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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
6-K
 
 
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE
13a-16
OR
15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of December 2020
Commission File Number:
001-38431
 
 
iQIYI, Inc.
 
 
9/F, iQIYI Innovation Building
No. 2 Haidian North First Street, Haidian District, Beijing 100080
People’s Republic of China
Tel: +86 10 6267-7171
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form
20-F
or Form
40-F.
Form
20-F  ☒                Form
40-F  ☐
Indicate by check mark if the registrant is submitting the Form
6-K
in paper as permitted by Regulation
S-T
Rule 101(b)(1):  ☐
Indicate by check mark if the registrant is submitting the Form
6-K
in paper as permitted by Regulation
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Rule 101(b)(7):  ☐
 
 
 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
iQIYI, Inc.
By:    
/s/ Xiaodong Wang
Name:     Xiaodong Wang
Title:     Chief Financial Officer
Date: December 15, 2020

Exhibit Index
 
Exhibit No.
  
Description
  99.1    Unaudited Interim Condensed Consolidated Financial Statements
101.INS    Inline XBRL Instance Document—this instance document does not appear in the Interactive Data File because its XBRL tags are not embedded within the Inline XBRL document
101.SCH    Inline XBRL Taxonomy Extension Schema Document
101.CAL    Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE    Inline XBRL Taxonomy Extension Presentation Linkbase Document
104    Cover Page Interactive Data File (embedded within the Inline XBRL document)


EX-99.1
Exhibit 99.1
iQIYI, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2019 AND
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2020
(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),
except for number of shares and per share data)
 
           
As of
 
    
Note
    
December 31,
2019
    
September 30,
2020
    
September 30,
2020
 
           
RMB
    
RMB
    
US$
 
                   (Unaudited)      (Unaudited)  
ASSETS
           
Current assets:
           
Cash and cash equivalents
        5,934,742        3,163,128        465,878  
Restricted cash
        974,932        655,653        96,567  
Short-term investments
        4,579,313        3,603,891        530,796  
Accounts receivable, net of allowance of RMB144,574 and RMB370,027 (US$54,499) as of December 31, 2019 and September 30, 2020, respectively
        3,627,749        3,260,191        480,174  
Prepayments and other assets
        3,719,228        3,463,425        510,108  
Amounts due from related parties
     14        211,993        169,799        25,009  
Licensed copyrights, net
     5        1,224,881        1,247,415        183,724  
     
 
 
    
 
 
    
 
 
 
Total current assets
     
 
20,272,838
 
  
 
15,563,502
 
  
 
2,292,256
 
     
 
 
    
 
 
    
 
 
 
Non-current
assets:
           
Fixed assets, net
        1,754,367        1,463,733        215,585  
Long-term investments
     4        2,982,154        3,710,782        546,539  
Deferred tax assets, net
        34,916        66,673        9,820  
Licensed copyrights, net
     5        6,287,330        6,061,511        892,764  
Intangible assets, net
        813,960        661,683        97,455  
Produced content, net
     6        4,355,221        5,517,095        812,580  
Prepayments and other assets
        3,508,476        2,711,235        399,322  
Operating lease assets
        722,742        1,001,648        147,527  
Goodwill
        3,888,346        3,888,346        572,691  
Amounts due from related parties
     14        172,200        242,000        35,643  
     
 
 
    
 
 
    
 
 
 
Total
non-current
assets
     
 
24,519,712
 
  
 
25,324,706
 
  
 
3,729,926
 
     
 
 
    
 
 
    
 
 
 
Total assets
     
 
44,792,550
 
  
 
40,888,208
 
  
 
6,022,182
 
     
 
 
    
 
 
    
 
 
 
LIABILITIES, MEZZANINE EQUITY AND SHAREHOLDERS’ DEFICIT
           
Current liabilities
(including current liabilities of the consolidated VIEs without recourse to the primary beneficiary of RMB12,093,465 and RMB11,646,729 (US$1,715,378) as of December 31, 2019 and September 30, 2020, respectively):
           
Accounts and notes payable
        8,212,449        7,455,954        1,098,143  
Amounts due to related parties
     14        1,604,258        1,828,085        269,248  
Customer advances and deferred revenue
        3,081,407        3,064,785        451,394  
Short-term loans
     7        2,618,170        3,804,396        560,327  
Long-term loans, current portion
     7        736,814        733,365        108,013  
Operating lease liabilities, current portion
        125,412        197,673        29,114  
Accrued expenses
        2,611,217        2,162,980        318,572  
Other liabilities
        1,183,439        1,256,218        185,020  
     
 
 
    
 
 
    
 
 
 
Total current liabilities
     
 
20,173,166
 
  
 
20,503,456
 
  
 
3,019,831
 
     
 
 
    
 
 
    
 
 
 
 
F-1

iQIYI, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2019 AND
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2020 (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),
except for number of shares and per share data)
 
           
As of
 
    
Note
    
December 31,
2019
   
September 30,
2020
   
September 30,
2020
 
           
RMB
   
RMB
   
US$
 
                  (Unaudited)     (Unaudited)  
Non-current
liabilities
(including
non-current
liabilities of the consolidated VIEs without recourse to the primary beneficiary of RMB1,932,830 and RMB 1,812,912 (US$267,013) as of December 31, 2019 and September 30, 2020, respectively):
         
Long-term loans
     7        880,278       628,286       92,537  
Convertible senior notes
     8        12,296,868       12,307,243       1,812,661  
Deferred tax liabilities
        30,136       13,749       2,025  
Amounts due to related parties
     14        1,061,883       993,608       146,343  
Operating lease liabilities
        402,732       757,882       111,624  
Other
non-current
liabilities
        232,555       207,071       30,498  
     
 
 
   
 
 
   
 
 
 
Total
non-current
liabilities
     
 
14,904,452
 
 
 
14,907,839
 
 
 
2,195,688
 
     
 
 
   
 
 
   
 
 
 
Total liabilities
     
 
35,077,618
 
 
 
35,411,295
 
 
 
5,215,519
 
     
 
 
   
 
 
   
 
 
 
Commitments and contingencies
     10  
Mezzanine equity
         
Redeemable noncontrolling interests
     11        101,542       106,802       15,730  
Shareholders’ equity:
         
