase in net tangible book value of US$                per ordinary share and US$                per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$                per ordinary share and US$                per ADS to investors purchasing ADSs in this offering.

The following table illustrates such dilution:

 

     Per Ordinary Share                  Per ADS              

Actual net tangible book value per share as of June 30, 2020

   US$ 0.84        US$                  

Pro forma net tangible book value per share after giving effect to the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares

   US$ 0.50     

Pro forma as adjusted net tangible book value per share after giving effect to (i) the automatic conversion of all of our outstanding convertible redeemable preferred shares into Class A ordinary shares and (ii) this offering

     

Assumed initial public offering price

     

Dilution in net tangible book value per share to new investors in the offering

     

 

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The following table summarizes, on a pro forma basis as of June 30, 2020, the differences between existing shareholders, including holders of our convertible redeemable preferred shares, and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of Class A ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.

 

    Ordinary Shares Total     Total
Consideration
    US$
Average Price
per
Ordinary
Share
Equivalent
    Average Price
per
ADS
Equivalent
 
    Number   Percent     Amount     Percent  

Existing shareholders

                              US$                                US$                   US$                

New investors

                 US$                    US$       US$    
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

                 US$                     
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

A US$1.00 increase (decrease) in the assumed public offering price of US$            per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) would increase (decrease) our pro forma net tangible book value after giving effect to the offering by US$            million, the pro forma net tangible book value per ordinary share and per ADS after giving effect to this offering by US$            per ordinary share and US$            per ADS and the dilution in pro forma net tangible book value per ordinary share and per ADS to new investors in this offering by US$            per ordinary share and US$            per ADS, assuming no change to the number of ADS offered by us as set forth on the front cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.

The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of the ADSs and other terms of this offering determined at pricing.

The discussion and tables above take into consideration the automatic conversions of all of our outstanding convertible redeemable preferred shares immediately upon the completion of this offering, and they do not take into consideration of any outstanding share options. As of the date of this prospectus, there are also (i) 41,733,506 Class A ordinary shares issuable upon exercise of outstanding share options under the 2018 Plan and (ii) 2,492,603 Class A ordinary shares initially reserved for future issuance upon the exercise of future grants under the 2020 Plan. If any of these options are exercised, there will be further dilution to new investors.

 

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ENFORCEMENT OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides protections for investors to a lesser extent. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Substantially all of our operations are conducted the United Arab Emirates and the PRC, and substantially all of our assets are located in these two jurisdictions. In addition, most of our directors and officers are residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce in United States courts judgments obtained in United States courts based on the civil liability provisions of the United States federal securities laws against us and our officers and directors.

We have appointed Cogency Global Inc. as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Conyers Dill & Pearman, our counsel as to Cayman Islands law, Al Tamimi & Company, our counsel as to United Arab Emirates law and JunHe LLP, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands, the United Arab Emirates or the PRC would, respectively, (1) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States and (2) entertain original actions brought in the Cayman Islands, the United Arab Emirates or the PRC against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Conyers Dill & Pearman has informed us that the uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the United States courts under the civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands. Conyers Dill & Pearman has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.

In addition, Conyers Dill & Pearman has advised us that there is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the Cayman Islands will generally recognize as a valid judgment, a final and conclusive judgment in personam obtained in the federal or state courts in the United States against us under which a sum of money is payable (other than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or, in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon

 

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provided that (i) such courts had proper jurisdiction over the parties subject to such judgment; (ii) such courts did not contravene the rules of natural justice of the Cayman Islands; (iii) such judgment was not obtained by fraud; (iv) the enforcement of the judgment would not be contrary to the public policy of the Cayman Islands; (v) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts of the Cayman Islands; and (vi) there is due compliance with the correct procedures under the laws of the Cayman Islands.

Al Tamimi & Company has advised us that the Dubai Courts will not enforce a foreign judgment where they would have had exclusive original jurisdiction to hear the underlying dispute. If the Dubai Courts did not have jurisdiction or had concurrent jurisdiction with a foreign court, the Dubai Courts would enforce the judgment under the same conditions a UAE judgment would be enforced in the country which issued the judgment if: i) the parties were served with the proceedings; ii) the judgment has res judicata effect; iii) the judgement does not conflict with a judgment previously issued in the UAE and does not violate public policy or morals. Additionally, a money judgment may be enforced in Dubai through the Dubai International Financial Centre Courts if the judgment is final and conclusive, the court issuing the judgment had jurisdiction to determine the dispute, and the judgment does not relate to payment of taxes, fines or penalties.

JunHe LLP has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. JunHe LLP has advised us further that under PRC law, courts in China will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As there existed no treaty or other form of reciprocity between China and the United States governing the recognition and enforcement of judgments as of the date of this prospectus, including those predicated upon the liability provisions of the United States federal securities laws, there is uncertainty whether and on what basis a PRC court would enforce judgments rendered by United States courts.

 

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OUR HISTORY AND CORPORATE STRUCTURE

We are a Cayman Islands holding company and conduct our operations through our operating subsidiaries in the United Arab Emirates and China. We commenced our business and launched our Yalla mobile application in April 2016 through FYXTech Limited, or FYXTech BVI, which was established under the laws of the British Virgin Islands, and Shenzhen Yale Technology Co., Ltd, or Shenzhen Yale, which was established under the laws of the PRC.

We undertook a reorganization in 2018, or the Reorganization, to streamline our organizational structure. We established FYXTECH CORPORATION, or FYXTech Cayman, under the laws of the Cayman Islands in February 2018 as our current ultimate holding company and changed its name to Yalla Group Limited in November 2019. After the establishment of the ultimate holding company, we established FYXTECH Group Limited in the British Virgin Islands in March 2018 to hold FYXTech HK Limited, our Hong Kong subsidiary established in March 2018. FYXTech HK Limited in turn became the holding company of our operating subsidiaries in the PRC, namely Hangzhou Yale Technology Co., Ltd., or Hangzhou Yale, and Shenzhen Moov Technology Co., Ltd, or Shenzhen Moov, which were established in June 2018 and October 2019, respectively. We also established FYXTECH YALLA LIMITED in the British Virgin Islands in June 2018 to hold our operating subsidiary in the UAE, Yalla Technology FZ-LLC, or Yalla UAE, which was established in July 2018.

As part of the Reorganization, FYXTech Cayman issued shares to the co-founders of FYXTech BVI and Shenzhen Yale. Upon the issuance of such shares, the equity structure of FYXTech Cayman was substantially identical to that of FYXTech BVI and Shenzhen Yale on a fully-diluted basis. In addition, from May 2018 to December 2018, FYXTech BVI and Shenzhen Yale transferred their business operations, including assets and employees, to Yalla UAE and Hangzhou Yale, respectively. Upon the completion of the Reorganization in December 2018, FYXTech BVI and Shenzhen Yale ceased to be consolidated within our group.

We currently operate our business through Yalla UAE, Hangzhou Yale and Shenzhen Moov. Yalla UAE functions as our primary business operation center and engages in sales, marketing, customer service and other business operations. Hangzhou Yale performs technology and product development functions. Shenzhen Moov primarily performs marketing and financial reporting functions.

The following diagram illustrates our corporate structure as of the date of this prospectus. Equity interests depicted in this diagram are held as to 100%.

 

LOGO

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of operations data and selected consolidated statements of cash flows data for the years ended December 31, 2018 and 2019 and selected consolidated balance sheets data as of December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected consolidated statements of operations data and selected consolidated statements of cash flows data for the six months ended June 30, 2019 and 2020 and selected consolidated balance sheet data as of June 30, 2020 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus.

Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results to be expected for any future period. The following selected consolidated financial data for the periods and as of the dates indicated are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.

Selected Consolidated Statements of Operations Data

 

     For the Year Ended December 31,     For the Six Months Ended
June 30,
 
     2018     2019     2019     2020  
     (US$ in thousands, except share and per share data)  

Revenues

     42,371       63,465       26,430       52,758  

Costs and expenses:

        

Cost of revenues

     (13,848     (20,553     (9,277     (17,233

Selling and marketing expenses

     (5,686     (8,250     (3,420     (5,547

General and administrative expenses

     (1,630     (4,121     (1,563     (2,734

Technology and product development expenses

     (853     (1,598     (722     (1,888
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     (22,017     (34,522     (14,982     (27,402
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     20,354       28,943       11,448       25,356  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     145       390       170       167  

Government grant

                       85  

Investment income

     6       28       6       8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     20,505       29,361       11,624       25,616  

Income tax expense

     (263     (436     (183     (421
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     20,242       28,925       11,441       25,195  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per ordinary share

        

—Basic and diluted

     (0.12     0.22       0.08       0.19  

Weighted average number of shares outstanding used in computing earnings (loss) per ordinary share

        

—Basic and diluted

     73,393,941       73,393,941       73,393,941       73,393,941  

 

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Selected Consolidated Balance Sheets Data

 

     As of December 31,      As of June 30,  
     2018     2019      2020  
     (US$ in thousands)  

Cash and cash equivalents

     17,017       45,303        58,540  

Term deposits

     1,311       2,723         

Short-term investments

     494       1,507        547  

Prepayments and other current assets

     2,295       3,930        15,303  

Total current assets

     21,117       53,463        74,390  

Total assets

     21,318       54,117        76,089  

Accounts payable

     433       724        731  

Deferred revenue

     3,439       6,011        8,986  

Accrued expenses and other current liabilities

     601       1,577        4,404  

Total current liabilities

     4,473       8,312        14,121  

Total liabilities

     4,473       8,312        14,121  

Total mezzanine equity

     23,963       25,903        26,938  

Total shareholders’ equity (deficit)

     (7,118     19,902        35,030  

Selected Consolidated Statements of Cash Flows Data

 

     For the Year Ended December 31,     For the Six Months Ended
June 30,
 
     2018     2019     2019      2020  
     (US$ in thousands)  

Net cash provided by operating activities

     23,378       31,281       13,483        19,701  

Net cash provided by/(used in) investing activities

     (1,905     (2,833     25        3,363  

Net cash used in financing activities

     (6,369     (200            (9,831

Effect of foreign currency exchange rate changes on cash and cash equivalents

     8       38       44        4  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in cash and cash equivalents

     15,112       28,286       13,552        13,237  
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at the beginning of the period

     1,905       17,017       17,017        45,303  
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at the end of the period

     17,017       45,303       30,569        58,540  
  

 

 

   

 

 

   

 

 

    

 

 

 

Key Operating Metrics

We regularly review a number of operating metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.

The following table sets forth our average MAUs, paying users and ARPPU for the periods indicated:

 

    Three Months Ended  
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
 

Average MAUs (in thousands)

    2,046       2,174       2,272       2,557       3,109       4,151       6,127       12,460  

Yalla (in thousands)

    2,046       2,173       2,250       2,428       2,716       3,286       4,016       4,835  

Yalla Ludo (in thousands)

          1       22       129       393       865       2,111       7,625  

Paying users (in thousands)

    417       451       547       790       510       723       1,620       5,360  

Yalla (in thousands)

    417       451       547       789       493       549       759       1,080  

Yalla Ludo (in thousands)

                0.1       1       17       174       861       4,280  

ARPPU (US$)

    33.4       27.8       22.2       18.0       34.8       26.6       13.0       5.9  

Yalla (US$)

    33.4       27.8       22.3       18.1       36.1       35.0       27.6       26.9  

Yalla Ludo (US$)

                0.2       0.5       0.1       0.1       0.1       0.6  

For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics.”

 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes that appear in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this prospectus, particularly in the section titled “Risk Factors.”

Overview

We are the largest voice-centric social networking and entertainment platform in MENA as measured by revenue in 2019, according to the Frost & Sullivan Report. We have built a large and vibrant Yalla community. In the second quarter of 2020, approximately 12.5 million users visited our platform on average each month; they spent a total of 309.5 million hours in Yalla rooms and played a total of 407.2 million rounds of casual games on Yalla Ludo. The number of paying users on our platform was 5.4 million in the second quarter of 2020. On average, active users of Yalla and Yalla Ludo spent approximately 4.5 hours and 1.4 hours on our platform every day in the second quarter of 2020, respectively.

We have experienced strong revenue growth in recent years. We primarily generate our revenues from users’ consumptions of virtual items and upgrade services. Virtual items primarily consist of various virtual gifts. Upgrade services primarily consist of VIP rights or premium membership on our platform. Our revenues increased by 49.8% from US$42.4 million in 2018 to US$63.5 million in 2019. Our revenues increased by 99.6% from US$26.4 million in the six months ended June 30, 2019 to US$52.8 million in the six months ended June 30, 2020.

Our innovative business model focuses on users’ interactions and social networking experience on our platform. Therefore, we do not incur significant content acquisition cost, such as incentive fees to key users or costs for acquiring media content. Our user acquisition channels have been cost-effective. As a result, we are able to achieve high profitability. Our net income was US$20.2 million and US$28.9 million in 2018 and 2019, respectively, and our net margin was 47.8% and 45.6% in 2018 and 2019, respectively. Our net income more than doubled from US$11.4 million in the six months ended June 30, 2019 to US$25.2 million in the six months ended June 30, 2020, representing net margins of 43.3% and 47.8%, respectively.

General Factors Affecting Our Results of Operations

Our business and operating results are affected by general factors affecting the voice-centric social networking and entertainment industry in our target markets, particularly MENA. Such general factors include:

 

   

overall political, economic and social environment in MENA;

 

   

growth of mobile Internet usage and penetration rate in MENA;

 

   

changes in user preferences and mobile-based consumption, as well as our ability to adapt to such changes;

 

   

social networking and entertainment habits and trends in MENA, including competition among different forms of entertainment; and

 

   

growth and competitive landscape of the social networking and entertainment industry in MENA.

Changes in any of these general industry conditions could affect demand for our services, as well as our results of operations.

 

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Specific Factors Affecting Our Results of Operations

While our business is influenced by general factors affecting the voice-centric social networking and entertainment industry in our target markets, particularly MENA, we believe our results of operations are more directly affected by company specific factors, including the following major factors:

Our ability to expand user base

We primarily generate revenues from users’ consumptions of virtual items and upgrade services. Our ability to expand our user base will affect the growth of our business and revenues going forward. Our average MAUs increased by 90.9% from 2.2 million in the three months ended December 31, 2018 to 4.2 million in the three months ended December 31, 2019, and increased by 387.3% from 2.6 million in the three months ended June 30, 2019 to 12.5 million in the three months ended June 30, 2020. We seek to further expand our user base by penetrating our existing markets and expanding into other underserved markets. Our ability to expand user base depends on our abilities to, among other things, deliver superior user experience, raise brand recognition, utilize cost-effective user acquisition channels and increase attractiveness and breadth of content offerings.

Our ability to offer superior user experience to enhance user engagement

User experience on our platform is critical to our ability to enhance user engagement. As a testament to users’ enjoyment of our platform, our active users on average spent approximately 4.5 hours in Yalla rooms and 1.4 hours playing casual games on Yalla Ludo every day in the second quarter of 2020, making Yalla a substantial part of their social life. We actively manage our platform to make the Yalla community more vibrant and interactive. For example, we organize online events on Yalla based on the holidays of the relevant cultures, and we organize tournaments on Yalla Ludo. We believe such online events enable us to foster a sense of community and enhance user engagement, which in turn drives users’ willingness to spend on our platform.

Our ability to monetize

Our results of operations mainly depend on our ability to monetize our user base by converting non-paying users into paying users and keeping them active. Our revenues are primarily affected by the number of paying users. We have experienced significant growth in the number of paying users from 450.9 thousand in the three months ended December 31, 2018 to 723.5 thousand in the three months ended December 31, 2019, and to 5.4 million in the three months ended June 30, 2020. Such growth was primarily due to the expansion of our user base, the superior user experience we offer, diversification of transaction scenarios on our platform and our expansion into new geographic markets.

We incentivize user spending by recognizing their generosity in the Yalla community. We have created rankings to honor users who have sent the most gifts. We will also continue to introduce new virtual items and upgrade services on our platform. We believe our massive and highly engaged user base and our leading position in the voice-centric social networking and entertainment industry in MENA will allow us to continue to strengthen our monetization capabilities.

Our ability to manage our costs and expenses

Due to our innovative business model, we have enjoyed strong unit economics and return for our shareholders. As our platform promotes users’ interactions, we do not incur significant content acquisition cost, such as incentive fees to key users or costs for acquiring media content. Our profitability will depend on our ability to continually improve cost efficiency. Selling and marketing expenses represent a significant component of our costs and expenses. We benefit from organic user acquisition through word-of-mouth referrals, and we will also continue to focus on cost-effective user acquisition channels to manage selling and marketing expenses.

 

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Key Operating Metrics

We regularly review a number of operating metrics, including the following key operating metrics, to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions. We believe that these key operating metrics are useful to investors because they are frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

The following table sets forth our average MAUs, paying users and ARPPU:

 

    Three Months Ended  
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
 

Average MAUs (in thousands)

    2,046       2,174       2,272       2,557       3,109       4,151       6,127       12,460  

Yalla (in thousands)

    2,046       2,173       2,250       2,428       2,716       3,286       4,016       4,835  

Yalla Ludo (in thousands)

          1       22       129       393       865       2,111       7,625  

Paying users (in thousands)

    417       451       547       790       510       723       1,620       5,360  

Yalla (in thousands)

    417       451       547       789       493       549       759       1,080  

Yalla Ludo (in thousands)

                0.1       1       17       174       861       4,280  

ARPPU (US$)

    33.4       27.8       22.2       18.0       34.8       26.6       13.0       5.9  

Yalla (US$)

    33.4       27.8       22.3       18.1       36.1       35.0       27.6       26.9  

Yalla Ludo (US$)

                0.2       0.5       0.1       0.1       0.1       0.6  

Average MAUs

Average MAUs allows us to evaluate the size of user base and the level of user engagement on our platform. We calculate average MAUs in a given period by dividing (i) the sum of active users for each month of such period, by (ii) the number of months in such period. We define active users as registered users who accessed any of our mobile applications at least once during a given period.

Average MAUs of Yalla and Yalla Ludo have grown significantly since the third quarter of 2019 primarily due to our interactive community culture and large user base that have led to a strong word-of-mouth effect as well as our online marketing efforts. In particular, the increasing popularity of Yalla Ludo in our community not only contributed to the growth in Yalla Ludo’s average MAU directly but also led to its high ranking on certain major app stores’ recommendation pages in the first half of 2020, which further contributed to the rapid growth of average MAUs of Yalla Ludo. In addition, the COVID-19 outbreak has incentivized online social networking and entertainment activities, which also enhanced user engagement on our platform in the first half of 2020.