Class A ordinary shares (US$0.00001 par value; 94,000,000,000 shares authorized as of December 31, 2019 and September 30, 2020, respectively; 2,603,890,438 and 2,617,771,642 shares issued as of December 31, 2019 and September 30, 2020, respectively; 2,259,125,125 and 2,318,853,056 shares outstanding as of December 31, 2019 and September 30, 2020, respectively)
        142       146       22  
Class B ordinary shares (US$0.00001 par value; 5,000,000,000 and 5,000,000,000 shares authorized as of December 31, 2019 and September 30, 2020, respectively; 2,876,391,396 and 2,876,391,396 shares issued and outstanding as of December 31, 2019 and September 30, 2020, respectively)
        183       183       27  
Additional
paid-in
capital
        41,298,328       42,464,474       6,254,341  
Accumulated deficit
        (33,834,357     (39,424,412     (5,806,588
Accumulated other comprehensive income
     16        2,106,718       2,274,276       334,965  
Noncontrolling interests
        42,376       55,444       8,166  
     
 
 
   
 
 
   
 
 
 
Total shareholders’ equity
     
 
9,613,390
 
 
 
5,370,111
 
 
 
790,933
 
     
 
 
   
 
 
   
 
 
 
Total liabilities, mezzanine equity and shareholders’ equity
     
 
44,792,550
 
 
 
40,888,208
 
 
 
6,022,182
 
     
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
 
F-2

iQIYI, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),
except for number of shares and per share data)
 
           
Nine months ended September 30
 
    
Note
    
2019
   
2020
   
2020
 
           
RMB
   
RMB
   
US$
 
            (Unaudited)     (Unaudited)     (Unaudited)  
Revenues:
         
Membership services (including related party amounts of RMB22,098 and RMB12,640 (US$1,862) for the nine months ended September 30, 2019 and 2020, respectively)
        10,574,553       12,655,829       1,864,002  
Online advertising services (including related party amounts of RMB51,635 and RMB153,725 (US$22,642) for the nine months ended September 30, 2019 and 2020, respectively)
        6,387,500       4,963,084       730,983  
Content distribution (including related party amounts of RMB389,990 and RMB137,597 (US$20,266) for the nine months ended September 30, 2019 and 2020, respectively)
        1,666,177       1,855,739       273,321  
Others (including related party amounts of RMB38,968 and RMB41,995 (US$6,185) for the nine months ended September 30, 2019 and 2020, respectively)
        2,868,804       2,774,383       408,622  
     
 
 
   
 
 
   
 
 
 
Total revenues
     
 
21,497,034
 
 
 
22,249,035
 
 
 
3,276,928
 
     
 
 
   
 
 
   
 
 
 
Operating costs and expenses:
         
Cost of revenues (including related party amounts of RMB965,944 and RMB827,884 (US$121,935) for the nine months ended September 30, 2019 and 2020, respectively)
        (22,433,904     (21,099,888     (3,107,678
Selling, general and administrative (including related party amounts of RMB2,482 and RMB17,133 (US$2,524) for the nine months ended September 30, 2019 and 2020, respectively)
        (3,836,478     (3,870,170     (570,014
Research and development (including related party amounts of RMB12,085 and RMB7,381 (US$1,087) for the nine months ended September 30, 2019 and 2020, respectively)
        (1,955,884     (2,012,113     (296,352
     
 
 
   
 
 
   
 
 
 
Total operating costs and expenses
     
 
(28,226,266
 
 
(26,982,171
 
 
(3,974,044
     
 
 
   
 
 
   
 
 
 
Operating loss
     
 
(6,729,232
 
 
(4,733,136
 
 
(697,116
     
 
 
   
 
 
   
 
 
 
Other income/(expense):
         
Interest income (including related party amounts of RMB3,596 and RMB1,247 (US$184) for the nine months ended September 30, 2019 and 2020, respectively)
        312,312       135,068       19,893  
Interest expenses (including related party amounts of RMB nil and RMB nil (US$ nil) for the nine months ended September 30, 2019 and 2020, respectively)
        (637,444     (796,997     (117,385
Foreign exchange (loss)/gain, net
        (634,187     14,349       2,113  
Loss from equity method investments
        (105,860     (183,792     (27,070
Other income, net
        22,847       129,039       19,005  
Total other expenses, net
  
     
  
 
(1,042,332
 
 
(702,333
 
 
(103,444
     
 
 
   
 
 
   
 
 
 
 
F-3

iQIYI, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020 (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),
except for number of shares and per share data)
 
         
Nine months ended September 30
 
    
Note
  
2019
   
2020
   
2020
 
         
RMB
   
RMB
   
US$
 
          (Unaudited)     (Unaudited)     (Unaudited)  
Loss before income taxes
     
 
(7,771,564
 
 
(5,435,469
 
 
(800,560
     
 
 
   
 
 
   
 
 
 
Income tax expense
   9      (29,266     (39,613     (5,834
     
 
 
   
 
 
   
 
 
 
Net loss
     
 
(7,800,830
 
 
(5,475,082
 
 
(806,394
     
 
 
   
 
 
   
 
 
 
Less: Net income attributable to noncontrolling interests
        28,714       15,665       2,307  
     
 
 
   
 
 
   
 
 
 
Net loss attributable to iQIYI, Inc.
     
 
(7,829,544
 
 
(5,490,747
 
 
(808,701
Accretion of redeemable noncontrolling interests
                 (5,260     (775
     
 
 
   
 
 
   
 
 
 
Net loss attributable to ordinary shareholders.
     