Paying Users

Paying users allow us to evaluate the monetization capabilities of our platform. We define paying users as registered users who purchased our virtual items or upgrade services using virtual currencies on our platform at least once in a given period, except for users who receive all of their virtual currencies directly or indirectly from us for free.

The number of paying users of Yalla grew by 44.3% from 547.1 thousand for the first quarter of 2019 to 789.5 thousand for the second quarter of 2019. The growth was primarily due to the expansion of our user base, diversification of transaction scenarios on our platform, as well as promotional efforts engaged in the quarter.

We adjusted our operational strategy in the third quarter of 2019 and introduced certain free features to enhance user engagement and interactions on Yalla. As a result, some of our previous paying users were able to satisfy their social networking and entertainment needs on Yalla through the free features and therefore the number of paying users of Yalla decreased by 37.6% from 789.5 thousand for the second quarter of 2019 to 492.7 thousand for the third quarter of 2019. We believe the operational adjustment was a success as it enhanced our user experience and contributed to a 11.8% increase in average MAUs of Yalla from 2.4 million for the second quarter of 2019 to 2.7 million for the third quarter of 2019. We believe that it has also brought long-term benefits to our platform, and we have experienced growths in paying users of Yalla after the third quarter of 2019. The number of paying users of Yalla grew from 549.3 thousand for the fourth quarter of 2019 to 1.1 million for the second quarter of 2020. The increase in paying users of Yalla was primarily due to optimization of user experience through improved product design and the expansion of user community.

 

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We have experienced rapid growth in paying users of Yalla Ludo in the first half of 2020. The number of paying users of Yalla Ludo grew from 174.2 thousand for the fourth quarter of 2019 to 4.3 million for the second quarter of 2020. Such growth was primarily due to optimization of user experience through localized product design and interactive features and the expansion of user community.

ARPPU

ARPPU is a measure we adopted to better understand user behaviors and evaluate our monetization strategies. We calculate ARPPU in a given period by dividing (i) revenue for such period, by (ii) the number of paying users for such period.

We have focused on expanding our user community and encouraging more users to experience the various paid features available on our platform. As the number of paying users increases, new paying users tend to spend less than existing paying users and thereby causes the ARPPU to decrease. The ARPPU of Yalla generally followed such trend, except that there was a significant increase in the ARPPU from the second quarter to the third quarter of 2019 due to the adjustment of our operational strategy as described above. More specifically, paying users who spent relatively less in the second quarter of 2019 were more likely to use the free features we introduced in the third quarter of 2019 to satisfy their social networking and entertainment needs, and therefore the remaining paying users in the third quarter of 2019 were more likely to be relatively higher spending users, which drove up the ARPPU in the quarter.

We experienced significant decreases in Yalla’s ARPPU in the first and second quarters of 2020 mainly due to rapid expansion of Yalla community and the significant increases in Yalla’s paying users in these periods.

We have adopted a different user engagement and monetization model for Yalla Ludo, and therefore the ARPPU of Yalla Ludo has been relatively insignificant in each of the past quarters. With the rapid increase in Yalla Ludo’s average MAU and paying users, we expect Yallo Ludo to become a significant driver of our revenue growth in the future, but expect Yalla Ludo’s ARPPU to remain significantly lower than Yalla’s. The ARPPU of Yalla Ludo may also experience fluctuations from quarter to quarter due to new features and transaction scenarios we introduce from time to time as well as our marketing efforts in the relevant period.

Key Components of Our Results of Operations

Revenues

We primarily generate our revenues from users’ consumptions of virtual items and upgrade services. We operate a voice-centric social networking and entertainment platform using a revenue model whereby users can get free access to the basic functions on the platform but have the options to purchase virtual currencies. Users can spend virtual currencies to purchase virtual items or upgrade services on the platform. Virtual items primarily consist of various virtual gifts. Upgrade services primarily consist of VIP rights or premium membership on our platform.

Costs and Expenses

Cost of revenues. Our cost of revenues consists primarily of (i) commission fees paid to third party payment platforms and (ii) staff cost and expenses related to the operations of our mobile platform.

Selling and Marketing. Our selling and marketing expenses consist primarily of (i) advertising costs and market promotion expenses and (ii) staff cost, rental and depreciation related to selling and marketing functions.

General and Administrative. Our general and administrative expenses consist primarily of (i) staff cost, rental and depreciation related to general and administrative personnel, (ii) professional service fees and (iii) other corporate expenses.

Technology and Product Development. Our technology and product development expenses consist primarily of (i) staff cost and (ii) related expenses for the employees involved in designing and developing new features for our mobile platform and self-developed mobile games.

 

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Results of Operations

The following table sets forth a summary of our consolidated results of operations, both in absolute amount and as a percentage of our total revenues, for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

     Year Ended December 31,     Six Months Ended June 30,  
     2018     2019     2019     2020  
     US$     %     US$     %     US$     %     US$     %  
     (in thousands, except for percentages)  

Revenues

     42,371       100.0       63,465       100.0       26,430       100.0       52,758       100.0  

Costs and expenses:

                

Cost of revenues

     (13,848     (32.7     (20,553     (32.4     (9,277     (35.1     (17,233     (32.7

Selling and marketing expenses

     (5,686     (13.4     (8,250     (13.0     (3,420     (12.9     (5,547     (10.5

General and administrative expenses

     (1,630     (3.8     (4,121     (6.5     (1,563     (5.9     (2,734     (5.2

Technology and product development expenses

     (853     (2.0     (1,598     (2.5     (722     (2.7     (1,888     (3.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     (22,017     (52.0     (34,522     (54.4     (14,982     (56.7     (27,402     (51.9

Operating income

     20,354       48.0       28,943       45.6       11,448       43.3       25,356       48.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

     145       0.3       390       0.6       170       0.6       167       0.3  

Government grant

                                         85       0.2  

Investment income

     6       0.0       28       0.0       6       0.0       8       0.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     20,505       48.4       29,361       46.3       11,624       44.0       25,616       48.6  

Income tax expenses

     (263     (0.6     (436     (0.7     (183     (0.7     (421     (0.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     20,242       47.8       28,925       45.6       11,441       43.3       25,195       47.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Revenues. Our total revenues increased by 99.6% from US$26.4 million in the six months ended June 30, 2019 to US$52.8 million in the same period in 2020, which was primarily driven by an increase of paying users of Yalla, which grew from 789.5 thousand in the three months ended June 30, 2019 to 1.1 million in the same period in 2020, as well as an increase in ARPPU of Yalla, which grew from US$18.1 in the three months ended June 30, 2019 to US$26.9 in the same period in 2020. The growth in paying users and ARPPU of Yalla was primarily due to the superior user experience we offer, diversification of transaction scenarios on our platform and the expansion of user community. In addition, paying users of Yalla Ludo increased rapidly from 0.6 thousand in the three months ended June 30, 2019 to 4.3 million in the same period in 2020. The growth was primarily due to optimization of user experience through localized product design and interactive features, as well as the expansion of user community as a result of high rankings of Yalla Ludo on certain major app stores’ recommendation pages. We expect Yalla Ludo to become a significant driver of revenue growth in the future, as we continue to expand the user base of Yalla Ludo. The enhanced user engagement on our platform in the first half of 2020 was also in part due to increased online social networking and entertainment activities as a result of the COVID-19 outbreak.

Costs and expenses. Our total costs and expenses increased by 82.9% from US$15.0 million in the six months ended June 30, 2019 to US$27.4 million in the same period in 2020.

 

   

Cost of revenues. Our cost of revenues increased by 85.8% from US$9.3 million in the six months ended June 30, 2019 to US$17.2 million in the same period in 2020, which was in line with our revenue growth and primarily due to increases in (i) commission fees paid to third-party payment

 

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platforms and (ii) technology services and bandwidth service fees and other direct costs. Cost of revenues as a percentage of our total revenues decreased from 35.1% in the six months ended June 30, 2019 to 32.7% in the same period in 2020, primarily due to (i) a decrease in technology service fees as a percentage of cost of revenues due to economies of scale and (ii) a decrease in average commission rate for third-party payment platforms due to diversification of such platforms.

 

   

Selling and marketing expenses. Our selling and marketing expenses increased by 62.2% from US$3.4 million in the six months ended June 30, 2019 to US$5.5 million in the same period in 2020. The increase was primarily due to an increase in advertising and market promotion expenses as a result of our continued user acquisition efforts. Selling and marketing expenses as a percentage of our total revenues decreased from 12.9% in the six months ended June 30, 2019 to 10.5% in the same period in 2020, primarily due to organic user acquisition through word-of-mouth referrals, as well as free promotion of Yalla Ludo by certain major app stores.

 

   

General and administrative expenses. Our general and administrative expenses increased by 74.9% from US$1.6 million in the six months ended June 30, 2019 to US$2.7 million in the same period in 2020. The increase was primarily due to (i) an increase in salaries and benefits for our general and administrative staff, which was in turn driven by an expansion of our general and administrative staff, (ii) an increase in professional service fees and (iii) an increase in the cost for office space for our general and administrative staff. General and administrative expenses decreased as a percentage of our total revenues from 5.9% in the six months ended June 30, 2019 to 5.2% in the same period in 2020 due to economies of scale.

 

   

Technology and product development expenses. Our technology and product development expenses increased by 161.5% from US$0.7 million in the six months ended June 30, 2019 to US$1.9 million in the same period in 2020. The increase was primarily due to an increase in salaries and benefits for our technology and product development staff, which was in turn driven by (i) an expansion of our technology and product development staff and (ii) an increase in our investment in developing new products and services. As a result of these reasons, technology and product development expenses also increased as a percentage of our total revenues from 2.7% in the six months ended June 30, 2019 to 3.6% in the same period in 2020.

Interest income. Our interest income decreased by 2.0% from US$170.3 thousand in the six months ended June 30, 2019 to US$166.9 thousand in the same period in 2020, primarily due to a decrease in interest rates.

Government grant. We recognized government grant of US$85.3 thousand in the six months ended June 30, 2020 from the local government of Hangzhou.

Investment income. Our investment income increased by 30.6% from US$6.2 thousand in the six months ended June 30, 2019 to US$8.1 thousand in the same period in 2020, primarily due to increased utilization of wealth management products in the six months ended June 30, 2020.

Income tax expense. Our income tax expense increased by 129.8% from US$183.0 thousand in the six months ended June 30, 2019 to US$420.5 thousand in the same period in 2020. The increase was due to an increase in our taxable income.

Net income. As a result of the foregoing, our net income increased by 120.2% from US$11.4 million in the six months ended June 30, 2019 to US$25.2 million in the same period in 2020.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenues. Our total revenues increased by 49.8% from US$42.4 million in 2018 to US$63.5 million in 2019, which was primarily driven by an increase of paying users, which grew from 450.9 thousand in the three months ended December 31, 2018 to 723.5 thousand in the three months ended December 31, 2019. The growth in paying users was primarily due to the superior user experience we offer, diversification of transaction scenarios on our platform and our expansion into new geographic markets.

 

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Costs and Expenses. Our total costs and expenses increased by 56.8% from US$22.0 million in 2018 to US$34.5 million in 2019.

 

   

Cost of Revenues. Our cost of revenues increased by 48.4% from US$13.8 million in 2018 to US$20.6 million in 2019, which was in line with our revenue growth and primarily due to increases in (i) commission fees paid to third-party payment platforms and (ii) staff cost and expenses related to the operations of our mobile platform. Cost of revenues as a percentage of our total revenues remained stable at 32.7% and 32.4% in 2018 and 2019, respectively.

 

   

Selling and marketing expenses. Our selling and marketing expenses increased by 45.1% from US$5.7 million in 2018 to US$8.3 million in 2019. The increase was primarily due to an increase in advertising and market promotion expenses as a result of our user acquisition efforts. Selling and marketing expenses as a percentage of our total revenues decreased from 13.4% in 2018 and 13.0% in 2019, primarily due to organic user acquisition through word-of-mouth referrals, as well as enhanced cost efficiency in targeted online advertising.

 

   

General and administrative expenses. Our general and administrative expenses increased by 152.8% from US$1.6 million in 2018 to US$4.1 million in 2019. The increase was primarily due to (i) an increase in salaries and benefits for our general and administrative staff, which was in turn driven by an expansion of our general and administrative staff, (ii) an increase in professional service fees and (iii) an increase in the cost for office space for our general and administrative staff. As a result of these reasons, our general and administrative expenses also increased as a percentage of our total revenues from 3.8% in 2018 to 6.5% in 2019.

 

   

Technology and product development expenses. Our technology and product development expenses increased by 87.3% from US$0.9 million in 2018 to US$1.6 million in 2019. The increase was primarily due to an increase in salaries and benefits for our technology and product development staff, which was in turn driven by (i) an expansion of our technology and product development staff and (ii) an increase in average compensation for technology and product development staff. As a result of these reasons, technology and product development expenses also increased as a percentage of our total revenues from 2.0% in 2018 to 2.5% in 2019.

Interest income. Our interest income increased by 169.8% from US$144.6 thousand in 2018 to US$390.2 thousand in 2019, primarily due to an increase in bank deposits.

Investment income. Our investment income increased by 384.2% from US$5.7 thousand in 2018 to US$27.6 thousand in 2019, primarily due to increased purchase of wealth management products in 2019.

Income tax expense. Our income tax expense increased by 65.5% from US$263.4 thousand in 2018 to US$435.8 thousand in 2019. The increase was due to an increase in our taxable income, as well as an increase in effective income tax rate from 1.3% in 2018 to 1.5% in 2019.

Net income. As a result of the foregoing, our net income increased by 42.9% from US$20.2 million in 2018 to US$28.9 million in 2019.

 

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Selected Quarterly Results of Operations

The following table sets forth our historical unaudited consolidated selected quarterly results of operations for the periods indicated.

 

    For the Three Months Ended  
    September 30,
2018
    December 31,
2018
    March 31,
2019
    June 30,
2019
    September 30,
2019
    December 31,
2019
    March 31,
2020
    June 30,
2020
 
    (in US$ thousands)  

Revenues

    13,932       12,524       12,173       14,257       17,763       19,271       21,075       31,683  

Costs and expenses:

               

Cost of revenues

    (4,222     (4,445     (4,840     (4,439     (5,433     (5,843     (6,812     (10,422

Selling and marketing expenses

    (2,124     (1,749     (1,487     (1,932     (1,750     (3,080     (2,824     (2,724

General and administrative expenses

    (420     (462     (631     (932     (998     (1,560     (1,341     (1,392

Technology and product development expenses

    (275     (358     (348     (374     (435     (440     (851     (1,037

Total costs and expenses

    (7,041 )      (7,014 )      (7,306 )      (7,677 )      (8,616 )      (10,923 )      (11,828 )      (15,575 ) 

Operating income

    6,891       5,510       4,867       6,580       9,147       8,348       9,247       16,108  

Interest income

    66       57       91       80       154       65       90       77  

Government grant

                                        85        

Investment income

    2                   6       13       9       3       5  

Income before income taxes

    6,959       5,567       4,958       6,666       9,314       8,422       9,425       16,190  

Income tax expenses

    (87     (97     (83     (100     (120     (133     (185     (235

Net income

    6,872       5,470       4,875       6,566       9,194       8,289       9,240       15,955  

Our revenues generally increased over the periods presented, which was primarily driven by the growth of paying users of our platform. Our cost of revenues generally followed our revenue trends. Changes in our selling and marketing expenses were driven by our marketing strategies. We have experienced increases in general and administrative expenses and technology and product development expenses as our business expanded.

Liquidity and Capital Resources

Our primary sources of liquidity have been issuance of preferred equity securities and cash provided by operating activities, which have historically been sufficient to meet our working capital and capital expenditure requirements.

In 2018 and 2019, net cash provided by operating activities was US$23.4 million and US$31.3 million, respectively. In the six months ended June 30, 2020, net cash provided by operating activities was US$19.7 million.

As of June 30, 2020, we had cash and cash equivalents of US$58.5 million, as compared to cash and cash equivalents of US$45.3 million as of December 31, 2019.

We believe that our existing cash and cash equivalents and anticipated cash flows from operating activities will be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for the next 12 months. We may, however, need additional cash resources in the future if we

 

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experience changes in business condition or other developments, or if we find and wish to pursue opportunities for investments, acquisitions, capital expenditures or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

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

 

     Year Ended December 31,     For the Six Months Ended
June 30,
 
     2018     2019     2019      2020  
     (US$ in thousands)  

Net cash provided by operating activities

     23,378       31,281       13,483        19,701  

Net cash provided by/(used in) investing activities

     (1,905     (2,833     25        3,363  

Net cash used in financing activities

     (6,369     (200            (9,831

Effect of foreign currency exchange rate changes on cash and cash equivalents

     8       38       44        4  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in cash and cash equivalents

     15,112       28,286       13,552        13,237  
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at the beginning of the year

     1,905       17,017       17,017        45,303  
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents at the end of the year

     17,017       45,303       30,569        58,540  
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating Activities

Net cash provided by operating activities was US$19.7 million in the six months ended June 30, 2020, primarily due to net income of US$25.2 million, adjusted for the effects of changes in working capital. Changes in working capital primarily consisted of an increase in prepayments and other current assets of US$11.4 million due to an increase in receivables from third-party payment platforms, which were partially offset by (i) an increase in deferred revenue of US$3.0 million due to the growth of our business and (ii) an increase in accrued expenses and other current liabilities of US$2.8 million mainly due to an increase in accrued salaries for employees as a result of the increase in the number of employees.

Net cash provided by operating activities was US$31.3 million in 2019, primarily due to net income of US$28.9 million, adjusted for the effects of changes in working capital. Changes in working capital primarily consisted of (i) an increase in deferred revenue of US$2.6 million due to the growth of our business and (ii) an increase in accrued expenses and other current liabilities of US$1.0 million mainly due to an increase in accrued salaries for employees as a result of the increase in number of employees and increased salaries, which were partially offset by an increase in prepayments and other current assets of US$1.6 million, primarily due to an increase in receivables from third-party payment platforms.

Net cash provided by operating activities was US$23.4 million in 2018, primarily due to net income of US$20.2 million, adjusted for the effects of changes in working capital and other activities. Changes in working capital primarily consisted of an increase in deferred revenue of US$2.5 million due to the growth of our business.

Investing Activities

Net cash provided by investing activities was US$3.4 million in the six months ended June 30, 2020, which was primarily attributable to (i) proceeds from maturity of term deposits of US$2.7 million and (ii) proceeds from sales of short-term investments of US$2.4 million, which was partially offset by purchases of short-term investments of US$1.5 million.

 

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Net cash used in investing activities was US$2.8 million in 2019, which was primarily attributable to (i) purchase of term deposits of US$7.7 million and (ii) purchase of short-term investments of US$5.9 million, which was partially offset by (i) proceeds from maturity of term deposits of US$6.3 million and (ii) proceeds from maturity of short-term investments of US$5.0 million.

Net cash used in investing activities was US$1.9 million in 2018, which was primarily attributable to (i) purchase of term deposit of US$2.9 million and (ii) purchases of short-term investments of US$2.0 million, which was partially offset by (i) proceeds from maturity of short-term investments of US$1.7 million and (ii) proceeds from maturity of term deposits of US$1.5 million.

Financing Activities

Net cash used in financing activities was US$9.8 million in the six months ended June 30, 2020, which was attributable to (i) payment of dividends of US$9.0 million and (ii) expenses related to our initial public offering of US$0.8 million.

Net cash used in financing activities was US$0.2 million in 2019, which was attributable to expenses related to our initial public offering.

Net cash used in financing activities was US$6.4 million in 2018, which was primarily attributable to (i) loans to shareholders of FYXTech BVI of US$10.3 million and (ii) cash distributed to the shareholders of FYXTech BVI and Shenzhen Yale of US$7.6 million and the repurchase of preferred shares of US$7.6 million, both in connection with the Reorganization described in “Our History and Corporate Structure,” which was partially offset by proceeds from issuance of series A redeemable convertible preferred shares of US$20.0 million.

Capital Expenditures

We made capital expenditures of US$0.2 million, US$0.4 million and US$0.3 million in 2018, 2019 and the six months ended June 30, 2020, respectively. Our capital expenditures were mainly used for purchases of property and equipment. We will continue to make capital expenditures to meet the expected growth of our business.

Commitments

The following table sets forth our contractual obligations as of June 30, 2020:

 

     Payment due by period  
     Total      Less than
1 Year
     1 – 3 Years      3 – 5 Years      More than
5 Years
 
     (US$ in thousands)  

Operating lease commitments

     799        691        108                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-balance Sheet Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or technology and product development services with us.

 

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Holding Company Structure

Yalla Group Limited is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries in the UAE and China, and all of users’ payments for virtual currencies are collected by Yalla UAE, our subsidiary in the UAE. As a result, Yalla Group Limited’s ability to pay dividends depends upon dividends paid by our UAE subsidiary. As a matter of the laws regulating the subsidiary in the UAE, the subsidiary can pay dividends only to the extent it has profits available for the purpose after deducting the statutory reserve required by the local laws. A company’s profits available for distribution are its accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses, so far as not previously written off in a reduction or reorganization of capital duly made.

Inflation

Since inception, inflation in the UAE and China has not materially affected our results of operations. According to the UAE Federal Competitiveness and Statistics Authority, the year-over-year percent changes in the consumer price index for December 2018 and December 2019 was an increase of 0.3% and a decrease of 1.4% respectively. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2018 and December 2019 were increases of 2.1% and 4.5%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if the UAE or China experiences higher rates of inflation in the future.

Quantitative and Qualitative Disclosures about Market Risks

Foreign Exchange Risk

All of our revenues are denominated in U.S. dollars, and a significant portion of our expenses are denominated in AED or Renminbi. The functional currency of our company and our subsidiaries incorporated in the UAE, Hong Kong and the British Virgin Islands is the U.S. dollar. The functional currency of our subsidiaries in the PRC is the Renminbi. We use U.S. dollars as our reporting currency. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are translated into the functional currency using the applicable exchange rate at the balance sheet date. The resulted exchange differences are recorded in general and administrative expenses in the consolidated statements of operations data. We recorded foreign currency translation adjustment of US$49.8 thousand, US$25.4 thousand and US$23.4 thousand in 2018, 2019 and the six months ended June 30, 2020, respectively.

We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although in general our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs could be affected by the exchange rate between the U.S. dollar and the AED and the exchange rate between the U.S. dollar and the Renminbi.

The AED has been pegged to the US dollar at 3.6725 AEDs per U.S. dollar since November 1997. However, there can be no assurance that the AED will not be de-pegged or that the existing peg will not be adjusted in the future.

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion.

 

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Interest Rate Risk

We have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, we cannot provide assurance that we will not be exposed to material risks due to changes in market interest rate in the future.

After the completion of this offering, we may invest the net proceeds we receive from the offering in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.

Taxation

Cayman Islands

We are an exempted company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to tax based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. In addition, upon payment of dividends by us to our shareholders, no Cayman Islands withholding tax will be imposed.

UAE

Under the current laws of the UAE, our subsidiary in the UAE is not subject to tax based upon profits, income, gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. In addition, upon payment of dividends by us to our shareholders, no UAE withholding tax will be imposed.

Hong Kong

Our subsidiary incorporated in Hong Kong is subject to Hong Kong profit tax at a rate of 16.5%. A two-tiered profits tax rates regime was introduced in 2018 where the first HK$2 million of assessable profits earned by a company will be taxed at half of the current tax rate (8.25%), whilst the remaining profits will continue to be taxed at 16.5%. There is an anti-fragmentation measure where each group will have to nominate only one company in the group to benefit from the progressive rates. No Hong Kong profit tax has been levied as we did not have assessable profit that was earned in or derived from the Hong Kong subsidiary during the periods presented. Hong Kong does not impose a withholding tax on dividends.

China

Generally, our subsidiaries in China are subject to enterprise income tax on their taxable income in China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

Any dividends paid by our wholly foreign-owned subsidiaries in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and receives approval from the relevant tax authority, in which case the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%.

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%.

 

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Critical Accounting Policies, Judgments and Estimates

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.

The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus. When reviewing our consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

Revenue Recognition

We generate the revenue primarily from our voice-centric social networking and entertainment platform for group chatting. We have the sole discretion in designing the specifications and establishing pricing of virtual items and upgrade service. Individual user purchases virtual items and upgrade service using our virtual currency which is in turn acquired through third party payment platforms. Virtual currency is non-refundable and does not have expiration date. Proceeds received from users’ recharging of virtual currency are recorded as deferred revenue.

We recognize revenue relating to virtual items at the point-in-time when the virtual item is consumed. Upgrade service primarily consists of VIP rights or premium membership in Yalla rooms over a specified limited period or the period the users are registered on the platform. Revenues for the upgrade service with limited period are recognized ratably over the period the service is made available to the users. Revenues from the upgrade service without any time limits are recognized ratably over the estimated period of the relevant user groups. The estimated period is determined based on the expected service period derived from historical users’ behavioral pattern. This estimate is re-assessed on a quarterly basis. Adjustments arising from the changes of estimated period of the users are applied prospectively as such changes are resulted from new information indicating a change in the users’ behavior.

Deferred revenue (a contract liability) is recognized when we have an obligation to transfer services to a customer for which we have received consideration related to our voice-centric social networking service from the customer.

Share-based Compensation and Valuation of Our Ordinary Shares

We periodically grant share-based awards, mainly including share options to eligible employees and managements, which are subject to service and performance conditions.

We recognize compensation cost for an equity classified award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award, provided that the cumulative amount of compensation cost recognized at any date at least equals the portion of the grant

 

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date fair value of such award that is vested at that date. For equity awards that contain both a service condition and a performance condition, we recognize compensation cost on a tranche-by-tranche basis, and when we consider that it is probable that the performance condition will be achieved. To the extent the required vesting conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating to those awards is reversed.

The fair value of the options granted is estimated on the date of grant using the binomial option pricing model with the following key assumptions used:

 

     Year Ended December 31,    Six Months
Ended
June 30, 2020
     2018    2019

Risk-free rate of return (per annum)

   2.9%    1.9%-2.0%    0.7%

Volatility

   57.10%    55%-56.2%    56.6%

Expected dividend yield

   0%    0%    0%

Exercise multiple

   2.2    2.2-2.8    2.2-2.8

Fair value of underlying ordinary share

   0.35    3.02-3.94    5.12

Expected term

   10    10    10

The estimated fair values of the underlying ordinary shares at the grant date was estimated by management with the assistance of an independent valuation firm. We first determined our enterprise value by using income approach, which required the estimation of future cash flows, and the application of an appropriate discount rate with reference to comparable listed companies engaged in the similar industry to convert such future cash flows to a single present value, and then allocated the enterprise value between the ordinary shares and preferred shares. The expected volatility was estimated based on the historical volatility of comparable peer public companies with a time horizon close to the expected term of our options. The risk-free interest rate was estimated based on the yield to maturity of U.S. treasury bonds denominated in U.S. dollars for a term consistent with the expected term of our options in effect at the option valuation date. The expected exercise multiple was estimated as the average ratio of the stock price to the exercise price of when employees would decide to voluntarily exercise their vested options. As we did not have sufficient information of past employee exercise history, it was estimated by referencing to a widely-accepted academic research publication. Expected dividend yield is zero as we do not anticipate any dividend payments in the foreseeable future. Expected term is the contract life of the option.

Determining the fair value of the share options required us to make complex and subjective judgments, assumptions and estimates, which involved inherent uncertainty. Had we used different assumptions and estimates, the resulting fair value of the share options and the resulting share-based compensation expenses could have been different.

Valuations of our ordinary shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants’ Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, and with the assistance of an independent valuation firm from time to time. The assumptions we use in the valuation model are based on future expectations combined with management judgment, with inputs of numerous objective and subjective factors, to determine the fair value of our ordinary shares, including the following factors:

 

   

our operating and financial performance;

 

   

current business conditions and projections;

 

   

our stage of development;

 

   

the prices, rights, preferences and privileges of our convertible preferred shares relative to our ordinary shares;

 

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the likelihood of occurrence of liquidity event and redemption event;

 

   

any adjustment necessary to recognize a lack of marketability for our ordinary shares; and

 

   

the market performance of industry peers.

In order to determine the fair value of our ordinary shares underlying each share-based award grant, we first determined our business entity value, or BEV, and then allocated the BEV to each element of our capital structure (convertible redeemable preferred shares and ordinary shares) using an option pricing method. In our case, three scenarios were assumed, namely: (i) the liquidation scenario, in which the option pricing method was adopted to allocate the value between convertible preferred shares and ordinary shares, and (ii) the redemption scenario, in which the option pricing method was adopted to allocate the value between convertible preferred shares and ordinary shares, and (iii) the mandatory conversion scenario, in which equity value was allocated to convertible preferred shares and ordinary shares on an as-if converted basis. Increasing probability was assigned to the mandatory conversion scenario during 2018 and 2019 in light of preparations for our initial public offering.

In determining the fair value of our BEV, we applied the income approach/discounted cash flow, or DCF, analysis based on our projected cash flow using management’s best estimate as of the valuation date. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation.

Assumptions and estimates will not be necessary to determine the fair value of our ordinary shares upon the listing of our ADSs on the NYSE.

Since the share options have both a service condition and a performance condition on the completion of an initial public offering, no compensation expense relating to the options was recorded for the years ended December 31, 2018 and 2019, because an initial public offering was not deemed probable. We will recognize compensation expenses relating to options vested cumulatively upon the completion of this offering. As of June 30, 2020, the total unrecognized compensation expense associated with share options amounted to US$137.5 million, of which US$32.2 million was based on the degree of service period that had been completed as of June 30, 2020.

Internal Control Over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal control and procedures over financial reporting. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in the course of preparing and auditing our consolidated financial statements for the years ended December 31, 2018 and 2019, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting as of December 31, 2019. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

The material weakness that has been identified relates to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to properly address complex U.S. GAAP accounting issues, and related presentation and disclosure in accordance with U.S. GAAP and SEC financial reporting requirements. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness in our internal control over financial reporting. We and they are required to do so only after we become a public company. Had we performed a formal assessment of our internal control

 

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over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.

To remedy our identified material weakness subsequent to December 31, 2019, we have started adopting measures to improve our internal control over financial reporting, including, among others: (i) hiring additional competent accounting staff with appropriate knowledge and experience of U.S. GAAP and SEC financial reporting requirements and strengthening period-end financial reporting controls and procedures, (ii) establishing effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with U.S. GAAP and SEC reporting requirements, and (iii) organizing regular training for our accounting staffs, especially training related to U.S. GAAP and SEC reporting requirements.

However, we cannot assure you that we will remediate our material weakness in a timely manner. See “Risk Factors—Risks Relating to Our Business and Industry—If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.”

As a company with less than US$1,070,000,000 in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, related to the assessment of the effectiveness of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We will take advantage of the extended transition period.

Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Updates (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 specifies the accounting for leases. For operating leases, ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 was further amended in November 2019 by ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date of new lease standard. As a result, Accounting Standards Codification (“ASC”) 842, Leases, is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. For all other entities, it is effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. As we are an “emerging growth company” and elect to apply for the new and revised accounting standards at the effective date for a private company, we will adopt the new standard on January 1, 2021. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The guidance replaces the incurred loss impairment methodology with an expected credit loss model for which a company recognizes an allowance based on the estimate of expected credit loss. ASU 2016-13 was further amended in November 2019 by ASU 2019-10. As a result, ASC326, Financial Instruments—Credit Losses is effective for public companies for annual reporting periods, and interim periods within those years beginning after December 15, 2019. For all other entities it is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

 

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As we are an “emerging growth company” and elect to apply for the new and revised accounting standards at the effective date for a private company, we will adopt the new standard on January 1, 2023. We are currently evaluating the impact of adopting this standard on our consolidated financial statements.

On August 6, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Payments. The ASU provides guidance on the classification of certain cash receipts and payments including debt prepayment or debt issuance costs and cash payments for contingent considerations. The ASU also provides clarification on the application of the predominance principle outlined in ASC230. The effective date for public entities will be annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. We adopted this ASU beginning January 1, 2018. The adoption of this ASU does not have any impact on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies certain disclosure requirements on fair value measurements, including (i) clarifying narrative disclosure regarding measurement uncertainty from the use of unobservable inputs, if those inputs reasonably could have been different as of the reporting date, (ii) adding certain quantitative disclosures, including (a) changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and (iii) removing certain fair value measurement disclosure requirements, including (a) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (b) the policy for timing of transfers between levels of the fair value hierarchy and (c) the valuation processes for Level 3 fair value measurements. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, we will adopt the new standard on January 1, 2020. We are currently evaluating the effect of the disclosure requirements of ASU 2018-13 will have on our consolidated financial statements and do not expect the impact to be material.

 

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INDUSTRY OVERVIEW

Overview of Online Social Networking and Entertainment Market in MENA

Measured by user base, online social networking and entertainment applications are among the most popular type of mobile applications in the world. In 2019, there were 3.8 billion users of online social networking and entertainment applications globally, which corresponded to a penetration rate of 49.5% based on the global population. In other words, close to half of the global population are on social networking and entertainment platforms. Online social networking and entertainment applications are also highly popular in MENA, with 137.0 million users in 2019 and a penetration rate of 55.5% based on the regional population, which is comparable to online social networking and entertainment penetration rates in many developed countries and regions. In particular, Qatar, the UAE, Bahrain, Kuwait and Saudi Arabia are among the countries with the highest online social networking and entertainment penetration rates in MENA, at 92.0%, 91.9%, 83.2%, 73.0% and 68.1% in 2019, respectively. In addition, penetration rates for several well-known global online social networking and entertainment applications in Saudi Arabia and the UAE were among the highest in the world in 2019.

The table below sets forth the online social networking and entertainment penetration rate (in percentage) in selected countries and regions in 2019:

 

   

MENA Countries

                   

MENA
Average

 

Qatar

 

UAE

 

Bahrain

 

Kuwait

 

Saudi
Arabia

 

Jordan

 

Algeria

 

Oman

 

Morocco

 

Egypt

 

Global
Average

 

US

 

Europe

 

SEA(1)

 

China

55.5   92.0   91.9   83.2   73.0   68.1   67.0   54.0   51.0   48.3   41.2   49.5   76.7   74.8   63.0   64.0

 

Source: Frost & Sullivan Report

(1)

“SEA” refers to Southeast Asia.

The online social networking and entertainment market size, as measured by revenue, in MENA grew from US$1,439.2 million in 2015 to US$5.8 billion in 2019, representing a CAGR of 41.9%, and is estimated to reach US$13.5 billion in 2024, representing a CAGR of 18.3% from 2019 to 2024, as illustrated below:

(US$ in Million, except percentages)

 

LOGO

 

Source: Frost & Sullivan Report

The user base of the online social networking and entertainment market in MENA reached 137.0 million in 2019 and is expected to reach 197.0 million in 2024, representing a CAGR of 7.5%, as set forth below:

 

Year

   2015      2016      2017      2018      2019      2020E      2021E      2022E      2023E      2024E  

User Base (in million)

     85.5        101.5        115.4        128.1        137.0        146.6        156.5        166.4        177.0        197.0  

 

Source: Frost & Sullivan Report

Online Social Networking and Entertainment Market Supported by Strong Fundamentals in MENA

Developed Mobile Internet Infrastructure

The total number of mobile Internet subscribers in MENA was 206.4 million in 2019, which corresponded to a mobile Internet penetration rate of 83.6%. Mobile Internet penetration rate is calculated by dividing (i) the

 

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number of mobile Internet subscribers in a country or region by (ii) total population in the same country or region. In addition, six out of the 10 MENA countries had a mobile penetration rate above 100% in 2019. The mobile Internet penetration rate in MENA is expected to remain high due to the proliferation of mobile devices, expansion of 4G coverage, introduction of 5G service, growth in per capita income and continued urbanization.

The table below sets forth the mobile Internet penetration rate (in percentage) in the selected countries and regions in 2019:

 

    

Selected MENA countries with over
100% mobile Internet penetration rate

                        

MENA
Average

  

UAE

  

Kuwait

  

Qatar

  

Bahrain

  

Oman

  

Saudi
Arabia

  

Global
Average

  

US

  

Europe

  

SEA

  

China

83.6    168.3    166.0    132.2    116.1    114.5    103.4    83.0    150.4    116.2    114.2    97.4

 

Source: Frost & Sullivan Report

Young and Tech-savvy Population

With a median age of 29.8 for the overall population in 2019, MENA has a younger population and mobile internet user base compared to the global average as well as many other countries and regions in the world. Younger populations are more immersed in online and social activities in their daily life, making them more receptive and enthusiastic of online social networking and entertainment activities.