 
(7,829,544
 
 
(5,496,007
 
 
(809,476
     
 
 
   
 
 
   
 
 
 
Net loss per Class A and Class B ordinary share:
   13       
Basic
        (1.54     (1.07     (0.16
Diluted
        (1.54     (1.07     (0.16
Net loss per ADS (1 ADS equals 7 Class A ordinary shares):
   13       
Basic
        (10.78     (7.49     (1.12
Diluted
        (10.78     (7.49     (1.12
Shares used in net loss per Class A and Class B ordinary share computation:
   13       
Basic
        5,098,456,394       5,157,297,932       5,157,297,932  
Diluted
        5,098,456,394       5,157,297,932       5,157,297,932  
Other comprehensive income
         
Foreign currency translation adjustments
        613,424       166,781       24,564  
Unrealized losses on
available-for-sale
debt securities
        (282     (315     (46
     
 
 
   
 
 
   
 
 
 
Total other comprehensive income, net of tax
     
 
613,142
 
 
 
166,466
 
 
 
24,518
 
     
 
 
   
 
 
   
 
 
 
Comprehensive loss
     
 
(7,187,688
 
 
(5,308,616
 
 
(781,876
     
 
 
   
 
 
   
 
 
 
Less: Comprehensive income attributable to noncontrolling interests
        29,821       14,573       2,146  
     
 
 
   
 
 
   
 
 
 
Comprehensive loss attributable to iQIYI, Inc.
     
 
(7,217,509
 
 
(5,323,189
 
 
(784,022
     
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
 
F-4

iQIYI, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020
(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),
except for number of shares and per share data)
 
    
Nine months ended September 30
 
    
2019
   
2020
   
2020
 
    
RMB
   
RMB
   
US$
 
     (Unaudited)     (Unaudited)     (Unaudited)  
Cash flows from operating activities:
      
Net loss
     (7,800,830     (5,475,082     (806,394
Adjustments to reconcile net loss to net cash provided by operating activities
      
Depreciation of fixed assets
     349,752       362,459       53,384  
Amortization and impairment of intangible assets
     419,919       271,935       40,052  
Amortization and impairment of licensed copyrights
     9,531,104       8,989,909       1,324,070  
Amortization and impairment of produced content
     2,324,085       3,492,657       514,413  
Impairment of long-lived assets
              143,534       21,140  
Provision for credit losses
     72,447       212,254       31,262  
Unrealized foreign exchange loss/(gain)
     625,126       (21,647     (3,188
Loss/(gain) on disposal of fixed assets
     3,193       (7,146     (1,052
Accretion on convertible notes payable or convertible senior notes
     241,107       324,136       47,740  
Barter transaction revenue
     (493,570     (957,675     (141,050
Share-based compensation
     769,527       1,021,116       150,394  
Share of losses on equity method investments
     105,860       183,792       27,070  
Fair value change and impairment of long-term investments
     21,024       35,099       5,170  
Fair value change of assets and liabilities remeasured at fair value on a recurring basis
     5,711                    
Other investment and interest income
     (61,065     7,663       1,129  
Deferred income tax benefit
     (44,646     (48,144     (7,091
Amortization of deferred income
     (7,938     (10,658     (1,570
Other
non-cash
expenses
     29,869       60,637       8,931  
Changes in operating assets and liabilities
        
Accounts receivable
     (155,359     92,912       13,684  
Amounts due from related parties
     (55,226     (126,909     (18,692
Licensed copyrights
              (7,913,397     (1,165,517
Produced content
     (3,433,945     (4,654,531     (685,538
Prepayments and other assets
     (1,246,280     1,200,455       176,808  
Accounts payable
     (335,234     (617,958     (91,015
Amounts due to related parties
     344,642       (86,373     (12,721
Customer advances and deferred revenue
     154,321       (20,622     (3,037
Accrued expenses and other current liabilities
     183,107       (330,627     (48,696
Other
non-current
liabilities
     16,943       (19,413     (2,860
  
 
 
   
 
 
   
 
 
 
Net cash provided by/(used for) operating activities
  
 
1,563,644
 
 
 
(3,891,624
 
 
(573,174
  
 
 
   
 
 
   
 
 
 
Cash flows from investing activities:
      
Acquisition of fixed assets
     (507,938     (214,227     (31,552
Acquisition of intangible assets
     (106,655     (131,320     (19,341
Acquisition of licensed copyrights from related parties
     (259,090                  
Acquisition of licensed copyrights from third parties
     (8,042,120                  
Purchase of long-term investments
     (409,941     (770,805     (113,527
Proceeds from disposal of long-term investments
     3,000       20,000       2,946  
Acquisition of business, net of cash acquired
     (5,798     (5,798     (854
Film investment as passive investor
     (3,250                  
Proceeds from film investments as passive investor
     14,368       1,612       237  
Loans provided to third parties
     (24,000     (6,415     (945
Repayment of loans provided to related parties
     26,500       100,000       14,728  
Purchases of
held-to-maturity
debt securities
     (6,226,900     (2,181,603     (321,315
Maturities of
held-to-maturity
debt securities
     5,632,495       2,972,378       437,784  
Purchases of
available-for-sale
debt securities
     (11,081,887     (8,104,132     (1,193,610
 
F-5

iQIYI, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2020 (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. Dollars (“US$”),
except for number of shares and per share data)
 
    
Nine months ended September 30
 
    
2019
   
2020
   
2020
 
    
RMB
   
RMB
   
US$
 
     (Unaudited)     (Unaudited)     (Unaudited)  
Maturities of
available-for-sale
debt securities
     11,330,555       8,190,405       1,206,316  
Other investing activities
              7,730       1,139  
  
 
 
   
 
 
   
 
 
 
Net cash used for investing activities
  
 
(9,660,661
 
 
(122,175
 
 
(17,994
  
 
 
   
 
 
   
 
 
 
Cash flows from financing activities:
      
Repayments of loans from related parties
     (70,462                  
Proceeds from short-term loans
     1,889,367       2,955,474       435,294  
Repayments of short-term loans
     (1,425,903     (1,773,315     (261,181
Proceeds from long-term loans and borrowings from third party investors, net of issuance costs
     295,395                    
Repayments of long-term loans and borrowings from third party investors
     (19,429     (302,060     (44,489
Proceeds from issuance of convertible senior notes, net of issuance costs
     7,909,506                    
Purchase of capped calls
     (567,140                  
Proceeds from issuance of subsidiaries’ shares
     103,500       114       17  
Acquisition of noncontrolling interests in a subsidiary
     (65,000                  
Proceeds from exercise of share options
     94,601       172,661       25,430  
Finance lease payments
              (9,020     (1,329
Other financing activities
     (4,880     (62,425     (9,194
Net cash provided by financing activities
  
 
8,139,555
 
 
 
981,429
 
 
 
144,548
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
     290,138       (58,523     (8,620
Net increase/(decrease) in cash, cash equivalents and restricted cash
  
 
332,676
 
 
 
(3,090,893
 
 
(455,240
Cash, cash equivalents and restricted cash at the beginning of the period
     6,760,447       6,909,674       1,017,685  
Cash, cash equivalents and restricted cash at the end of the period
     7,093,123       3,818,781       562,445  
Supplemental disclosures of cash flow information:
      
Acquisition of fixed assets included in accounts payable
     289,504       9,943       1,464  
Acquisition of long-term investments with
non-cash
consideration
     7,500       4,000       589  
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.
 
F-6

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
 
1. ORGANIZATION AND BASIS OF PRESENTATION
iQIYI, Inc. (“iQIYI” or the “Company”) was incorporated under the laws of the Cayman Islands on November 27, 2009. It was formerly known as Ding Xin, Inc. and changed its name to Qiyi.com, Inc. on August 30, 2010 and iQIYI, Inc. on November 30, 2017. The Company completed its initial public offering (“IPO”) on April 3, 2018.
The unaudited interim condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, variable interest entities (“VIEs”), and VIEs’ subsidiaries, hereinafter collectively referred to as the “Group”. In the opinion of management, the unaudited interim condensed consolidated financial statements, which comprise the condensed consolidated balance sheet as of September 30, 2020, the condensed consolidated statements of comprehensive loss and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2020, reflect all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the Company’s consolidated financial position as of September 30, 2020, the Company’s consolidated results of operations and consolidated cash flows for the nine months ended September 30, 2019 and 2020. The consolidated balance sheet data as of December 31, 2019 was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”) for annual financial statements. These unaudited interim condensed consolidated financial statements and the notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2019. Results for the nine months ended September 30, 2020 are not necessarily indicative of the results expected for the full fiscal year or for any future period.
The Group is an innovative platform in China offering a diverse collection of high-quality internet video content, including professionally-produced content licensed from professional content providers and self-produced content, on its platform. The Group provides membership services, online advertising services, content distribution services, live broadcasting services and online gaming services. The Group’s principal geographic market is in the People’s Republic of China (“PRC”) and is penetrating into new geographic regions. The Company does not conduct any substantive operations of its own but conducts its primary business operations through its wholly-owned subsidiaries, VIEs and VIEs’ subsidiaries in the PRC.
As of September 30, 2020, the Company’s major subsidiaries, VIEs and VIEs’ subsidiaries are as follows:
 
    
Place of

Incorporation
    
Date of

Establishment/Acquisition
 
 
 
 
 
 
 
  
Effective

interest held
 
Subsidiaries:
        
Beijing QIYI Century Science & Technology Co.,
Ltd. (“Beijing QIYI Century”)
     PRC        March 8, 2010        100
Chongqing QIYI Tianxia Science & Technology Co.,
Ltd. (“QIYI Tianxia”)
     PRC        November 3, 2010        100
iQIYI HK Limited (“QIYI HK”)
     Hong Kong        April 14, 2011        100
iQIYI Film Group Limited
     Cayman        May 26, 2017        100
iQIYI Media Limited
     Cayman        May 26, 2017        100
iQIYI Film Group HK Limited
     Hong Kong        June 12, 2017        100
Beijing iQIYI New Media Science &Technology Co.,
Ltd. (“iQIYI New Media”)
     PRC        July 27, 2017        100
Skymoons Inc.
     Cayman        Acquired on July 17, 2018        100
Magic Prime Group Limited
     BVI        Acquired on July 17, 2018        80
Special (Hong Kong) Co., Ltd
     Hong Kong        Acquired on July 17, 2018        80
iQIYI International Singapore Pte, Ltd.
     Singapore        February 11, 2020        100
VIEs and VIEs’ subsidiaries:
        
Beijing iQIYI Science & Technology Co., Ltd.
(“Beijing iQIYI”; formerly known as Beijing
Xinlian Xinde Advertisement Media Co., Ltd.)
     PRC        Acquired on November 23, 2011        Nil  
Shanghai iQIYI Culture Media Co., Ltd. (“Shanghai iQIYI”)
     PRC        December 19, 2012        Nil  
 