The table below sets forth the median age in selected countries and regions in 2019:

 

     MENA
Average
     Global
Average
     US      Europe      SEA      China  

Median Age (in year)

     29.8        31.5        38.5        38.9        31.8        38.4  

 

Source: Frost & Sullivan Report

Lack of Offline Social Networking and Entertainment Options Motivates Users to Search for Online Alternatives

People in MENA have relatively limited offline social networking and entertainment options. Leisurely social gatherings among family members and friends are the main traditional social networking and entertainment activities in this region. By replicating such offline social interactions online, social networking and entertainment applications have made it easier for users to continue their social networking and entertainment activities anywhere and anytime. Due to the lack of offline social networking and entertainment options, the average amount of time spent on online social networking and entertainment applications by active users in MENA is substantially longer compared to many other countries and regions.

The table below sets forth the average daily time spent by active online social networking and entertainment users in selected countries and regions in 2019:

 

     MENA
Average
     UAE      Saudi
Arabia
     Bahrain      Qatar      Kuwait      Global
Average
     US      SEA      China  

Average Daily Time Spent by Active Social Networking Users (in minutes)

     230.0        254.0        276.0        242.0        231.0        226.0        194.0        175.5        255.0        215.0  

 

Source: Frost & Sullivan Report

Voice-centric Online Social Networking and Entertainment Market in MENA

Voice-centric online social networking and entertainment platforms refer to platforms that primarily facilitate voice-based interactions among users. These platforms typically facilitate online voice-based chatting among users or voice live streaming.

 

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The voice-centric online social networking and entertainment market is a fast-growing industry in MENA. It is the more natural and sustainable form of social interaction compared to other forms, such as text, pictures and videos, because of the following reasons:

 

   

Lifestyle and cultural fit. Leisurely chatting is one of the most common and popular offline social networking and entertainment activities in MENA and is deeply rooted in the local lifestyle and tradition. In particular, participation in majlis, which is the name given to any “gathering place” where family members and friends gather to discuss local topics, has remained highly popular in MENA for centuries. As such, online voice-centric social networking and entertainment platforms, especially those offering leisurely group chatting, do not need to invest a substantial amount of time and capital to develop user habits for their services.

 

   

Convenience. Voice is the most natural and common form of human interaction. As a result, it requires minimal time for people to adapt to a voice-based mobile application. Moreover, voice-based interactions can be carried out anytime and anywhere, even when people are multi-tasking, which allows a user to spend a longer period of time on a voice-centric platform.

 

   

Accessibility. Voice-based interaction eliminates some personal hurdles for users to participate in online interaction, as many users are not comfortable with video chatting for cultural or social reasons or privacy concerns, making social networking and entertainment more accessible and acceptable by users in MENA.

In addition, voice-centric platforms typically incur significantly less bandwidth costs compared to video-based platforms. As such, voice-centric platforms are economically more attractive for platform operators, which ultimately also benefit users.

Key Growth Drivers of Online Voice-centric Social Networking and Entertainment Market in MENA

Content generated by user interactions fosters strong network effects. Voice-centric online social networking and entertainment applications, especially group chatting-based applications, are designed for real-time social interactions among users. Content on such applications is generated through user engagement. With growing user interactions, content become more diversified and personalized, which in turn attracts more users to participate and results in further interactions and content creation.

 

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Imbalance between the supply of, and demand for, social networking and entertainment options. The popularity of online social networking and entertainment in MENA is expected to grow, given that voice-centric online social and entertainment platforms (i) fits the lifestyle and traditional social networking and entertainment habits of the local population, (ii) enables interactions with a wider group of users, and (iii) enables users to access anytime and anywhere. However, the number of applications available to users in MENA is relatively limited. In 2019, out of the top 50 mobile games globally as measured by gross billing and top 20 online mobile social networking platforms globally as measured by MAU, only 28.0% and 65.0% had Arabic versions, respectively, whereas a majority of these mobile games and social networking platforms have English versions, and 96% of the top 50 mobile games and 90% of the top 20 social networking platforms have Chinese versions. In addition, very few online social networking and entertainment platforms have localized their Arabic user interfaces based on MENA culture. As a result, the demand for online social networking and entertainment services from MENA is significantly underserved. Active online social networking and entertainment users in MENA on average downloaded social networking and entertainment applications 3.4 times in 2019, below the numbers in the United States, Europe, Southeast Asia and China at 6.2, 4.0, 4.3 and 13.8 times respectively. The imbalance is further exacerbated by the lack of offline social networking and entertainment options in MENA, as a result of a scarcity of night life venues due to alcohol restrictions, more than 200 days of exceptional heat in the region in a year and cultural considerations. The table below sets forth a comparison on availability of selected offline social networking and entertainment options across countries and regions:

 

     As of December 31, 2019  
     MENA      US      Europe      SEA      China  

Number of Cinema / million population

     7.3        134.5        57.9        9.8        42.9  

Retail Space (sq.ft) per population

     3.2        23.5        12.9        2.8        5.3  

As such, there is significant growth potential for the online social networking and entertainment market in MENA, as more online social networking and entertainment applications become available to MENA’s users.

Strong growth potentials for mobile Internet across the large and young population in MENA. Although six out of the 10 MENA countries have reached a mobile Internet penetration rate of greater than 100%, countries like Morocco, Jordan, Algeria and Egypt still have significant room for growth, with mobile Internet penetration rates at 80.0%, 64.0%, 73.7% and 68.0%, respectively, in 2019. In addition, MENA had a population of 247.0 million in 2019, which is expected to grow at a CAGR of 2.0% between 2019 and 2024. The expected population growth in MENA is significantly faster compared to those in other countries and regions, including the United States at 0.5%, Europe at 0.1%, Southeast Asia at 1.0% and China at 0.2% over the same time period.

Opportunity to Combine with Other Online Social Networking and Entertainment Activities in MENA

A key feature of online voice-centric social networking and entertainment platform is voice-based interactions among users. This popular feature can be combined with other online social networking and entertainment activities to further enhance user experience.

There are significant market opportunities in the combination of online voice-centric social network and entertainment and online games, in particular online casual games, such as popular card and board games. Such games are already known to or can be easily learned by mobile Internet users. A product that offers such combination benefits from a more balanced audience mix in terms of age and gender. This approach is also particularly relevant to the MENA market, given casual games often come hand-in-hand with leisure chatting, as casual games function as an icebreaker that facilitates social interactions among users.

 

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The chart below sets forth the size of online casual game market in MENA as measured by revenue from 2015 to 2024:

(US$ in Million, except percentages)

 

LOGO

 

Source:

Frost & Sullivan Report

As the social networking and entertainment platforms incorporate new content and product offerings, they will be able to capitalize on the additional users and monetization opportunities presented by these new content and product offerings.

Opportunity for Online Social Networking and Entertainment Platforms Outside of MENA

With the evolution of Internet technology, online social networking and entertainment platforms have continued to improve user experience and offer new formats that are more interactive and entertaining. As a result, the demand for online social networking and entertainment has continued to rise globally. The global online social networking and entertainment user base has grown at a CAGR of 13.4% from 2.3 billion users in 2015 to 3.8 billion users in 2019, and is expected to reach 5.3 billion users in 2024, representing a CAGR of 6.7% from 2019 to 2024.

As part of the social networking and entertainment experience, voice-based interactions are one of the most widely accepted, traditional and natural forms of social networking among human beings. Hence, there is a need for voice-centric online social networking and entertainment applications across all cultures and regions. The global voice-centric online social networking and entertainment user base has grown at a CAGR of 24.3% from 422.0 million users in 2015 to 1,005.9 million users in 2019, and is expected to reach 2,080.1 million users in 2024, representing a CAGR of 15.6% from 2019 to 2024.

In particular, countries with cultures and social networking and entertainment activities that are similar to MENA, such as Turkey, Indonesia, India and Pakistan, present favorable market opportunities for voice-centric online social networking and entertainment platforms. In these countries, a platform must maintain a fine balance between social interaction, cultural fit and privacy in order to achieve success. Moreover, regions such as Latin America, which has a strong cultural emphasis on social networking and entertainment as well as a large population, also present opportunities for social networking and entertainment platforms to grow. The online social networking and entertainment penetration rate in Latin America was relatively low at 64.0% in 2019, indicating significant room for growth.

 

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The diagram below illustrates the user base of global online social networking and entertainment market by interaction format:

 

LOGO

 

Source:

Frost & Sullivan Report

The diagram below illustrates the user base of the global online social networking and entertainment market in selected regions and countries in 2015, 2019 and 2024:

 

 

LOGO

 

Source:

Frost & Sullivan Report

(1)

Including India, Pakistan, Turkey and Indenesia.

 

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BUSINESS

Mission

We aspire to build the most popular destination for online social networking and entertainment activities in MENA.

Overview

A Community Built on Voice

Voice connects us to our fellow humans.

Voice is unique, like a person’s signature, instantly recognizable by friends.

Voice is fun, stories, songs, jokes and gossips are among the oldest, as well as the most popular, forms of entertainment.

Voice is spontaneous, no need to look for a pen or a keyboard, just open the mouth.

Voice is powerful, it is an effective medium to convey ideas and emotions.

Voice is charming, few things are as beautiful as a loved one’s voice.

Social gatherings for group chatting and other casual entertainment have been a long-standing tradition in MENA. A common example is majlis, a gathering event of friends and neighbors to socialize, exchange gifts and play casual games. Majlis is deeply ingrained in the cultures of many countries in MENA and has remained popular for centuries. Since the founding of our business, we have been helping the local people in MENA to bring their traditions online and continue their social enjoyment in the mobile Internet era. Our products mirror what people enjoy doing in majlis, cafés and other offline leisure and entertainment settings and make social interactions more convenient. Leveraging our cultural insights, we identified voice chats to be uniquely suitable for online social networking and entertainment in MENA and pioneered the development of a voice-centric mobile social networking and entertainment platform in the region.

Today, we are the largest voice-centric social networking and entertainment platform in MENA as measured by revenue in 2019, according to the Frost & Sullivan Report. We have built a large and vibrant Yalla community. In the second quarter of 2020, approximately 12.5 million users visited our platform on average each month; they spent a total of 309.5 million hours in Yalla rooms and played a total of 407.2 million rounds of casual games on Yalla Ludo. The number of paying users on our platform was 5.4 million in the second quarter of 2020. On average, active users of Yalla and Yalla Ludo spent approximately 4.5 hours and 1.4 hours on our platform every day in the second quarter of 2020, respectively.

A Market Full of Opportunities

Comprised of 10 countries and with a total population of 247.0 million as of December 31, 2019, MENA is a predominantly Arabic-speaking region with a very unique culture. The region encompasses some of the more affluent countries in the world in terms of nominal GDP per capita, including Qatar, the UAE, Kuwait and Saudi Arabia, with nominal GDP per capita in 2019 at US$66,060, US$39,806, US$28,664 and US$23,187, respectively, compared to the global average at US$11,319 in 2019, according to the Frost & Sullivan Report. Given MENA’s stable economic development with relatively high nominal GDP per capita, high mobile Internet penetration rate and high standard of social welfare, especially in the Gulf countries, people in MENA generally favor a more balanced lifestyle, thus creating a positive environment for online social networking and entertainment market.

 

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The MENA online social networking and entertainment landscape is characterized by favorable macroeconomic and demographic conditions, as illustrated by the following figures:

 

Stable Economic Development

  

Young Population

  

Stable Population Growth

  

High Mobile Internet
Penetration

3.3%

 

Expected Nominal GDP CAGR from 2019 to 2024

  

29.8

 

Median Age (years)
in 2019

  

2.0%

 

Expected Population CAGR from 2019 to 2024

  

104.8%(1)

 

Mobile Internet Penetration Rate Expected by 2024

 

Source: the Frost & Sullivan Report

(1)

Mobile Internet penetrate rate in MENA was 83.6% in 2019.

There also exists a significant imbalance between the supply of, and demand for, online social networking and entertainment options in MENA. In 2019, there were 137.0 million active online social networking and entertainment users in MENA with an average daily time spent of 230 minutes per user, substantially longer than many other countries and regions. However, the availability of Arabic online social networking and entertainment applications is limited, according to the Frost & Sullivan Report. In addition, very few online social networking and entertainment platforms have localized their Arabic user interfaces based on MENA culture. As such, the demand for online social networking and entertainment services from MENA is significantly underserved. Active online social networking and entertainment users in MENA only downloaded social networking and entertainment applications 3.4 times in 2019, below the numbers in the United States, Europe, Southeast Asia and China at 6.2, 4.0, 4.3 and 13.8 times, respectively. There is significant growth potential for the online social networking and entertainment market in MENA, as more online social networking and entertainment applications become available to users in the region.

The opportunity in online social networking and entertainment is further amplified by the relatively limited offline social networking and entertainment options in MENA as a result of local cultures and customs. Leisurely social gatherings among family members and friends are the main traditional social networking and entertainment activities in this region. By bringing such offline social interactions online, social networking and entertainment applications have made it easier for users to continue their social networking and entertainment activities anywhere and anytime.

As MENA becomes more affluent and experiences further mobile Internet penetration, and the size of the tech-savvy young generation grows, we believe the demand for online social networking and entertainment will continue to increase in this region. Moreover, as options for both online and offline social networking and entertainment are limited in MENA, its mobile users’ desire for online social networking and entertainment is still relatively overlooked compared to other countries and regions. As a result, we believe MENA is an attractive market for online social networking and entertainment, as the market is currently underserved and has not reached its full potential.

Why Users Love Us

We believe “Yalla” has become synonymous with fun and enjoyable mobile social experience in MENA. Users love our platform for the following reasons:

 

   

Superior Social Experience

We provide a mobile platform for users to enjoy superior social experience online. Our mobile applications were inspired by offline social leisure activities in MENA. We bring such activities to the mobile Internet to make them more convenient. Our flagship mobile application, Yalla, primarily features Yalla rooms, which may be viewed as the online version of majlis or cafés, where people spend their leisure time in casual chats. On the other hand, Yalla Ludo resembles a family living room where family members and friends play simple board games that are highly popular in MENA, such as Ludo and Domino. We carefully preserve the traditional

 

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features and tastes of these popular games so that our users can easily apply their offline experience to our mobile platform.

Leisure is a mentally beneficial experience, and we believe that leisure activities should be done for their own sake. Our users gather on our platform for a relaxing social leisure experience. Whether their time is spent on an hour of casual chatting or a few rounds of casual games, social interactions and companionships are what our users cherish. We aim to provide our users with a pure social leisure experience. While our users may receive virtual gifts and accumulate virtual currencies on our platform, none of the virtual gifts and virtual currencies are convertible into real money under any circumstance and our users are unable to sell such virtual items to other users through our platform. Instead, users send virtual gifts to express their appreciation of contributions by other users or gain recognition within the community.

 

   

Localized Appeal

We have developed the leading social networking and entertainment platform tailored to the local cultures of our target markets, particularly MENA. We believe localizing is much more than using the local language in user interfaces. Leveraging our insights into MENA culture and local user preferences, we infuse our user interfaces with local cultural elements. For non-English versions of Yalla, we update the user interface with color themes and logos related to specific local holidays to celebrate with our users, and virtual gifts are typically designed based on local customs. As a result of our close attention to detail, our mobile applications deliver a seamless user experience and foster a strong sense of belonging among users. Such localized appeal resonates with users and allows us to build a highly loyal and engaging user community. Our ability to faithfully preserve the traditional flavors of local offline social life also differentiates us from other platforms.

 

   

Voice-Centric Interaction Preferred by Users

Our users mainly interact through real-time voice chats on our platform. Compared to other forms of online communication such as texts, graphics or video, users are able to communicate more comfortably and effortlessly by voice. Moreover, voice chats are more suitable to the cultural norms in MENA compared to video chats. We believe our voice-centric approach has been one of the key reasons for our success in MENA.

 

   

Highly Interactive User Community

Our platform is designed to maintain users’ equal status, thereby encouraging all of them to freely communicate and interact with each other. There are no differences of influencers and followers, or gurus and newbies. Instead of passively consuming content, users come to our platform in order to actively participate in the social leisure activities we offer. We believe these social interactions foster a sense of community among users and enable our platform to attract and retain users more effectively compared to other platforms.

Our Financial Performance

We have experienced strong revenue growth in recent years. We primarily generate our revenues from users’ consumptions of virtual items and upgrade services. Virtual items primarily consist of various virtual gifts. Upgrade services primarily consist of VIP rights or premium membership on our platform. Our revenues increased by 49.8% from US$42.4 million in 2018 to US$63.5 million in 2019. Our revenue increased by 99.6% from US$26.4 million in the six months ended June 30, 2019 to US$52.8 million in the six months ended June 30, 2020.

Our innovative business model focuses on users’ interactions and social networking experience on our platform. Therefore, we do not incur significant content acquisition cost, such as incentive fees to key users or costs for acquiring media content. Our user acquisition channels have been cost-effective. As a result, we are able to achieve high profitability. Our net income was US$20.2 million and US$28.9 million in 2018 and 2019, respectively, and our net margin was 47.8% and 45.6% in 2018 and 2019, respectively. Our net income was US$11.4 million and US$25.2 million in the six months ended June 30, 2019 and 2020, respectively, and our net margin was 43.3% and 47.8% in the six months ended June 30, 2019 and 2020, respectively.

 

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Our Strengths

We believe the following competitive strengths contribute to our continued success and will help us fulfill our mission:

Leading position based on an innovative business model

We are a first mover in the development of a voice-centric mobile social networking and entertainment platform in MENA. We have successfully proven to our users the intrinsic value of voice-based, online human interactions, and cultivated a large, loyal and active base of users who appreciate and enjoy the social leisure activities available on our platform. The success of our business model has allowed us to achieve leading positions in our existing markets. Our flagship mobile application, Yalla, was the largest voice-centric social networking and entertainment platform in MENA as measured by revenue in the first half of 2020, according to the Frost & Sullivan Report. In the second quarter of 2020, Yalla was the most downloaded mobile application in the “Entertainment” category in seven countries, including Bahrain, Kuwait, Oman, Qatar, Saudi, the UAE and Algeria, and was the most downloaded voice-centric social networking and entertainment platform in the UAE, Saudi Arabia, Bahrain, Jordan, Oman, Qatar and Kuwait, according to the Frost & Sullivan Report. In the second quarter of 2020, Yalla Ludo was ranked among the top ten most downloaded mobile applications in the “Game” category in Saudi Arabia and Oman, and was the most downloaded game application of iOS App Store in the UAE, Saudi Arabia and Kuwait, according to the Frost & Sullivan Report.

Our leading position also contributes to our strong brand recognition. We are a well-known voice-centric social networking and entertainment platform in MENA. We believe our “Yalla” brand has become synonymous with fun and enjoyable mobile social experience in MENA.

Highly engaged and interactive user community

We have attracted and engaged an interactive user community. The average MAUs on our platform increased by 90.9% from 2.2 million in the three months ended December 31, 2018 to 4.2 million in the three months ended December 31, 2019, and increased by 387.3% from 2.6 million in the three months ended June 30, 2019 to 12.5 million in the three months ended June 30, 2020. The registered users on our platform increased by 116.3% from 16.8 million as of December 31, 2018 to 36.4 million as of December 31, 2019, and increased by 195.9% from 23.2 million as of June 30, 2019 to 68.6 million as of June 30, 2020. As of June 30, 2020, 54.6% of our registered users installed the Arabic version of our platform, and 45.4% installed the non-Arabic versions.

Our wide array of localized and popular social features allow users to interact in real time and cultivate a strong sense of belonging, which translates into more interactions and better user retention. On Yalla, 10.6 million users participated in voice chats in 3.3 million Yalla rooms in the six months ended June 30, 2020, and 2.3 million users sent a total of 882.2 million virtual gifts during the same period. We also achieved 67.9 thousand peak concurrent Yalla rooms and 221.3 thousand peak concurrent users on Yalla during the same period. On Yalla Ludo, users played a total of 407.2 million rounds of casual games in the three months ended June 30, 2020.

Superior user experience

Our mobile platform delivers superior social leisure experience to our users. We design the features and activities on our platform based on the different cultural backgrounds of our users to offer them localized experience. Our voice-centric approach allows users to communicate more comfortably and effortlessly, while eliminating hurdles that would have existed for video chatting due to cultural or social reasons or privacy concerns. Furthermore, our platform is designed to maintain users’ equal status and encourages all of them to freely communicate and interact with each other. There are no differences of influencers and followers, or gurus and newbies. Instead of passively consuming content, users come to our platform in order to actively participate

 

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in the social leisure activities we offer. As a testament to users’ enjoyment of our platform, our active users on average spent approximately 4.5 hours in Yalla rooms and 1.4 hours playing casual games on Yalla Ludo every day in the second quarter of 2020, making Yalla a substantial part of their social life. In the second quarter of 2020, users spent a total of 309.5 million hours in Yalla rooms. In addition, users sent a monthly average of 309.5 million one-on-one messages and posted a monthly average of 1.4 million moments on Yalla in the three months ended June 30, 2020.

Strong monetization capabilities to capitalize on immense market opportunities

We primarily generate our revenues from users’ consumptions of virtual items and upgrade services, with various transaction scenarios seamlessly integrated into our platform. The number of our paying users increased by 60.4% from 450.9 thousand in the last quarter of 2018 to 723.5 thousand in the last quarter of 2019, and increased by 578.4% from 790.1 thousand in the second quarter in 2019 to 5.4 million in the second quarter in 2020. Our net margin was 47.8% in 2018, 45.6% in 2019 and 47.8% in the six months ended June 30, 2020. Our strong monetization capabilities reflect the premium user experience we offer on our platform and the uniqueness of our business model. It also allows us to reinvest and fund future technology and product innovations. Furthermore, as a result of our low content cost, our business is more cost-effective compared to competitors that focus on purchasing professional-generated content.

Given our strong monetization capabilities, we are well positioned to capitalize on the immense market opportunities in MENA. MENA’s stable economic development with high GDP per capita, high mobile Internet penetration rate and high standard of social welfare, especially in the Gulf countries, create a positive environment for online social networking and entertainment market. There also exists a significant imbalance between the supply of, and demand for, online social networking and entertainment options in MENA. In 2019, there were 137.0 million active online social networking and entertainment users in MENA with an average daily time spent of 230 minutes per user, substantially longer than many other countries and regions. However, options for online social networking and entertainment are more limited in MENA, compared to markets such as the United States, Southeast Asia, Europe and China. In light of these factors, there is significant growth potential for the online social networking and entertainment market in MENA.

“Glocalized” and experienced management

By making MENA their home, our management team has gained valuable exposure to the region’s rich cultures. They have extensive experience working on the ground and more importantly, they live and socialize with members of the local communities, thereby acquiring a deep understanding of users’ behavior and preferences in MENA, which is critical to our success in localizing our services. Certain members of our management team are natives of MENA, and they offer valuable insights as to the local customs. In addition, our management team has extensive experience in mobile Internet and technology sectors. We believe such combination of in-depth local knowledge and strong industry expertise is unique and difficult to replicate, forming a high barrier to entry.

Proven track record in expanding product offerings and geographic coverage

Our open and user-friendly platform brings offline social leisure activities to the mobile Internet to make them more convenient. Our existing products are inspired by voice chats and board games, both of which are highly popular in MENA. We launched the Arabic version of Yalla in April 2016 and have quickly established a strong presence and leading position in MENA. We launched Yalla Ludo in the third quarter of 2018 to capture users’ demand for casual games, and the application has rapidly gained popularity. Technology creates endless possibilities, and we will continue to develop new ways for users to socialize and interact on the mobile Internet.

We believe social leisure is a fundamental need for people in every society and culture, and we are confident of our ability to leverage our existing experience and know-how to successfully expand the reach of our platform to more underserved markets. As of June 30, 2020, our platform was available in over 100 countries, with Yalla in eight languages and Yalla Ludo in three languages.

 

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Our Strategies

To fulfill our mission, we plan to pursue the following strategies to grow our business:

Expand user base

We plan to rapidly expand our user base by both further penetrating our existing markets and expanding into new markets. We will promote brand awareness and acquire new users through various online and offline channels. We may also launch new applications that offer different mobile social leisure activities to attract new users.

We will continue to take a proactive yet prudent approach to our expansion into new markets. We have been actively monitoring and analyzing the demographic, social and economic conditions of various countries and regions in the world and intend to continue to do so in the future in order to identify the right markets to enter at the right time.

Enhance user experience

The success of our business depends on our ability to continuously improve our user experience. We have built a loyal and engaging user community by offering them superior user experience tailored to local cultures. As we expand our user base to include users from additional cultural backgrounds, we will continue to introduce highly localized features to optimize the experience for such users. We also strive to maintain a careful balance between maintaining consistent user experience and introducing new features and applications that cater to changing preferences and tastes of our user base.

In addition, we plan to expand and enhance our dedicated customer service teams to better serve our users and increase their activity level on our platform.

Enrich our platform with new products

We plan to continue to study popular offline social leisure activities in MENA and move them to the mobile Internet. We are continuously testing new features and new mobile social leisure activities that we may officially introduce to our users in the future. Through expanded product offerings, we aim to make our platform more integrated with users’ everyday life and bring more value to them.

Invest in technology

Technology helps us better understand our users and improve our business operations. We also rely on technology to provide better user experience and improve our operating efficiency. We plan to further strengthen our technology and product development capabilities by recruiting talents in relevant fields. We intend to focus on technologies relating to content recommendation algorithms and online security.

Explore strategic partnerships

In addition to organic growth, we may explore strategic partnerships to further accelerate our business expansion. Such partnerships may include opportunities involving user acquisition, technology, content and other resources to further strengthen our platform.

Our Business

The Yalla Community

We have built a loyal and highly interactive Yalla community by offering superior user experience tailored to local cultures. A substantial number of our users are Arabic-speaking, and activities on our platform mirror popular offline social leisure activities in MENA.

 

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The chart below illustrates ways for users to leisurely gather, enjoy social entertainment and build social networks in the Yalla community. As a core feature of our platform, Yalla rooms enable voice-based, real-time, many-to-many interactions. The key additional forms of interactions available on our platform are casual games, messaging and moments, each offering differentiated value propositions to users. Casual games, such as Ludo and Domino, cater to users’ instincts for playing and fun. Messaging allows users to build friendships through in-depth conversations. Moments satisfy users’ desire for self-expression. These interactive features are self-reinforcing and help to enhance user engagement and promote a sense of community among our users.

 

LOGO

A Refreshing and Fun-filled Journey into the Yalla Community

We have developed the leading voice-centric social networking and entertainment platform tailored for MENA. For Arabic-speaking users, the journey into the Yalla community is both familiar and refreshing. The Yalla community is familiar to a newcomer, because our platform faithfully preserves the traditional flavors of offline social life in MENA. The vibrant Yalla rooms resemble majlis and cafés, where people spend their leisure time in casual chats. The experience is also refreshing, since we are different from other mobile platforms that use local languages without incorporating local cultures. Users find our localized features heart-warming and develop a sense of belonging towards the Yalla community.

By way of illustration, the following paragraphs describe the refreshing and fun-filled journey of an Arabic-speaking new user into the Yalla community, as such user explores the interactive features on our platform. These interactive features play a critical role in our efforts to enhance user engagement and monetize user base. We call this exemplar user Amir to simplify the description below.

Welcoming Experience For Newcomers

To convert a new user into a loyal user, we endeavor to quickly familiarize a newcomer like Amir with our platform, especially Yalla rooms. Through this welcoming experience, we help Amir integrate into the Yalla community.

 

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Welcoming Page. When launching Yalla for the first time, Amir is presented with a welcoming page. To make Amir feel at home, the page is customized based on his language setting. The style of our user interface is casual, fun and refreshing, which reflects the spirit of the Yalla community.

 

   

Room Recommendations. Yalla rooms are a core feature of our platform. After Amir launches Yalla, our platform automatically recommends rooms for him. He may choose a room based on its interest tags, its number of users or other information displayed on the screen. Our room recommendations feature is user friendly and allows Amir to explore a broad variety of options.

Set forth below are screenshots of the welcoming page and room recommendations.

 

LOGO

 

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Vibrant Yalla Rooms

Yalla rooms provide a virtual meeting place for our users to leisurely gather and enjoy voice-based, many-to-many social interactions. After Amir enters a Yalla room, he may participate in voice chats, non-voice chats, gifting and other interactive features, all of which are designed to foster a lively online community. The screenshot of a Yalla room is set forth below.

 

LOGO

 

   

Voice Chats. Among the first things that capture Amir’s attention are the lively voice chats. The other users in the room notice Amir and warmly greet him, which makes him more interested in the conversations. He is then invited to speak on a microphone. A Yalla room can have up to ten microphones, which allow ten users to speak at the same time and have their voice heard by others in the room. Given its leisure nature, voice chats can cover any topic and may spontaneously wander from one topic to another. We believe this is one of the main reasons why users are attracted to our Yalla app—they can chat freely, which is a very enjoyable and relaxing social experience.

 

   

Text Chats. The Yalla room interface contains a section that displays non-voice chats. This section is also very lively, and users may send texts, emojis or pictures.

 

   

Gifts. After Amir tells a good joke, he receives a virtual gift from another user. He feels delighted by the gift and wishes to send gifts as well. After he opens the list of available gifts, he is immediately impressed by the beautiful designs. As part of our localized appeal, the virtual gifts offered to Arabic-speaking users are based on local customs in MENA. Users send virtual gifts to express their appreciation of contributions by other users or gain recognition within the community. To incentivize gifting, we have created rankings to recognize users who have given the most gifts, as well as users who have received the most gifts, and we refresh these rankings on a real-time basis.

 

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Additional Interactive Features. Amir also explores other interactive features that make Yalla rooms lively. Users can upload photos to share with others in a room. Various simple game tools, such as rock-paper-scissors, are available for users to integrate with the small games they play in Yalla rooms. A user can also share virtual currencies with others under the “Lucky Golds” feature to bring excitement to the room. A screenshot of these interactive features is set forth below.

 

LOGO

Room recommendations among friends are an effective way for users to find interesting rooms, thereby making these rooms more lively. Amir can recommend Yalla rooms to his friends by sending them room invitations. He can also view the rooms that his friends are currently in and enter the room that interests him the most.

As Amir becomes more involved in the Yalla community and establishes his own social circle, he wants to create his own room and take the center of the stage. As the room chair, Amir is able to set interest tags of the room, which reflect his preferred topics for conversations. After creating his Yalla room, Amir is able to meet more people of similar interest or backgrounds. With more like-minded friends in the Yalla community, Amir spends more time on our platform.

Messaging and Moments

To foster social connections in the Yalla community and enhance user stickiness, we offer additional features for users to interact and access entertaining content.

 

   

Messaging. We provide a two-way messaging function on Yalla. After Amir adds another user as a friend, they can exchange private text messages directly without entering a Yalla room or experiencing any interruption by other users. Therefore, they can engage in more in-depth conversations to bond further. Besides texts, Amir is also able to send voice clips and gifts on the messaging page.

 

   

Moments. Moments are a mini-blog feature on our platform. Besides his friends’ moments, Amir is also able to “follow” users who cover topics that interest him. We have embedded interactive features in moments to facilitate user interactions. When Amir finds a moment that he enjoys, he can share with friends, comment on it or “like” it. He can also give a virtual gift to the user who created the moment. Gifts allow Amir to express appreciation for good content, thereby building social connections with

 

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like-minded users. Gifts also incentivize users to post high quality content, which will in turn make the moments feature more attractive to users. In addition, Amir can explore “featured” and “topics” sections to find more interesting content. In the “featured” section, we select moments that are popular among users. The “topics” section presents moments based on their topics. The “topics” section helps users find friends with common interest, while also facilitating the creation of more in-depth content in the Yalla community.

Screenshots of a messaging page and a moments page are set forth below.

 

LOGO

 

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Casual Games

A friend invites Amir to play two casual games on our platform, Ludo and Domino, and he eagerly checks out these games on Yalla Ludo, as both Ludo and Domino are highly popular board games in MENA and can be learned by beginners with relative ease. Screenshots for Domino and Ludo games are set forth below.

 

LOGO

We offer casual games to enrich the entertainment options on our platform and further enhance user interactions. These games help Amir make more friends by serving as icebreakers. While playing games, he can voice-chat and bond with other players. Our system provides two options for player matching in a game. Amir can choose to be assigned with a player that our system selects based on certain criteria, such as language setting, and meet new friends through this function. He can also play the games with friends. Amir needs to spend virtual currencies in order to start a game on Yalla Ludo, and the winner of the game can keep a portion of the virtual currencies paid by the other player. He can also use virtual currencies to gain certain advantages in games. In addition, Amir may socialize with other users through chat rooms on Yalla Ludo.

Localized Online Events

We organize localized online events, most of which are based on traditional holidays, to further enhance user engagement and interactions. In 2019, we organized a total of 22 online events, 15 of which were on the Arabic version of Yalla. In the six months ended June 30, 2020, we organized a total of 18 online events, 9 of which were on the Arabic version of Yalla. Amir likes our online events, and he participated in the Eid al-Fitr (Festival of Breaking the Fast) event on the Arabic version of Yalla in 2019. Eid al-Fitr is a religious holiday celebrated by Muslims worldwide that marks the end of Ramadan, the Islamic holy month of fasting. From June 4 to June 13 in 2019, our users celebrated Eid al-Fitr on our platform by playing games traditionally associated with the holiday. 59.8 thousand users participated in the event.

Monetization

We primarily generate our revenues from users’ consumption of virtual items and upgrade services, which are purchased with our virtual currencies. Virtual items primarily consist of various virtual gifts. Upgrade

 

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services primarily consist of VIP rights or premium membership on our platform. On Yalla Ludo, users can access the basic functions by spending our virtual currencies. They can also use virtual currencies to purchase virtual items and upgrade services to enhance their experience on the mobile application. Users buy our virtual currencies through third-party payment platforms. Our virtual currencies are non-refundable and do not have expiration date.

We believe our users come to our platform primarily for an enjoyable social experience, and not to make money. We have designed our platform settings to ensure that our users cannot use our platform for money-making purposes. On Yalla, while our users may receive gifts from other users, such gifts cannot be redeemed into real money. Similarly, on Yalla Ludo, while our users may win virtual currencies from other users that they play games with, they can only use such virtual currencies to play more games and/or gain advantages in games. Our users are not allowed to convert any of our virtual currencies into real money or sell our virtual currencies to other users under any circumstances.

Customer Service

Our customer service is available on a 24/7 basis. We engage third-party service providers to perform customer service tasks. Our in-house customer services and operations staff is responsible for managing the customer service representatives employed by the third-party service providers and providing customer services to certain high-paying users, as well as other aspects of operating our online platform.

Our users may submit inquiries, feedbacks or complaints by sending messages via Yalla rooms and the “FAQ & Feedback” portals in our mobile applications at any time. Upon receipt of complaints or inquiries, our customer service representatives will conduct investigations and promptly provide users with explanations and solutions for the issues they report. We also utilize an automated system to address certain common questions from users. We require complaints to be attended to within one business day.

In addition to the routine customer service that is available to all users on our platform, we also provide premium customer service to certain high-paying users. We identify and contact these users and offer them 24/7 access to customer service representatives, which allows the users to receive responses and services in a more timely manner.

Content Management and Monitoring

An engaged and interactive user community is key to our success and we strive to cultivate and maintain a healthy and inviting culture. Our terms of service set out types of content strictly prohibited on our platform, and we have also developed a content monitoring system that utilizes primarily automation, as well as manual screening, to filter inappropriate content. Our operations staff is responsible for reviewing and handling content on our platform to maintain a healthy ecosystem and promote a positive user experience. They are aided by software and technologies to screen text and images that users upload to our system.

We also encourage users to assist us with content monitoring. Room chairs and ministers are incentivized to maintain a healthy environment in their rooms to attract and retain members. They have the ability to remove users from their rooms for rule violations. Other users are able to conveniently notify us about inappropriate behavior on our platform.

Branding and Marketing

We believe that our interactive community culture and large user base have led to repeated user visits and a strong word-of-mouth effect that strengthens awareness of our brand among users.

As a supplement to word-of-mouth marketing, we often promote our brand and platform through online marketing. We market our platform through advertisements on app stores, Google Ads and various social media

 

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applications, such as Facebook, Twitter and Snapchat. We also collaborate with social media influencers to promote our platform.

Technology

Our advanced and stable technology infrastructure and capabilities allow us to provide users with reliable access to our platform and ensure superior user experience. Our platform incorporates the following features:

 

   

Live audio streaming capabilities. We implement third-party audio streaming solutions from industry-leading providers, including Shanghai Zhaoyan Network Technology Co., Ltd., or Agora, and Shenzhen Zego Technology Co., Ltd., or Zego, on our platform. We also strive to adopt the latest industry standards for mobile audio interactions. Our platform enables real-time multi-cast audio interactions among users, which provides our users with a superior experience. Our mobile applications are designed to run smoothly on all mobile phones, with minimum bandwidth requirements of approximately 512 kilobytes per Yalla room user per second.

Our agreement with Agora has a term of three years and is due to expire in November 2021. The agreement is automatically renewable upon the expiration of the initial term. The agreement may be terminated by either party for cause, such as breach of contract, with 30 days written notice. Our agreement with Zego has a term of one year and is due to expire in March 2021. The agreement is automatically renewable for a one-year term upon the expiration of the initial term. The service fees under each of the agreements are based on the amount of data transmitted and are settled on a monthly basis.