F-7

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
 
    
Place of

Incorporation
  
Date of

Establishment/Acquisition
  
Effective

interest held
Shanghai Zhong Yuan Network Co., Ltd.
(“Shanghai Zhong Yuan”)
   PRC    Acquired on May 11, 2013    Nil
iQIYI Pictures (Beijing) Co., Ltd. (“iQIYI
Pictures”)
   PRC    December 31, 2014    Nil
Beijing iQIYI Intelligent Entertainment Technology Co., Ltd. (“Intelligent Entertainment”, formerly known as Beijing iQIYI Cinema Management
Co., Ltd.)
   PRC    June 28, 2017    Nil
Tianjin Skymoons Technology Co., Ltd. (“Tianjin Skymoons”)
   PRC         Acquired on July 17, 2018         Nil
Chengdu Skymoons Digital Entertainment Co., Ltd. (“Chengdu Skymoons”)
   PRC    Acquired on July 17, 2018    Nil
Chengdu Skymoons Interactive Network Game Co.,Ltd. (“Skymoons Interactive”)
   PRC    Acquired on July 17, 2018    Nil
PRC laws and regulations prohibit or restrict foreign ownership of companies that engage in value-added telecommunication services, internet audio-video program services and certain other businesses. To comply with these foreign ownership restrictions, the Group operates its websites and primarily conducts its business in the PRC through the VIEs. The
paid-in
capital of the VIEs was mainly funded by the Company through loans extended to the authorized individuals who were the shareholders of the VIEs. The Company has entered into certain agreements with the shareholders of the VIEs through the Company or its wholly-owned subsidiaries in the PRC, including loan agreements for the
paid-in
capital of the VIEs and share pledge agreements for the equity interests in the VIEs held by the shareholders of the VIEs. In addition, the Group has entered into shareholder voting rights trust agreements and exclusive purchase option agreements with the VIEs and nominee shareholders of the VIEs through the Company or its wholly-owned subsidiaries in the PRC, which give the Company or its wholly-owned subsidiaries the power to direct the activities that most significantly affect the economic performance of the VIEs and to acquire the equity interests in the VIEs when permitted by the applicable PRC laws, respectively. Commitment letters have been entered into which obligate the Company to absorb losses of the VIEs that could potentially be significant to the VIEs and certain exclusive agreements have been entered into that entitle the Company or its wholly-owned subsidiaries to receive economic benefits from the VIEs that potentially could be significant to the VIEs.
Despite the lack of legal majority ownership, the Company has effective control of the VIEs through a series of contractual arrangements and a parent-subsidiary relationship exists between the Company and the VIEs. Through the contractual arrangements, the shareholders of the VIEs effectively assigned all of their voting rights underlying their equity interest in the VIEs to the Company. In addition, through the other exclusive agreements, which consist of business operation agreements, business cooperating agreements, exclusive technology consulting and services agreements and trademark and software usage license agreements, the Company, through its wholly-owned subsidiaries in the PRC, have the right to receive economic benefits from the VIEs that potentially could be significant to the VIEs. Lastly, through the commitment letters, the Company has the obligation to absorb losses of the VIEs. Therefore, the Company is considered the primary beneficiary of the VIEs and consolidates the VIEs and their subsidiaries as required by SEC Accounting Standards Codification (“ASC”) topic 810 (“ASC 810”),
Consolidation
.
In the opinion of the Company’s legal counsel, (i) the ownership structure relating to the VIEs of the Company is in compliance with existing PRC laws and regulations; and (ii) each of the contractual arrangements with the VIEs and their shareholders, and the contractual arrangements taken as a whole, are valid and legally binding upon each party to such agreement under PRC laws; is enforceable against each party thereto in accordance with its terms; and does not contravene any applicable PRC laws or regulations currently in effect.
However, uncertainties in the PRC legal system could cause the Company’s current ownership structure to be found in violation of any existing and/or future PRC laws or regulations and could limit the Company’s ability to enforce its rights under these contractual arrangements. Furthermore, the VIEs’ shareholders may have interests that are different with those of the Company, which could potentially increase the risk that they would seek to act in contrary to the terms of the aforementioned agreements.
 
F-8

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
 
In addition, if the current structure or any of the contractual arrangements were found to be in violation of any existing or future PRC laws, the Company may be subject to penalties, including but not be limited to: the cancelation or revocation of the Company’s business and operating licenses, being required to restructure the Company’s operations or discontinue the Company’s operating activities. The imposition of any of these or other penalties may result in a material and adverse effect on the Company’s ability to conduct its operations. As a result, the Company may not be able to operate or control the VIEs, which may result in deconsolidation of the VIEs.
The carrying amounts of the assets, liabilities and the results of operations of the VIEs and VIEs’ subsidiaries included in the Company’s consolidated balance sheets and statements of comprehensive loss are as follows:
 
    
As of
 
    
December 31,
2019
    
September 30,
2020
    
September 30,
2020
 
    
RMB
    
RMB
    
US$
 
ASSETS
        
Current assets:
        
Cash and cash equivalents
     882,743        909,623        133,973  
Short-term investments
     169,565        228,179        33,607  
Accounts receivable, net
     2,839,945        2,750,509        405,106  
Licensed copyrights, net
     716,008        952,996        140,362  
Prepayments and other assets
     3,202,489        2,958,358        435,718  
  
 
 
    
 
 
    
 
 
 
Total current assets
  
 
7,810,750
 
  
 
7,799,665
 
  
 
1,148,766
 
  
 
 
    
 
 
    
 
 
 
Non-current
assets:
              
Fixed assets, net
     856,116        726,666        107,026  
Long-term investments
     2,130,467        2,249,307        331,287  
Licensed copyrights, net
     1,640,582        1,157,843        170,532  
Produced content, net
     4,355,221        5,145,750        757,887  
Operating lease assets
     649,273        736,802        108,519  
Goodwill
     2,412,989        2,412,989        355,395  
Others
     1,552,160        986,015        145,225  
  
 
 
    
 
 
    
 
 
 
Total
non-current
assets
  
 
13,596,808
 
  
 
13,415,372
 
  
 
1,975,871
 
  
 
 
    
 
 
    
 
 
 
Total assets
  
 
21,407,558
 
  
 
21,215,037
 
  
 
3,124,637
 
  
 
 
    
 
 
    
 
 
 
LIABILITIES
        
Current liabilities:
        
Accounts payable
     4,193,022        3,920,413        577,414  
Customer advances and deferred revenue
     2,982,011        2,964,704        436,654  
Long-term loans, current portion (i)
     732,213        712,253        104,904  
Operating lease liabilities, current portion
     95,905        100,201        14,758  
Accrued expenses and other liabilities
     4,090,314        3,949,158        581,648  
  
 
 
    
 
 
    
 
 
 
Total current liabilities
  
 
12,093,465
 
  
 
11,646,729
 
  
 
1,715,378
 
Non-current
liabilities:
              
Long-term loans (i)
     937,782        664,299        97,841  
Operating lease liabilities
     364,853        620,583        91,402  
Others
     630,195        528,030        77,770  
  
 
 
    
 
 
    
 
 
 
Total
non-current
liabilities
  
 
1,932,830
 
  
 
1,812,912
 
  
 
267,013
 
Amounts due to the Company and its subsidiaries
  
 
13,583,317
 
  
 
15,618,372
 
  
 
2,300,338
 
  
 
 
    
 
 
    
 
 
 
Total liabilities
  
 
27,609,612
 
  
 
29,078,013
 
  
 
4,282,729
 
  
 
 
    
 
 
    
 
 
 
 
F-9

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
 
    
Nine months ended September 30
 
    
2019
    
2020
    
2020
 
    
RMB
    
RMB
    
US$
 
Total revenues
     20,116,714        20,351,564        2,997,461  
Net loss
     (1,943,153      (1,940,779      (285,846
Net cash provided by operating activities
     1,644,590        259,018        38,149  
Net cash used for investing activities
     (2,173,941      (364,693      (53,714
Net cash provided by financing activities
     586,135        152,753        22,498  
 