 

   

Content recommendation engine. We have been developing and implementing an individualized content recommendation engine. We established this engine based on the user behavior data that we have accumulated from 68.6 million registered users as of June 30, 2020, analyzed through our proprietary algorithms to achieve accurate user profiling. Such accurate user profiling in turn allows our content recommendation engine to match users with their favorite content.

 

   

Cloud-based network infrastructure. We have deployed a cloud-based network infrastructure designed to handle multi-party real-time online audio interactions. We currently use servers provided by an industry-leading cloud service provider that are hosted in data centers in Hong Kong and Germany. Our cloud-based network infrastructure provides high quality data delivery and allows multiple users to interact online from anywhere in the world conveniently in real time. Our system is designed to ensure scalability and reliability to support growth in our user base. The number of servers contributes significantly to our fast streaming speed and reliable services, and can be expanded with comparative ease, given the relative convenience of renting data centers to host additional servers in any high traffic region in our network.

We entered into a framework agreement with the cloud service provider for services to support our Yalla mobile application with a term of one year, which is due to expire in February 2021. The agreement may be terminated by either party for cause, such as breach of contract. We also entered into an agreement with the cloud service provider for services to support our Yalla Ludo mobile application in December 2019. The agreement does not provide for a finite term and may be terminated by either party without cause with one month written notice or for cause, such as breach of contract, with immediate effect upon written notice to the other party. The service fees under each of the agreements are based on the actual services provided.

Product Development

We believe that our ability to develop mobile applications, product features, functions and services tailored to the needs of our user base has contributed to the success of our business. We have been able to rapidly scale our product development output and deliver an increasing range of products and services to fulfill the needs of

 

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our expanding user base and optimize the quality of user experience. Our technology and product development team works on both back-end and front-end development of our products and services, including (a) the enhancement of network and server structures, as well as data distribution and transfer technologies to achieve lower latency and reduce interruptions, and (b) the creation of new features and functions to meet the diverse needs of our users. We plan to continue to invest in technology and product development in order to reinforce and solidify our industry-leading position.

Intellectual Property

Intellectual property is an important aspect of our business, and our practice is to seek protection for our intellectual property as appropriate. We safeguard our proprietary technologies through contractually requiring our employees to keep all our proprietary technologies confidential, as well as seeking to protect our technologies through patents and copyrights.

Our trademarks, including “Yalla,” and “Yalla Ludo,” are a critical component of the value of our business. As of June 30, 2020, we had 34 registered trademarks, 25 pending trademark applications and 35 registered copyrights in 20 jurisdictions, including a number of jurisdictions in MENA. As of June 30, 2020, we had 19 domain names, including yallatech.ae.

We face certain risks relating to our intellectual property. For further information, see “Risk Factors—Risks Relating to Our Business and Industry—Our intellectual property may not provide adequate protection to us, and we may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position” and “Risk Factors—Risks Relating to Our Business and Industry—We may be subject to intellectual property or other third-party rights infringement claims, which could be time-consuming and costly to defend and may result in diversion of our financial and management resources.”

Data Privacy and Protection

We consider the protection of the personal privacy of each of our users to be of paramount importance. We believe it is crucial that our users understand how we handle their information so that they feel comfortable while accessing our platform. To this end, we have developed a company-wide policy on data collection and use practices to preserve individual privacy rights in all respects, the key principles of which include: (i) providing adequate notice to users as to how their data is being collected and used, (ii) encrypting user data stored on our system, (iii) limiting access of user data to authorized employees and (iv) making reasonable efforts to prevent loss or leakage of user data. We believe the measures we take with respect to data privacy and protection are consistent with industry standards. For risks relating to data privacy and protection, see “Risk Factors—Risks Relating to Our Business and Industry—Concerns about collection, use, retention, transfer, disclosure, processing and security of personal data could damage our reputation and deter current and potential users from using our platform and services, or subject us to significant compliance costs or penalties, which could materially and adversely affect our business, financial condition and results of operations.”

Competition

We operate an innovative business model of building a voice-centric social networking and entertainment community. As one of the few players in this market, we directly compete with other voice-centric social networking and entertainment platforms for users. In addition, we compete with other social networking and entertainment platforms. Some of our larger competitors have substantially broader service offerings and more working capital to support heavy spending on sales and marketing. We believe that our ability to compete effectively for users depends on many factors, including user experience on our platform, preservation of our vibrant community culture, effectiveness of content monitoring and review, our marketing efforts and reputation of our brands.

 

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In addition, as our business continues to grow, we face significant competition for highly skilled personnel, including management, engineers, product managers and sales and marketing personnel. The success of our growth strategy depends in part on our ability to retain our existing personnel and recruit additional highly skilled employees.

Employees

We had 97, 189 and 274 employees as of December 31, 2018 and 2019 and June 30, 2020, respectively. Our employees are based across Dubai, Hangzhou and Shenzhen. The following table sets forth the number of our employees by function as of June 30, 2020.

 

     Number of
Employees
     % of total
employees
 

Function

     

Platform maintenance and product development

     163        59.5  

Customer services and operations

     66        24.1  

General and administration

     32        11.7  

Sales and marketing

     13        4.7  
  

 

 

    

 

 

 

Total

     274        100.0  
  

 

 

    

 

 

 

We primarily recruit our employees through online postings, headhunters, internal referrals or on-campus recruiting. Our success, to a considerable extent, depends on our ability to attract, retain and motivate qualified personnel. Therefore, as part of our human resources strategy, we offer employees competitive salaries, performance-based cash bonuses and promotions, engagement activities, various welfare as well as other incentives. We design and provide training to our employees regularly in order to enhance their professional skills and foster their career development.

There is no mandatory employee social security plans in the United Arab Emirates and we currently provide commercial healthcare insurance to our full-time employees based in Dubai. In China, we participate in housing fund and various employee social security plans that are organized by applicable local municipal and provincial government authorities, including housing, pension, medical, work-related injury and unemployment benefit plans, under which we make contributions at specified percentages of the salaries of our employees. We believe that we have complied with the relevant local labor and social welfare laws and regulations in all materials respects. We additionally provide commercial healthcare insurance to our full-time employees and enhanced healthcare insurance to senior management. For details, see “—Insurance.”

We typically enter into standard employment, confidentiality and non-compete agreements with our senior management and core personnel. These contracts include a standard non-compete covenant that prohibits the employee from competing with us, directly or indirectly, during his or her employment and for no longer than two years after the termination of his or her employment, provided that we pay compensation during the restriction period in accordance with PRC laws and regulations in this regard.

Bonuses are generally discretionary and based in part on employee performance and in part on the overall performance of our business. We have granted, and expect to continue to grant, share options to our eligible employees in the future to incentivize their contributions to our growth and development.

We believe that we maintain a good working relationship with our employees, and we have not experienced any material labor disputes.

Properties

Our headquarters are located at our offices in Dubai, the United Arab Emirates, where we manage our corporate affairs, as well as maintaining certain sales and marketing and customer service personnel. Our technology and product development team is based in our offices in Hangzhou, China.

 

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We currently lease and occupy approximately 2,662 square feet of office space in Dubai, approximately 2,265 square meters of office space in Hangzhou and approximately 541 square meters of office space in Shenzhen. These leases have terms of one year or three years.

Insurance

We maintain the statutory social insurance as required by the relevant local laws and regulations. In addition, we maintain commercial healthcare insurance for all full-time employees and enhanced healthcare insurance for senior management. However, we do not maintain product liability insurance or insurance policies for our properties. We believe that our existing insurance coverage of our business is consistent with what we believe to be customary for business of our size and type and in line with the standard commercial practice in our industry.

Legal Proceedings

We are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial costs and diversion of our resources, including our management’s time and attention. See “Risk Factors—Risks Relating to Our Business and Industry—We may be subject to intellectual property or other third-party rights infringement claims, which could be time-consuming and costly to defend and may result in diversion of our financial and management resources” and “Risk Factors—Risks Relating to Our Business and Industry—User misconduct and misuse of our platform may adversely impact our brand image, and we may be held liable for information or content displayed on, retrieved from or linked to our platform, or distributed to our users, and the relevant local authorities may impose restrictions on access to our platform.”

 

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REGULATIONS

This section sets forth a summary of the most significant rules and regulations that affect our business activities in the United Arab Emirates and China.

United Arab Emirates

Overview of the Emirate of Dubai

Introduction

The UAE is a federation of seven emirates made up of Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Fujairah and Ras Al Khaimah. The UAE has one of the most liberal business environments in the Middle East focused around economic liberalization and promoting the role of the private sector. There are currently no exchange controls on the remittance of profits or repatriation of capital. Additionally, the UAE enjoys low tariffs, and there are virtually no restrictions on foreign trade.

Legal System

There are three primary sources of law in the UAE: federal laws and decrees, local laws and Sharia (Islamic law). The secondary source of law is trade custom or practice. In the absence of federal legislation on areas specifically reserved to federal authority, the ruler or local government of each emirate will apply his or its own rules, regulations and practices. Pursuant to its right under the federal constitution (established between the emirates on the creation of the UAE and permanently adopted in July 1996), or the UAE Constitution, the Emirate of Dubai has elected to maintain its own court system, separate from that of the federation, and the courts of Dubai have sole jurisdiction to hear cases brought in Dubai. Although both federal and Dubai courts have a similar three-tier structure (Court of First Instance, Court of Appeal and Court of Cassation/Supreme Court), Dubai has retained complete autonomy over its courts in all matters, including the appointment of judges. In accordance with the UAE Constitution, however, the Dubai courts will first apply federal law where this exists and, in its absence, the laws of Dubai. There are federal codes of law which apply in Dubai and the other emirates dealing with the most important and fundamental principles of law, including civil, commercial, civil procedure, companies, intellectual property, immigration, maritime, industrial, banking and employment law. In contrast, many of the laws enacted by the ruler of the Emirate of Dubai, or the Ruler, relate to matters which are more administrative in nature, such as the establishment and operation of government affiliated entities.

In addition, free zones have been created in Dubai. Such free zones have, to varying degrees, different rules and regulations compared to the rest of the emirate. For example, the financial free zones in Dubai are independent of the civil and commercial laws of the UAE, but remain subject to UAE criminal law. Other types of free zones are still subject to the civil, commercial and criminal laws applicable in the UAE, provided that such laws do not contradict the rules and regulations of the relevant free zone. Our UAE subsidiary is not incorporated in a financial free zone and therefore remains subject to civil, commercial and criminal laws in the UAE.

Article 5 in the Federal Law No. 2 of 2015 concerning Commercial Companies Law, or the UAE Companies Law, states that the provisions of the UAE Companies Law shall not apply to companies established in the free zones if a special provision to this effect is contained in the laws or regulations of the relevant free zone.

With the exception of the financial free zones, which require a federal decree, the creation of separate legal systems for each free zone is primarily authorized by local laws or decrees which are issued by the ruler of each concerned emirate.

 

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Free Zone Regulations

Our subsidiary in the UAE, Yalla Technology FZ-LLC, is located in the Dubai Creative Clusters free zone, the DCC free zone, in the Dubai Internet City cluster, and is therefore governed by certain of the federal laws of the UAE, certain of the local laws of the Emirate of Dubai and the regulations of the Dubai Creative Clusters.

The DCC free zone was created in 2000 pursuant to Law No. 1 of 2000 on Establishing the Technology, Electronic Commerce and Media Free Zone, or the TECOM Law. The DCC free zone was initially known as Dubai Technology and Media Free Zone. In 2014, the Law No 15 of 2014 Concerning the Creative Clusters in the Emirate of Dubai, or the DCC Law, was implemented. The DCC Law changed the name of the free zone from the DTMFZ to Dubai Creative Clusters, or DCC. The TECOM Law was not repealed when the DCC Law was brought into force but was amended as to replace all references to the DTMFZ with references to the DCC free zone. It was further stipulated that the DCC Law would prevail over that of the TECOM Law should a conflict arise between the two.

The Dubai Development Authority, or the DDA, is the primary regulator of the DCC free zone. The DDA was created pursuant to the TECOM law and is responsible for providing licenses for all companies incorporated in the DCC free zone. Businesses that have been incorporated in the DCC free zone are subject to the regulations of the DDA, together with the laws of Dubai and the UAE (to the extent applicable).

Regulations Relating to Companies

The principal legislation governing companies incorporated in the DCC free zone, such as our UAE subsidiary, is the Dubai Creative Clusters Private Companies Regulations 2016, or the DCC Company Regulations. The DCC Company Regulations exempt companies incorporated in the DCC free zone from the ambit of the UAE Companies Law and permit 100% foreign ownership.

Regulations Relating to Commercial Activities

The provisions of Federal Law No. 18 of 1993 on commercial transactions, or the Commercial Code, generally apply to companies incorporated in the DCC free zone. The Commercial Code covers a broad range of commercial and banking transactions and contains provisions relating to, among other things, commercial obligations, commercial pledges, commercial agency, commercial papers and bankruptcy and liquidation.

The provisions of Federal Law No. 5 of 1985 regarding civil transactions, or the Civil Code, generally apply to commercial transactions to the extent they do not conflict with the corresponding provisions of the Commercial Code. The Civil Code governs, among other things, basic contract law principles, property rights and the creation of various security interests. The Civil Code also contains general provisions imposing liability arising from intentional and negligent acts. Such provisions are derived from the disciplines and principles of Sharia. The Civil Code further provides for a distinction between direct and indirect (or consequential) harm, but does not define these terms.

Regulations Relating to Employment

UAE Federal Law No. 8 of 1980 regulating labor relations, or the Labor Law, applies to all private-sector employees working in the UAE, except for those working in the Dubai International Financial Centre or the Abu Dhabi Global Market and therefore applies to our subsidiary. The Labor Law governs, among other things, minimum employee leave entitlements (for example, sick leave, annual leave and maternity leave), working hours and overtime, work-related injuries and safety standards. In relation to the termination of employment, the Labor Law differentiates between limited and unlimited term employment contracts, with different rules and requirements applying to each. The Labor Law also sets out the compensation which may be awarded to an employee who has been unlawfully dismissed. Such compensation may not exceed the equivalent of three months’ salary.

 

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The Labor Law also provides for compensation payable to workers for injuries sustained during the course of their employment. The Labor Law also provides for a mandatory end of service gratuity to be paid to all employees upon termination of their employment. Employers and employees may not contract out of these minimum standards of employment established by the Labor Law. Trade unions and collective bargaining are not recognized under the Labor Law.

In addition to the Labor Law, all companies operating within Dubai Internet City (part of the DCC free zone) are also subject to the Dubai Technology and Media Free Zone Employment Regulations 2004, or the Employment Regulations. The Employment Regulations authorize the DDA to sponsor employees’ residence visas, and contain provisions relating to the identity cards and passports of employees, the provision of medical care, as well as health and safety standards for employees. While applications for visas in the DCC free zone are made to the DDA, it is ultimately the federal immigration authority that grants these visas to the employees of companies in the DCC free zone. The DDA is also authorized to mediate labor disputes (as a preliminary step prior to litigation in the Dubai Labor Court) and to impose fines on companies for failure to comply with the Labor Law or the Employment Regulations. The Labor Law and the Employment Regulations are applicable to all employees working for companies within the DCC free zone, including foreign nationals.

Regulations Relating to Technology Media and Telecommunications

General Content Standards

Notwithstanding that the Federal Law No.15 for 1980 Concerning Press and Publications, or the PPL, is now almost 40 years old, it is still the key source for content regulations, which has been confirmed in later resolutions from the National Media Council, or the NMC, the regulator in this area, in particular the Cabinet Resolution No. 23 of 2017 Concerning Media Content, or 2017 Cab Resolution, and the Chairman of the Board’s Resolution No. 26 of 2017 on Media Content, or the 2017 Content Resolution. The basis for all content restrictions in respect of media and online platforms comes from the PPL.

The prohibitions contained in Chapter 7 of the PPL include, among other things, no criticism of any of the rulers of the individual emirates that constitute the UAE; no instigation against Islam or the system of ruling; no harm to the interest of the state or values of society; no opinions that violate public discipline and order or circulation of subversive ideas; no instigation of criminal activity or incitement of hatred; no publication of confidential communications without permission; no blemishing of a president of, or agitating relations with, an Arab, Islamic or friendly state; no article defaming Arabs and their civilization and heritage; no news on an ongoing criminal investigation, if the judge has ordered confidentiality; no information about an individual’s private life, if such information is meant to disgrace the individual; no divulgence of a secret that may cause reputational harm; no publication to coerce payment or other benefit; no false news (with bad faith); nothing inconsistent with public order, or that is misleading to the public. Article 5 of the 2017 Content Resolution has guidelines that clarify these prohibitions.

Also of importance is the operation of the Telecommunications Annex 1-IAM Regulatory Policy, under Federal Law No 3 of 2003 regarding the organization of the Telecommunications Sector, or the IAM. The IAM grants the Telecommunications Regulatory Authority, or the TRA, the broad ability to block websites and digital content (including games). In particular, the TRA has the ability to block a website that contains content that is “contrary to the public interest, public morality, public order, public and national security, Islamic morality or is otherwise prohibited by any applicable UAE law, regulation, procedure, order or requirement.” As a result, the TRA has the authority to block any website involving inappropriate content, such as pornography, nudity, illegal drugs or gambling.

Finally, Federal Law No. 5 of 2012 on Combatting Cybercrimes, or the CCL, criminalizes certain online behavior and could, if a complaint is raised, result in criminal charges being laid against the entities and people involved with the offending content (such as authors, editors, publishers). Offending content may include pornography, gambling, defamation, breach of privacy, sedition and similar incitements, and promotion of weapons.

 

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Advertising and Commercial Content

Advertising is primarily regulated under the 2017 Content Resolution. Given that the 2017 Content Resolution refers specifically to “advertising” as being part of the definition of “content,” the prohibitions contained within the 2017 Content Resolution that apply to content also apply to advertising. The 2017 Content Resolution is media-neutral in application and apply to traditional advertising as well as advertising on social media and online content (including gaming). The 2017 Content Resolution also addresses specific issues associated with advertising (for example, the separation of advertising from other content).

The 2017 Content Resolution specifically notes that “[i]t shall be prohibited to advertise any forbidden materials as per the applicable rules and laws such as tobacco.” Various federal and Dubai laws prohibit the advertisement of alcohol, including both “direct” and “indirect” promotion of alcohol. The 2017 Content Resolution states in Article 44(7) that “[n]o advertisement on alcoholic drinks or prohibited drugs shall be allowed by any means directly or indirectly.”