(i)
In accordance with the arrangement as described in Note 7, the Group consolidates the securitization vehicle as it is a VIE for which the Group considers itself the primary beneficiary given the Group has the power to govern the activities that most significantly impact its economic performance and is obligated to absorb losses that could potentially be significant to the VIE. As of December 31, 2019 and September 30, 2020, RMB424,000 (US$62,448) of the loan is repayable within one year and is included in “Long-term loans, current portion” and the remaining balance of RMB527,000 (US$77,619) of the loan is included in “Long-term loans” in the carrying amounts of the liabilities of the VIEs and VIEs’ subsidiaries.
Unrecognized revenue-producing assets held by the VIEs include certain internet content provisions and other licenses, domain names and trademarks. The internet content provisions and other licenses, which are held by the VIEs that provide the relevant services, are required under relevant PRC laws, rules and regulations for the operation of Internet businesses in the PRC, and therefore are integral to the Company’s operations. The VIEs and VIEs’ subsidiaries contributed an aggregate of 94% and 91% of the Group’s consolidated revenues for the nine months ended September 30, 2019 and 2020, respectively, after elimination of inter-company transactions. As of September 30, 2020, there was no pledge or collateralization of the VIEs and VIEs’ subsidiaries’ assets that can only be used to settled obligations of the VIEs and VIEs’ subsidiaries, other than the collateralization of a VIE’s office building as described in Note 7 and the share pledge agreements and business operation agreements with respect to the VIEs contractual arrangements as disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2019.
The VIEs’ third-party creditors did not have recourse to the general credit of the Company in normal course of business. The Company did not provide or intend to provide financial or other supports not previously contractually required to the VIEs and VIEs’ subsidiaries during the years presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently adopted accounting pronouncements
Adoption of ASU
2016-13
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU
2016-13,
Measurement of Credit Losses on Financial Instruments
, which replaces the incurred loss impairment guidance in legacy GAAP and establishes a single allowance framework for financial assets carried at amortized cost with a methodology that requires consideration of a broader range of information to estimate credit losses. The Group adopted ASC 326,
Credit Losses
(“ASC 326”) on January 1, 2020, using a modified retrospective transition method, which resulted in a cumulative-effect adjustment to increase the opening balance of accumulated deficit on January 1, 2020 by RMB94,048.
The Group maintains an allowance for credit losses for accounts receivable and contract assets, which is recorded as an offset to accounts receivable and contract assets, and the estimated credit losses charged to the allowance is classified as “Selling, general and administrative” in the condensed consolidated statements of comprehensive loss. When similar risk characteristics exist, the Group assesses collectability and measures expected credit losses on a collective basis for a pool of assets, whereas if similar risk characteristics do not exist, the Group assesses collectability and measures expected credit losses on an individual asset basis. In determining the amount of the allowance for credit losses, the Group considers historic collection experience, the age of the accounts receivable and contract assets balances, credit quality of the Group’s customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect the customer’s ability to pay.
 
F-10

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
 
The allowance for credit losses on accounts receivable and contract assets
, including amounts due from related parties,
 
was RMB151,799 and RMB400,719 (US$59,020) as of December 31, 2019 and September 30, 2020, respectively. The provisions and write-offs charged against the allowance were RMB214,388 (US$31,576) and RMB49,194 (US$7,245), respectively, for the nine months ended September 30, 2020.
For debt securities, the allowance for credit losses reflects the Company’s estimated expected losses over the contractual lives of the debt securities and is recorded as a charge to “Other income, net” in the condensed consolidated statements of comprehensive loss. Estimated allowances of credit losses are determined by considering reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions.
Adoption of ASU 2017-04
In January 2017, the FASB issued ASU
2017-04,
Simplifying the Test for Goodwill Impairment
, which simplifies the accounting for goodwill impairment by eliminating Step two from the goodwill impairment test. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, versus determining an implied fair value in Step two to measure the impairment loss. The Company adopted this guidance on a prospective basis on January 1, 2020 with no material impact on its consolidated financial statements and related disclosures as a result of adopting the new standard.
Adoption of ASU
2019-02
In March 2019, the FASB issued ASU
2019-02,
Improvements to Accounting for Costs of Films and License Agreements for Program Materials
(“ASU
2019-02”)
which includes the following major changes from previous legacy GAAP that are applicable to the Group:
 
   
The content distinction for capitalization of production costs of an episodic television series and production costs of films is removed;
 
   
Entities are required to test films and license agreements for program material for impairment at a film group level when the film or license agreements are predominantly monetized with other films and license agreements;
 
   
Entities shall assess estimates of the use of a film in a film group and account for such changes prospectively;
 
   
Cash outflows for the costs incurred to obtain rights for both produced and licensed content are required t
o
be reported as operating cash outflows in the statement of cash flows.
The Group adopted ASU
2019-02
on January 1, 2020, using a prospective transition method. For the nine months ended September 30, 2020, cash outflows for the costs incurred to acquired licensed copyrights are reported as operating cash outflows in the Group’s condensed consolidated statement of cash flows whereas they were reported as investing cash outflows prior to the adoption of ASU
2019-02.
There was no material impact to the condensed consolidated balance sheet or condensed consolidated statement of comprehensive loss. See the Group’s updated accounting policies for Produced Content and Licensed Copyrights below for further details.
 
To supplement cash flow disclosure of operating activities in 2020, cash paid for content, which includes both licensed copyrights and produced content, is RMB11,941,392 (US$1,758,777) for the nine months ended September 30, 2020. 
Produced content, net
The Group produces original content
in-house
and collaborates with external parties. Produced content primarily consists of films, episodic series, variety shows and animations. The costs incurred in the physical production of original content includes direct production costs, production overhead and acquisition costs. Production costs for original content that are predominantly monetized in a film group are capitalized and reported separately as
non-current
assets with caption of “Produced content, net” on the condensed consolidated balance sheets. Production costs for original content predominantly monetized on its own are capitalized to the extent that they are recoverable from total revenues expected to be earned (“ultimate revenue”); otherwise, they are expensed as cost of revenues. Ultimate revenue estimates include revenue expected to be earned from all sources, including exhibition, licensing, or exploitation of produced content if the Group has demonstrated a history of earning such revenue. The Group estimates ultimate revenue to be earned during the economic useful lives of produced content based on anticipated release patterns and historical results of similar produced content, which are identified based on various factors, including cast and crew, target audience and popularity. Produced content also includes cash expenditures made to acquire a proportionate share of certain rights to films including profit sharing, distribution and/or other rights. Exploitation costs are expensed as incurred.
 
F-11

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
 
For produced content that is predominantly monetized in a film group, the Group amortizes film costs using an accelerated method based on historical and estimated future viewership consumption patterns. For produced content that is monetized on its own, the Group amortizes film costs using an accelerated method based on historical and estimated usage patterns of similar produced content, which represents the Group’s best estimate of usage. Based on the estimated patterns, the Group amortizes produced content within ten years, beginning with the month of first availability and such costs are included in “Cost of revenues” in the condensed consolidated statement of comprehensive loss.
Licensed copyrights, net
Licensed copyrights consist of professionally-produced content such as films, television series, variety shows and other video content acquired from external parties. The license fees are capitalized and, unless prepaid, a corresponding liability is recorded when the cost of the content is known, the content is accepted by the Group in accordance with the conditions of the license agreement and the content is available for its first showing on the Group’s websites. Licensed copyrights are presented on the condensed consolidated balance sheet as current and
non-current
based on estimated time of usage.
The Group’s licensed copyrights include the right to broadcast and, in some instances, the right to sublicense. The broadcasting right, refers to the right to broadcast the content on its own websites and the sublicensing right, refers to the right to sublicense the underlying content to external parties. When licensed copyrights include both broadcasting and sublicensing rights, the content costs are allocated to these two rights upon initial recognition, based on the relative proportion of the estimated total revenues that will be generated by each right over its economic useful lives.
For the right to broadcast the contents on its own websites that generates online advertising and membership services revenues, the content costs are amortized using an accelerated method based on historical and estimated future viewership consumption patterns by categories over the shorter of each content’s contractual period or economic useful lives within ten years, beginning with the month of first availability. Estimates of future viewership consumption patterns and economic useful lives are reviewed periodically, at least on an annual basis and revised, if necessary. Revisions to the amortization patterns are accounted for as a change in accounting estimate prospectively in accordance with ASC topic 250 (“ASC 250”),
Accounting Changes and Error Corrections.
For the right to sublicense the content to external parties that generates direct content distribution revenues, the content costs are amortized based on its estimated usage pattern and recorded as cost of revenues.
Change in accounting estimates of licensed copyrights and produced content
In
 2020, the Group reviewed and revised its estimates of the estimated future viewership consumption patterns and extended the
estimated
useful lives of its licensed copyrights and produced content to better reflect the usage of these content assets. As a result of these revisions, amortization expense decreased by
 RMB
398,469 (US$58,688)
, net loss decreased by
RMB398,469
(US$58,688), and basic and diluted net loss per Class A and Class B ordinary share decreased by RMB0.08 (US$0.01) for the
nine
months ended September 30, 2020.
Impairment of licensed copyrights and produced content
Our business model is mainly subscription and advertising based, as such the majority of the Group’s content assets (licensed copyrights and produced content) are predominantly
m
onetized with other content assets, whereas a smaller portion of the Group’s content assets are predominantly monetized at a specific title level such as variety shows and investments in a proportionate share of certain rights to films including profit sharing, distribution and/or other rights. Because the identifiable cash flows related to content launched on our Mainland China platform are largely independent of the cash flows of other content launched on our overseas platform, the Group has identified two separate film groups. The Group reviews its film groups and individual content for impairment when there are events or changes in circumstances that indicate the fair value of a film group or individual content may be less than its unamortized costs. Examples of such events or changes in circumstances include, a significant adverse change in technological, regulatory, legal, economic, or social factors that could affect the fair value of the film group or the public’s perception of a film or the availability of a film for future showings, a significant decrease in the number of subscribers or forecasted subscribers, or the loss of a major distributor, a change in the predominant monetization strategy of a film that is currently monetized on its own, actual costs substantially in excess of budgeted costs, substantial delays in completion or release schedules, or actual performance subsequent to release failing to meet expectations set before release such as a significant decrease in the amount of ultimate revenue expected to be recognized.
 
F-12

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
When such events or changes in circumstances are identified, the Group assesses whether the fair value of an individual content (or film group) is less than its unamortized film costs, determines the fair value of an individual cont
e
nt (or film group) and recognizes an impairment charge for the amount by which the unamortized capitalized costs exceed the individual content’s (or film group’s) fair value. The Group mainly uses an income approach to determine the fair value of an individual content or film group, for which the most significant inputs include forecasted future revenues, costs and operating expenses attributable to the film group and the discount rate. An impairment loss attributable to a film group is allocated to individual licensed copyrights and produced content within the film group on a pro rata basis using the relative carrying values of those assets as the Group cannot estimate the fair value of individual contents in the film group without undue cost and effort.
Comparative Information
Certain items in the assets of the VIEs and VIEs’ subsidiaries included in the Company’s condensed consolidated balance sheets have been adjusted to conform with the current year’s presentation to facilitate comparison.
Convenience translation
Translations of amounts from RMB into US$ for the convenience of the reader have been calculated at the exchange rate of RMB6.7896 per US$1.00 on September 30, 2020, as published on the website of the United States Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at such rate.
Use of estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Management evaluates estimates, including those related to the standalone selling prices of performance obligations of revenue contracts, accrued sales rebates for online advertising revenues, the allowance for credit losses of accounts receivable, contract assets and debt securities, future viewership consumption patterns and useful lives of licensed copyrights and produced content, future revenues generated by the broadcasting and sublicensing rights of content assets (licensed and produced) , useful lives of certain finite-lived intangible assets, fair values of certain debt and equity investments, recoverability and useful lives of long-lived assets, recoverability of indefinite-lived intangible assets and goodwill, ultimate revenue of produced content predominantly monetized on its own, fair values of licensed copyrights and produced content monetized as a film group or individually, the purchase price allocation and fair value of noncontrolling interests with respect to business combinations, fair value of nonmonetary content exchanges, fair value of financial instruments, fair value of share options to purchase the Company’s ordinary shares, forfeiture rates for share options granted, valuation allowances on deferred tax assets and income tax uncertainties, among others. Management bases these estimates on its historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.
Revenue recognition
The Group’s revenues are derived principally from membership services, online advertising services and content distribution. Revenue is recognized when control of promised goods or services is transferred to the Group’s customers in an amount of consideration to which an entity expects to be entitled to in exchange for those goods or services. Value added taxes (“VAT”) are presented as a reduction of revenues.
The Group’s revenue recognition policies are as follows:
Membership services
The Group offers membership services to subscribing members with various privileges, which primarily including access to exclusive and
ad-free
streaming of premium content 1080P/4K high-definition video, Dolby Audio, and accelerated downloads and others. When the receipt of membership fees is for services to be delivered over a period of time, the receipt is initially recorded as deferred revenue and revenue is recognized ratably over the membership period as services are rendered. Membership services revenue also includes fees earned from subscribing members for
on-demand
content purchases and early access to premium content. The Group is the principal in its relationships where partners, including consumer electronics manufacturers (TVs and cell phones), mobile operators and internet service providers, provide access to the membership services as the Group retains control over its service delivery to its subscribing members. Typically, payments made to the partners, such as for payment processing services, are recorded as cost of revenues. For the sale of the right to services, such as cooperation with other parties’ memberships, the Group recognizes revenue on a net basis when the Group does not control the specified services before they are transferred to the customer.
 