As far as identifying advertising content, Article 19 of the 2017 Cab Resolution states, “[a]ll paid advertising material must be explicitly and clearly stated as paid advertising material.” Article 43 of the 2017 Content Resolution further provides that “[a]ll paid advertising materials or items shall include a clear and candid indication that they are paid advertising materials or items.” This requirement applies to all advertising in all types of media, including social media.

Article 45(7) states that “the identity of the advertisement must be made clear and be presented as they are special and independent from the other advertising and editing materials or items, and borders must be placed to separate such advertisement from any other material or item as well as intervals or time breaks in case of TV and radio broadcasting.”

The Guidelines for Advertising, issued in 2018, provide a summary of laws applicable to advertising. It also contains a list of special conditions for social media. Key points include the use of the hashtag “#ad” or “#paid_ad” for disclosure. Phrases such as “thank you to …” or “in cooperation with…” are not sufficient. These hashtags must be legible and easy to find, and readers should not have to scroll down to find them. Video content must include a verbal reference to the disclosure within the video.

Online Content Licensing and Standards

Online content can be distributed without the need for a license. Licenses are only required for traditional media, unless the activity falls under the scope of the 2018 Electronic Media Regulation Resolution, or the E-Media Law. The relevant licensing requirement applies only to distributors based within the UAE. The E-Media Law opens with the statement that “this Resolution applies to all Electronic Media activities carried out within the State, including those in free zones.”

Article 4 of the E-Media Law addresses the issue of what will be “Licensable Electronic Media Activities”; which includes: website of trading, offering and selling of audiovisual and print material; on-demand electronic publishing and printing; specialized websites (e-ads, news sites, etc.); as well as any electronic activity that the NMC may determine to add.

Article 4(3) and 4(4) of the E-Media Law gives rise to uncertainty. Article 4(3) is uncertain as to the scope of “specialized websites.” From conversations held between Al Tamimi & Company and the NMC, the term is understood to cover commercial websites that replicate newspapers, traditional broadcast and magazines. Currently, there are no additional licensable electronic activities set out by the NMC under the broad powers granted under Article 4(4). Additional licensing requirements could be implemented in the future, and it is conceivable that such requirements could be extended to mobile apps and/or online gaming sites.

 

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Defamation

In the UAE, defamation is a criminal matter. If the defamation is online, it is covered by the CCL. In both cases of offline defamation and online defamation, the relevant department within the police force will determine the party that it wishes to pursue for the violation, such as author, editor and/or publisher. As a result, all publishers of online content have the obligation to screen defamatory content.

Privacy—the Publishing of Private Information by a User

Article 31 of the UAE Constitution states that “[f]reedom of communication by post, telegraph or other means of communication and the secrecy thereof shall be guaranteed in accordance with law.” Nonetheless, the scope of the term “privacy” is not actually determined or set out in any law, meaning that it is almost entirely subjective and therefore can be complex in application.

Article 378 of the Federal Law No. 3 1987, or the UAE Penal Code, states:

“Whoever publishes news, pictures or comments related to the secrets of private or family life of persons, even if they are true, shall be punished by detention for a period not exceeding one year and by a fine not exceeding ten thousand Dirhams, or by one of these two penalties.”

There is limited guidance as to what “secrets of private or family life” might be, but it would be fair to surmise that if the person themselves had not made a matter public, a third party should not do so. The disclosure of a matter by that person would remove any element of secrecy and render the Article unavailable as the basis for a claim by the supposedly injured party. In that respect, the UAE’s position might be more restrictive than some other jurisdictions.

The UAE Penal Code allows corporate entities to be found guilty of the offenses established by the UAE Penal Code, through the agency of directors, agents and other representatives. A corporate body convicted under these provisions would be liable to pay a fine of up to AED 20,000 and allow for the judges to include a jail sentence of up to 2 years where it is considered to be warranted.

Article 21 of the CCL also addresses the concept of privacy and states that any person who used an Information Network, Electronic Information System or any of the Information Technology Tools in assaulting the privacy of a person shall be punished by imprisonment for at least six months and a fine between AED150,000 (US$40,844) and AED500,000 (US$136,147). Additionally, any person who uses an Electronic Information System or an Information Technology Tool to perform any amendment or processing on a recording, picture or scene for the purpose of defamation or insulting another person or assaulting or violating his or her privacy shall be punished by imprisonment for at least one year and a fine between AED250,000 (US$68,074) and AED500,000 (US$136,147). This is in addition to the fine payable under the UAE Penal Code.

There is no guidance as to what “assaulting the privacy of a person” might mean. The Court has determined that a breach of privacy to simply show a person on a television program without obtaining written consent (and in another case, verbal consent was given but was judged to be imperfect as a consent). Further, by way of example, a man who took a photo of two people fighting in public was found to have breached privacy when he published the photo.

Given this subjectivity and the heavy emphasis placed on privacy by the authorities, anything that is intrinsically “personal” or “sensitive” to another person could be considered private.

Potential Safe Harbor Defense and Third-party Liability

While ordinarily safe harbor defenses would be found in laws relating to copyright in other jurisdictions, the Federal Law No. 7 of 2002 Pertaining to Copyrights and Neighboring Rights, or the Copyright Law, does not

 

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contain “safe harbor” provisions designed to immunize intermediaries from liability for copyright damage. In fact, the Copyright Law contains no provision dealing expressly with secondary liability at all. There are no safe harbor defenses in UAE law.

Similarly, the CCL is directed at both owner and operators of an electronic site or information network, so a safe harbor would not be generally available under the CCL either. As such, the CCL may apply to a party that hosts user uploaded content within a chat room or an online voice communication application. Article 39 of the CCL Law provides: “Any owner or operator of an Electronic Site or Information Network who deliberately and knowingly stores or makes available any illegal content or if he fails to remove or blocks access to this illegal content within the period determined in the written notice addressed to him by the competent authorities that states that content is illegal and is available on the Electronic Site or Information Network shall be punished by imprisonment and a fine or by any of these penalties.”

Article 39 of the CCL authorizes a competent authority to issue a takedown notice, and any party that has received such notice is required to respond to the relevant authority. Such takedown requirements are similar to those in other jurisdictions, albeit in practice, takedown notices have not been often issued in the UAE.

In addition, it is possible to interpret the CCL as stating that any entity acting as an intermediary or service provider could commit an offense if it benefits from or unlawfully facilitates a third party’s uses of communication services through its Information Network. Article 35 of the CCL provides that any person who benefited or unlawfully facilitated a third party use of communication services or audio or visual transmission channels through the Information Network or the Information Technology Tool shall be punished by imprisonment for at least one year and a fine between AED250,000 (US$68,074) and AED1,000,000 (US$272,294).

There is little clarity on what the public prosecutors might deem to be “unlawfully facilitating.” Nonetheless, the term may be interpreted to include the act of retaining content that is known to be infringing the CCL. Although there has been no prosecution on the basis of unlawful facilitation of copy infringement, potential prosecution on such grounds cannot be ruled out in the future.

The above laws only require a party to assist claimants in relation to infringing material once the party receives a takedown notice from a competent UAE authority or a UAE Court order. Where such a notice is issued, the notice will specify the period within which the takedown must be done, or the period within which the party must respond, if that option is provided.

Data Protection Laws

There is no comprehensive data protection legislation in the UAE specifically designed to regulate the collection, processing, transfer and/or use of personal data. There are, however, provisions of general application in the context of privacy that may be relevant to the processing of personal data in the UAE. While these types of provisions are not entirely consistent with the approach to data privacy issues addressed in modern data protection laws in other jurisdictions, they should be considered when assessing the legal basis for processing personal information in the UAE, and associated transfers of personal data to recipients outside the UAE.

Of primary relevance are Articles 379 and 380 (bis) of the UAE Penal Code, which provides:

Article 379: “[…] Any individual who, by reason of his profession, craft, circumstance or art is entrusted with a secret and who discloses it in cases other than those permitted by the law, or who uses it for his own advantage or another person’s advantage, shall be punished by imprisonment of at least one year and/or a fine of at least AED20,000 (US$5,446) unless the individual to whom the secret pertains has consented that it be disclosed or used.”

Article 380 (bis): “Detention shall be inflicted upon whoever unrightfully copies, distributes or provides another person with the content of a phone call or message or information or data or any other such things that he

 

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examines by virtue of his profession.” The penalty is not specified in the provision, and reference to the criminal procedure rule would indicate that the detention would be between one month and three years.

The term “secret” contained in Article 379 of the UAE Penal Code is undefined, and it could be interpreted to include sensitive personal data.

Telecommunications Law

Voice Over Internet Protocol, or VoIP, services are specifically regulated under Voice over Internet Protocol Policy, or VoIP Policy, issued by the UAE Telecommunications Regulatory Authority, or the TRA, on December 30, 2009. “VoIP Services” are defined for the purposes of the VoIP Policy as “all of the services and technologies that allow transmitting, receiving, delivering and routing of voice telecommunications by means of Internet Protocol (IP).”

Based on a strict interpretation of laws and regulations, VoIP services can only be used in the UAE in limited circumstances where:

 

   

the VoIP service is provided between users of a “Closed Group Network” where the relevant calls originate and terminate in the UAE in accordance with the TRA’s VoIP Policy; or

 

   

the VoIP service is a paid service provided through the local public telecommunications service providers licensed by the TRA under Federal Law No 3 Of 2003 Regarding The Organization of The Telecommunications Sector, as amended, or the Telecoms Law.

The sale or supply of telecommunications services to subscribers in the UAE is a regulated activity under the Telecoms Law. No individual or organization is permitted to conduct any regulated activity unless authorized by a license or exempted in accordance with the Telecoms Law. There are currently only two licensed public telecommunications network operators and service providers in the UAE, or the Licensees. The granting of any further public telecommunications licenses is unlikely at this time due to state policy. Importantly, the Licensees are expressly permitted to block VoIP services over their networks which are provided by a person not licensed to do so under the Telecoms Law unless instructed by the TRA to do otherwise.

The TRA issued a statement in March 2015 clarifying that “Voice over Internet Protocol (VoIP) are considered part of the UAE’s regulated activities. The TRA has granted licensed operators the eligibility to provide such services across their networks. Companies wishing to provide such services should coordinate with the UAE’s licensed service providers in this regard.”

However, there are uncertainties in the UAE market regarding the use of VoIP services, as despite the apparently strict legal position concerning the use of VoIP services and the blocking of certain well-known international VoIP service brands in the UAE, many users in the UAE can in fact use various other VoIP applications, such as certain online gaming platforms.

Very recently, there have been media reports that the legal restrictions on the use of VoIP services in the UAE may soon be lifted. To date the TRA has not made any comment on such reports.

Under the Telecoms Law, it is a criminal offense that may be penalized by a fine between AED50,000 (US$13,615) and AED1,000,000 (US$272,294) and/or imprisonment of up to two years to provide regulated telecommunication services without being licensed to do so. It is the supplier, rather than the user, that commits this offense.

In practice, the main enforcement action taken against unlicensed VoIP service providers is for the Licensees to block the VoIP service in the UAE.

 

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Our mobile applications, which enable voice-based, real time communications on the Internet, may be deemed to be VoIP services. See “Risk Factors—Risks Relating to Our Business and Industry—We may be required to obtain and maintain licenses and approvals relating to Internet or telecommunications services in certain jurisdictions.”

Consumer Protection Law

The Federal Law No. 24 of 2006 on Consumer Protection along with Ministerial Resolution No. 12 of 2007 in respect of the Executive Regulations of the Consumer Protection Law, together referred to as the Consumer Protection Laws, define consumers’ rights and obligations and outlines certain protection measures to fight monopoly, overpricing and fraudulent commercial activities against consumers.

According to the Consumer Protection Laws, UAE consumers are granted the following rights:

 

   

The Right to Safety: to be protected from products, production processes and services that may cause harm to health and safety;

 

   

The Right to Know: to know the accurate information concerning the goods and services;

 

   

The Right to Choose: to have multiple options of items and services at competitive prices and quality;

 

   

The Right to Representation: to express opinions to develop the goods, services, prices and availability. The consumer has the right of having his or her opinions listened to, his or her interests represented at official and non-official entities and his or her opinions shall be taken into consideration during the process of developing the commodities and services;

 

   

The Right to Be Informed: to acquire knowledge and skill and awareness of consumer rights and responsibilities through continuous awareness programs.

The department of economic development in each emirate within the UAE deals with consumer rights issues and implement plans and procedures related to Consumer Protection Laws. It receives consumer complaints and raises consumers’ awareness about their rights and duties.

Regulations Relating to Intellectual Property

Copyright Law

Copyrights are currently regulated in the UAE under the Copyright Law. The Copyright Law protects original expressions of creative works in the fields of literature, art, or the sciences, regardless of the kind or manner of its expression, and regardless of its importance or its purpose. Importantly, the Copyright Law does not protect ideas, but rather the original material produced by virtue of a creative process. There are 12 categories of protected works listed by the Copyright Law:

 

   

Books, pamphlets, essays, and other written works:

 

   

Computer programs and applications, databases;

 

   

Lectures and similar works;

 

   

Dramatic, musical works;

 

   

Musical composition with or without words;

 

   

Sound and audio-visual works;

 

   

Architectural works, engineering plans and layouts;

 

   

Works of drawing, painting, sculpture, lithography (fabric, metal, stones, wood) and engravings or any similar works in the scope of fine arts;

 

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Photographic works and works analogous to photography;

 

   

Works of applied art and plastic art; and

 

   

Illustrations, geographical maps, sketches, three-dimensional works related to geography, topography, and architectural designs, etc.

 

   

Derivative works, subject to the protection afforded to the work(s) upon which they are based. The protection shall extend to the title of the work if created, as well as the creative concept devised for broadcast material.

The Copyright Law provides for the protection of copyright for a duration of the life of the author plus 50 years after his or her death (in which case the rights pass on to his or her next of kin).

Registration is not a prerequisite to legal protection under the Copyright Law. Legal protection is automatic upon the creation of the work. In the event of enforcement of copyright against a third party, the Dubai Department of Economy will require a certificate of registration to be submitted alongside any complaint. For this, the copyright must be registered with the UAE Ministry of Economy.

Authors derive both economic and moral rights in their work. Economic rights are those rights through which the author can reap material benefit, including the exclusive right to reproduce the work, broadcast or rebroadcast the work, publicly perform the work, translate, modify, alter, lease, rent, lend or publish the work. Whereas moral rights are those rights that vest exclusively in the author of a work, and unlike economic rights, they cannot be waived, transferred or assigned. The Copyright Law recognizes four moral rights, namely:

 

   

Right of integrity: the author shall have the right to object to any distortion, mutilation or other modification, or other derogatory action in relation to the relevant work. This is to protect the honor and reputation of the author.

 

   

Right of attribution/paternity: the author has the right to claim authorship of the work.

 

   

Right of retraction: the author shall have the right to withdraw the work from circulation if there are serious justifications behind this. This right may be enforced through the courts, provided that a fair compensation is given to the affected persons, such as those who have purchased the work legally.

 

   

Right of divulgation: the author has the right to determine the first publication of his work.

The Copyright Law also covers neighboring rights; namely, rights over performances, sound recordings, broadcastings, with neighboring rights holders also holding their own economic and moral rights, outlined under the Copyright Law.

The Copyright Law permits the transfer of copyright provided it is: (i) made in writing; (ii) the grant clause or scope is specified (for example, to reproduce, translate, adapt and/or display); and (iii) place and duration is also specified.

Copyright infringement exposes the infringer to criminal (including, fine and/or imprisonment), civil (such as compensation) and/or administrative actions (including, seizure, confiscation and destruction of infringing goods, fines, closure of business premise).

Trademark Law

Trademarks are currently regulated in the UAE under Federal Law Number 37 of 1992 and its amendments, or the Trademark Law. The Trademark Law defines a trademark as anything that takes a distinctive form, whether composed of words, names, symbols, images, advertisements, or any other marks or combination of marks. Sounds can also be considered part of a trademark. Trademarks can be registered for goods as well as

 

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services. Trademarks must be used either to distinguish goods or services or to inform the consumer as to the source of the goods or services. A trademark must be:

 

   

Distinctive: trademarks that lack distinctiveness or are otherwise descriptive or generic cannot be registered.

 

   

Used as a form of identification: a trademark must be used as a form of identification to allow consumers to distinguish goods, products or services as to their origin.

 

   

Used or intended to be used: one cannot register a trademark just to prevent others from using it, without actually using it or intending to use it.

Trademarks are protected for a period of ten (10) years upon registration with the UAE Ministry of Economy, commencing on the date of first filing; protection can be renewed for a further period of ten (10) years indefinitely. In the event that the registration certificate is not renewed, protection will lapse and the owner will lose all rights in the trademark.

The Trademark Law determines that any person who registers a mark shall be deemed its sole owner. The ownership of such a mark may not be disputed if a registrant uses it uninterruptedly for a period of five (5) years. Importantly, the owner of a registered trademark can prevent any third party from using an identical or confusingly similar mark to distinguish products that are identical, similar or correlated to those for which he has registered his own trademark.

Trademark owners may license their rights to third parties, indicating the duration of the license, quality control provisions, exclusivity and any formalities. Trademark licenses should be registered if the licensee is to bring an action in this respect against third parties. A trademark owner may also assign his or her trademark to a third party. The transfer must be recorded with the UAE Ministry of Economy as proof of consent to the rights being assigned.

Trademark infringements expose the infringer to criminal (including, fine and/or imprisonment), civil (compensation) and/or administrative actions (including, seizure, confiscation and destruction of infringing goods, fines, closure of business premises).

Patent Law

Patents are currently regulated in the UAE under the Federal Law number 17 of 2002 pertaining to Patents, Utility Models, Industrial models and Designs, or the UAE Patents and Designs Law. The application of the UAE Patents and Designs Law is the responsibility of the UAE Ministry of Economy, which administers the filing, prosecution and registration of patents, designs and utility models.

Patent protection in the UAE is granted for inventions that are novel, inventive and useful. Absolute worldwide novelty is required. The term of protection for patents is 20 years from the filing date. Certain items, such as game rules and guides, are considered unpatentable subject matters in the UAE. On the other hand, computer-implemented methods are among patentable subject matters.

There are two routes to patent protection in the UAE, a national route and a regional route. The national route requires the filing of a national application at the UAE Patent Office. The regional route requires the filing of a Gulf Cooperation Council, or GCC, patent application. A GCC patent offers protection in the 6 GCC countries. Accepted applications are published in the UAE Official Gazette after an opposition period of 60 days from the publication date.

Utility models require lesser thresholds of inventiveness, but are subject to the same novelty requirement and, additionally, must be industrially applicable. The life of a utility certificate is 10 years from the date of grant of such utility certificate. Similarly, designs must be innovative, novel (i.e., absolute novelty) and industrially applicable and is valid for a period of ten (10) years.

 

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Regulations Relating to Tax

Value-Added Tax

VAT was introduced at the UAE federal level effective from January 1, 2018. VAT is imposed on the supply of goods and services and on imports of goods and services at the standard rate of 5%, unless the supply or import is subject to the VAT zero rate or exempt from VAT.

Supplies of services fall within the scope of UAE VAT if the place of supply for VAT purposes is located in the UAE. The general rule is that a supply of services is subject to VAT if the supplier has a place of residence for VAT purposes in the UAE. However, the UAE VAT legislation sets out several exceptions concerning the place of supply. Amongst these exceptions, the VAT legislation provides that electronic services that are automatically delivered over the Internet, over an electronic network or over an electronic marketplace are not subject to UAE VAT, if such electronic services are used or enjoyed outside of the UAE.

Corporate Income Tax

Currently, there is no corporate income tax, or CIT, at the federal level in the UAE. The introduction of a CIT at the federal level has been under discussion in the past. However, while there is a possibility that a federal CIT may be introduced in the future, there has been no public announcement in this regard and there is no indication that it would be implemented in the next few years. Certain emirates in the UAE, such as Dubai, have introduced a CIT at the emirates level. Under these emirates-level decrees, CIT is imposed on the net income generated by bodies corporate and branches operating in the emirate, at progressive rates of up to 55%. However, in practice the emirates-level CIT has only been imposed on companies engaged in upstream oil and gas activities. Free zones in the UAE, such as the DCC free zone, provide for an exemption from emirates-level corporate taxes for 15 to 50 years depending on the free zone. In particular, companies set up in the DCC free zone are exempt from emirates-level corporate taxes in connection with the operations carried out within the DCC, for a period of fifty (50) years starting from the date on which the company or its staff commenced to work. There is no withholding tax in the UAE.

China

Regulations Related to Foreign Investment

Foreign Investment Law

The establishment, operation and management of corporate entities in the PRC is governed by the Company Law of the PRC, or the Company Law, which was promulgated by the Standing Committee of the National People’s Congress, or the SCNPC, on December 29, 1993 and last amended and became effective on October 26, 2018. A foreign-invested company is also subject to the Company Law unless otherwise provided in the foreign investment laws.

On March 15, 2019, the National People’s Congress, or the NPC approved the Foreign Investment Law, which became effective on January 1, 2020. On December 26, 2019, the State Council issued the Implementation Rules of the Foreign Investment Law, which became effective on January 1, 2020. The Foreign Investment Law and the Implementation Rules of the Foreign Investment Law replaced three existing laws on foreign investments in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic invested enterprises in China. The Foreign Investment Law establishes the basic framework for the access to, and the promotion, protection and administration of foreign investments in view of investment protection and fair competition.

 

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According to the Foreign Investment Law, the State Council will publish or approve to publish a catalog for special administrative measures, or the “negative list.” The Foreign Investment Law grants national treatment to foreign-invested entities, except for those foreign-invested entities that operate in industries deemed to be either “restricted” or “prohibited” in the “negative list.” Because the “negative list” has yet to be published, it is unclear whether it will differ from the current 2019 Negative List. The Foreign Investment Law provides that foreign investors shall not invest in the “prohibited” industries, and shall meet the market entry conditions stipulated under the “negative list” for making investment in “restricted” industries.

Furthermore, the Foreign Investment Law provides that foreign-invested enterprises established according to the existing laws regulating foreign investment may maintain their structure and corporate governance within five years after the implementing of the Foreign Investment Law.

In addition, the Foreign Investment Law also provides several protective rules and principles for foreign investors and their investments in the PRC, including, among others, that local governments shall abide by their commitments to the foreign investors; foreign-invested enterprises are allowed to issue stocks and corporate bonds; except for special circumstances, in which case statutory procedures shall be followed and fair and reasonable compensation shall be made in a timely manner, expropriation or requisition of the investment of foreign investors is prohibited; mandatory technology transfer is prohibited; and the capital contributions, profits, capital gains, proceeds out of asset disposal, licensing fees of intellectual property rights, indemnity or compensation legally obtained, or proceeds received upon settlement by foreign investors within China, may be freely remitted inward and outward in RMB or a foreign currency. Also, foreign investors or the foreign investment enterprise should be imposed legal liabilities for failing to report investment information in accordance with the requirements.

The Implementation Rules of the Foreign Investment Law provides that foreign-invested enterprises and other domestic enterprises shall be equally treated with respect to, among others, the allocation of governmental funding, land supply, tax treatment, licensing and permits.

Regulations Related to Foreign Investment Restrictions

Investments in the PRC by foreign investors and foreign-invested enterprises were regulated by the Guidance Catalog of Industries for Foreign Investment, or the Catalog, promulgated by the NDRC and the MOFCOM on June 28, 1995, and most recently amended on June 28, 2017. The Catalog listed three categories with regard to foreign investment: “encouraged”, “restricted” and “prohibited.” Industries not listed in the catalog are generally deemed as falling into a fourth category “permitted” unless specifically restricted by other PRC laws. Establishment of wholly foreign-owned enterprises is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, foreign investment in restricted category projects is subject to government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalog are generally open to foreign investment unless specifically restricted by other PRC regulations. The “encouraged” foreign investment industries in the Catalog were substituted by the Catalog of Industries for Encouraging Foreign Investment (2019 Edition), or the 2019 Encouraging Catalog, and the “restricted” and “prohibited” foreign investment industries in the Catalog were substituted by the Special Management Measures (Negative List) for the Access of Foreign Investment (2019 Edition), or the 2019 Negative List, both of which were promulgated by the NDRC and the MOFCOM on June 30, 2019 and became effective on July 30, 2019.

Regulations Related to Dividend Distribution

The principal regulations governing the distribution of dividends by wholly foreign-owned enterprises include the Company Law, the Foreign Investment Law, the Implementation Rules of the Foreign Investment Law, and the Enterprise Income Tax Law, or the EIT Law, and its implementation rules. Under these regulations,

 

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wholly foreign-owned enterprises in the PRC may pay dividends only out of their accumulated profits, if any, as determined in accordance with the PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in the PRC is required to set aside at least 10% of its after-tax profit, as calculated using the PRC accounting standards, each year to its general reserves until its cumulative total reserve funds reach 50% of its registered capital.

Regulations Related to Foreign Exchange

Regulations Related to Foreign Currency Exchange

According to the Foreign Exchange Administration Regulations as last amended on August 5, 2008, the foreign exchange income and expenditure and foreign exchange business operations of Chinese institutions and individuals, as well as the foreign exchange income and expenditure and foreign exchange business operations conducted within the territory of the PRC by overseas institutions and individuals, shall be subject to foreign exchange administration. Renminbi is freely convertible for payments of current account items such as trade and service-related foreign exchange transactions and dividend payments, but is not freely convertible for capital expenditure items such as direct investment, loans or investments in securities outside of the PRC unless the approval from the SAFE, or its local counterpart is obtained in advance.

SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign invested Enterprises, or the SAFE Circular 19 which was partly amended by the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or the SAFE Circular 16, effective on June 9, 2016. According to SAFE Circular 19 and SAFE Circular 16, the flow and use of the Renminbi capital converted from foreign currency denominated registered capital of a foreign-invested company is regulated such that Renminbi capital may not be used for business beyond its business scope or to provide loans to persons other than affiliates unless otherwise permitted under its business scope. Violations of SAFE Circular 19 or SAFE Circular 16 could result in administrative penalties.

Regulations Related to Foreign Exchange Registration of Overseas Investment by PRC Resident

SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, an SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents (including individuals and entities) for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to direct investment in China by PRC residents through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents are required to complete foreign exchange registration with SAFE or its local branch. Following the initial registration, any major changes such as change in the SPV’s PRC resident shareholders, name of the SPV, term of operation or any increase or reduction of the SPV’s registered capital, share transfer or swap, merger or division, or similar development, shall be registered with SAFE in time. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. However, remedial registration applications made by PRC residents that previously failed to comply with the SAFE Circular 37 continue to fall under the jurisdiction of the relevant local branch of SAFE.

 

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Regulations Related to Tax

Enterprise Income Tax

On March 16, 2007, the NPC issued the PRC Enterprise Income Tax Law, or the EIT Law, which was last amended by the SCNPC on December 29, 2018. The Regulation on the Implementation of the Enterprise Income Tax Law, or the EIT Regulation, was issued by the State Council on December 6, 2007 and became effective on January 1, 2008, and was partly amended on April 23, 2019 and became effective on the same date. Pursuant to the EIT Law and the EIT Regulation, both domestic and foreign-invested enterprises established under the laws of foreign countries or regions whose “de facto management bodies” are located in the PRC are considered resident enterprises. The defined term “de facto management bodies” are“ establishments that carry out substantial and overall management and control over production and operations, personnel, accounting, and properties” of the enterprise. If an enterprise is considered a PRC resident enterprise under the above definition, its global income will be subject to enterprise income tax at the rate of 25%. The Notice on Issues about the Determination of Chinese-Controlled Enterprises Registered Abroad as Resident Enterprises on the Basis of Their Body of Actual Management issued by the State Administration of Taxation, or the SAT, on April 22, 2009 and effective on January 1, 2008 and partly amended on December 29, 2017 and effective on the same date, sets up a more specific definition of the “de facto management bodies” standard.

Value-Added Tax

The State Council issued the Interim Regulation on Value Added Tax, or the VAT, on December 13, 1993, which was last amended on November 19, 2017. The Detailed Rules for the Implementation of the Interim Regulation on VAT was issued by the Ministry of Finance, or the MOF, on December 25, 1993 and last amended on October 28, 2011. According to the Interim Regulation on VAT and Detailed Rules for the Implementation of the Interim Regulation on VAT, entities and individuals selling goods in the PRC or providing processing services, repair services and importation services should be subject to VAT, and the payable tax amount shall be calculated by deducting input tax for the current period from output tax for the current period.

The Notice of Taxation on Implementing the Pilot Program of Replacing Business Tax with VAT in an All-round Manner was issued jointly by the MOF and SAT on March 23, 2016, partly amended by the MOF, SAT and the General Administration of Customs on March 20, 2019 and became effective on April 1, 2019, according to which the countrywide pilot practice of levying VAT in lieu of business tax, or the Pilot Practice, has been carried out since May 1, 2016. According to the specific regulatory documents for the Pilot Practice, including the Implementation Measures for the Pilot Practice of Levying VAT in lieu of Business Tax, the VAT rates vary from 17%, 11%, 6%, 3% to 0% for taxpayers incurring taxable activities. According to the Notice of the MOF and SAT on Adjusting the Value-added Tax Rate effective on May 1, 2018 and the Announcement of the Ministry of Finance, the SAT and the General Administration of Customs on Relevant Policies for Deepening the Value-Added Tax Reform promulgated on March 20, 2019, which came into effect on April 1, 2019, the VAT rates on sales activities and import of goods that were previously 17% and 11%, respectively, were adjusted to 13% and 9%, respectively.

Withholding Income Tax

According to the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income issued by the SAT on August 21, 2006 and that came into effect on December 8, 2006, if the shareholders of a PRC company are Hong Kong residents holding at least 25% of the registered capital of the PRC company, a withholding tax rate of 5% applies to any dividends declared by the PRC company, or if the shareholders of a PRC company are Hong Kong residents holding less than 25% of registered capital, a withholding income tax rate of 10% applies. According to the Announcement of SAT on Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of Treaty Benefits issued on October 14, 2019 and effective on January 1, 2020, the withholding tax rate of 5% does not automatically apply. To enjoy the

 

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treatment of the dividend clause of a tax treaty, an enterprise shall apply to the local competent tax authorities for approval.

On February 3, 2018, the SAT issued the Announcement on Matters Concerning “Beneficial Owners” in Tax Treaties, which became effective on April 1, 2018, according to which, when determining an applicant’s “beneficial owner” status regarding tax treatments in connection with dividends, interests or royalties in tax treaties, several factors set forth below will be taken into account, although the actual analysis will be fact-specific: (i) whether the applicant is obligated to pay more than 50% of his or her income in 12 months to residents in a third country or region; (ii) whether the business operated by the applicant constitutes a substantial business operation; and (iii) whether the counterparty country or region to the tax treaties does not levy any tax or grants tax exemption on relevant income or levies tax at an extremely low rate. The applicants shall submit relevant documents to the competent tax authorities to prove his or her “beneficial owner” status.

Regulations Related to Employment

On July 5, 1994, the SCNPC promulgated the Labor Law, which was last amended on December 29, 2018 and became effective on the same date. The Labor Law provides that employees are entitled to equal opportunities in employment, selection of occupations, receiving labor remuneration, rest days and holidays, protection of occupational safety and healthcare, social insurance and welfare. On June 29, 2007, the SCNPC adopted the Labor Contract Law, which was last amended on December 28, 2012 and came into effect on July 1, 2013. The Labor Contract Law requires every employer to enter into a written contract of employment with each of its employees. The employer shall not force the employees to work beyond the time limit and each employer must pay overtime compensation to its employees.

The Social Insurance Law was issued by the SCNPC on October 28, 2010, last amended on December 29, 2018 and effective on the same date. Under the Social Insurance Law, an employee shall participate in five types of social insurance funds, including pension insurance, medical insurance, unemployment insurance, maternity insurance and occupational injury insurance. If the employer fails to fully contribute to social insurance funds on time, the collection agency for such social insurance may demand the employer to make full payment or to pay the shortfall within a set period and collect a late charge. If the employer fails to pay after the due date, the relevant government administrative body may impose a fine on the employer. In accordance with the Regulation on the Administration of Housing Funds issued by the State Council on April 3, 1999 and last amended on March 24, 2019 and came into effect on the same date, enterprises must register with the competent managing center for housing funds and shall contribute to the Housing Fund for any employee on its payroll. Where an employer fails to pay up housing funds within the prescribed time limit, the employer may be fined and ordered to make payment within a certain period.

Regulations Related to Employee Stock Incentive Plan

SAFE promulgated the Circular of the State Administration of Foreign Exchange on Issues concerning the Administration of Foreign Exchange Used for Domestic Individuals’ Participation in Equity Incentive Plans of Companies Listed Overseas, or the Stock Option Rules in February 2012. Under the Stock Option Rules and other relevant rules and regulations, domestic individuals, which means the PRC residents and non-PRC citizens residing in China for a continuous period of not less than one year, subject to a few exceptions, who participate in a stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of the overseas publicly-listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. The participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock

 

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incentive plan, the PRC agent or the overseas entrusted institution or other material changes. The PRC agents must, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution to such PRC residents. In addition, SAFE Circular 37 provides that PRC residents who participate in a share incentive plan of an overseas unlisted special purpose company may register with SAFE or its local branches before exercising rights.

Regulations Related to M&A Rules and Overseas Listings

On August 8, 2006, six PRC regulatory agencies jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rules, among other things, require that (i) PRC entities or individuals obtain MOFCOM approval before they establish or control an SPV overseas, provided that they intend to use the SPV to acquire their equity interests in a PRC company at the consideration of newly issued share of the SPV, or Share Swap, and list their equity interests in the PRC company overseas by listing the SPV in an overseas market; (ii) the SPV obtains MOFCOM’s approval before it acquires the equity interests held by the PRC entities or PRC individual in the PRC company by Share Swap; and (iii) the SPV obtains CSRC approval before it lists overseas.

In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors. Further, on August 25, 2011, MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement Circular 6. Under Circular 6 and the MOFCOM Security Review Regulations, if MOFCOM decides that a specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Circular 6, to carry out the security review. The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.

Regulations Related to Leasing

Pursuant to the Law on Administration of Urban Real Estate which took effect in January 1995 with the latest amendment in August 2019, lessors and lessees are required to enter into a written lease contract and both lessor and lessee are also required to register the lease with the real estate administration authorities.

According to the PRC Contract Law which took effect in October 1999, the lessee may sublease the leased premises to a third party, subject to the consent of the lessor. Where the lessee subleases the premises, the lease contract between the lessee and the lessor remains valid. The lessor is entitled to terminate the lease contract if the lessee subleases the premises without the consent of the lessor. In addition, if the lessor transfers the premises, the lease contract between the lessee and the lessor should still remain valid.

Others

Regulations Relating to Personal Privacy and Data Protection

The GDPR, which came into effect on May 25, 2018, increased our burden of regulatory compliance and requires us to change certain of our privacy and data security practices in order to achieve compliance. The

 

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GDPR implements more stringent operational requirements for processors and controllers of personal data, including, for example, requiring expanded disclosures about how personal information is to be used, limitations on retention of information, mandatory data breach notification requirements, higher standards for data controllers to demonstrate that they have obtained either valid consent or have another legal basis in place to justify their data processing activities, expanded definition of personal data, higher consent standards for processing personal data, new individual rights to be forgotten, conducting data protection impact assessment (DPIA) to identify and reduce risks of a data processing activity, appointing data protection officer where applicable and additional obligations relating to contracting with service providers that may process personal data. The GDPR further provides that EU member states may make their own additional laws and regulations in relation to certain data processing activities, which could further limit our ability to use and share personal data and could require localized changes to our operating model. Under the GDPR, fines of up to Euro 20 million or up to 4% of an organization’s total worldwide annual turnover for the preceding financial year, whichever is higher, may be imposed by data protection supervisory authorities for non-compliance, which significantly increases our potential financial exposure for noncompliance. However, in the absence of precedence and guidance from EU regulators, the application of GDPR to, and its enforcement on, Internet services providers without physical establishment in EU remains uncertain. Moreover, the implementation of the GDPR may require substantial amendments to our procedures and policies, and these changes could impact our business by increasing its operational and compliance costs. These regulations regarding data privacy are increasing in number, as well as levels of enforcement, as manifested in increased amounts of fines and the severity of other penalties. We expect that personal privacy and data protection will receive greater attention and focus from regulators, as well as public scrutiny and attention. While we have adopted certain policies and procedures pursuant to the GDPR, including but not limited to the privacy policy and certain internal data protection policy, these policies and procedures may need to be updated when additional information concerning the best practices is made available through guidance from regulators or published enforcement decisions and further detailed policies may need to be adopted in the future in order to ensure our compliance with the GDPR.

 

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MANAGEMENT

Directors and Executive Officers

The following table sets forth certain information relating to our directors and executive officers as of the date of this prospectus.

 

Name

  

Age

    

Position/Title

Tao Yang

     43