F-13

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
 
Online advertising services
The Group sells advertising services primarily to third-party advertising agencies and a small portion are sold d
i
rectly to advertisers. Advertising contracts are signed to establish the price and advertising services to be provided. Pursuant to the advertising contracts, the Group provides advertisement placements on its websites in different formats, including but not limited to video, banners, links, logos, brand placement and buttons. The Group performs a credit assessment of the customer to assess the collectability of the contract price prior to entering into contracts. For contracts where the Group provides customers with multiple performance obligations, primarily for advertisements to be displayed in different spots, placed under different forms and occur at different times, the Group would evaluate all the performance obligations in the arrangement to determine whether each performance obligation is distinct. Consideration is allocated to each performance obligation based on its standalone selling price and revenue is recognized as each performance obligation is satisfied through the Group’s display of the advertisements in accordance with the revenue contracts.
The Group provides various sales incentives to its customers for meeting certain cumulative purchase volume requirements, including cash rebates to certain third-party advertising agencies and noncash credits which can be used to acquire future online advertising services in certain bundled arrangements, which are negotiated on a contract by contract basis with customers. The Group accounts for cash rebates granted to customers as variable consideration which is measured based on the most likely amount of incentive to be provided to customers. Noncash credits granted to customers are considered options to acquire additional services that provide customers with a material right. The contract consideration related to these customer options to acquire additional services are deferred and recognized as revenue when future services are transferred or when the options expire.
Content distribution
The Group generates revenues from
sub-licensing
content licensed from vendors for cash or through nonmonetary exchanges mainly with other online video broadcasting companies. The exclusive licensing agreements the Group enters into with the vendors has a specified license period and provides the Group rights to
sub-license
these contents to other parties. The Group enters into a
non-exclusive
sub-license
agreement with a
sub-licensee
for a period that falls within the original exclusive license period. For cash
sub-licensing
transactions, the Group is entitled to receive the
sub-license
fee under the
sub-licensing
arrangements and does not have any future obligation once it has provided the underlying content to the
sub-licensee
(which is provided at or before the beginning of the
sub-license
period). The
sub-licensing
of content represents a license of functional intellectual property which grants a right to use the Group’s licensed copyrights and is recognized at the point in time when the licensed copyright is made available for the customer’s use and benefit.
The Group also enters into nonmonetary transactions to exchange online broadcasting rights of licensed copyrights with other online video broadcasting companies from time to time. The exchanged licensed copyrights provide rights for each party to broadcast the licensed copyrights received on its own website only. Each transferring party retains the right to continue broadcasting the exclusive content on its own website and/or sublicense the rights to the content it surrendered in the exchange. The Group accounts for these nonmonetary exchanges based on the fair value of the asset received. Barter sublicensing revenues are recognized in accordance with the same revenue recognition criteria above. T
h
e Group estimates the fair value of the licensed copyrights received using a market approach based on various factors, including the purchase price of similar
non-exclusive
and/or exclusive contents, broadcasting schedule, cast and crew, theme and box office. The attributable cost of sublicensing transactions, whether for cash or through nonmonetary exchanges, is recognized as cost of revenues through the amortization of the sublicensing right component of the exclusive licensed copyright.
The Group recognized barter sublicensing revenues of RMB493,570 and RMB957,675 (US$141,050) and related costs of RMB411,921 and RMB710,199 (US$104,601) for the nine months ended September 30, 2019 and 2020, respectively.
 
F-14

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except for number of shares (or ADS) and per share (or ADS) data)
 
Others
Other revenues mainly include revenues from live broadcasting and online games.
Live broadcasting
The Group operates a live broadcasting platform, iQIYI Show, whereby users can follow their favorite hosts and shows in real time through live broadcasting. Users can purchase virtual currency for usage in iQIYI Show to acquire consumable virtual gifts, which are simultaneously presented to hosts to show their support or time-based virtual items, which enables users to enjoy additional functions and privileges for a specified time period.
The Group operates the live broadcasting platform and determines the price of virtual items sold. Therefore, revenues derived from the sale of virtual items are recorded on a gross basis as the Group acts as the principal in the transaction. Costs incurred from services provided by the hosts are recognized as cost of revenues. To facilitate the sale of virtual items, the Group bundles special privileges and virtual items as a package at a discounted price and the Group allocates the arrangement consideration to each performance obligation based on their relative standalone selling prices. Revenue from the sale of consumable virtual gifts is recognized when consumed by the user, or, in the case of time-based virtual items, recognized ratably over the period each virtual item is made available to the user. Virtual currency sold but not yet consumed by the purchasers is recorded as “Customer advances and deferred revenue” on the condensed consolidated balance sheets.
Online games
The Group operates mobile games including both self-developed and licensed mobile games and generates mobile game revenues from the sale of
in-game
virtual items, including items, avatars, skills, privileges or other
in-game
consumables, features or functionality, within the games.
The Group records revenue generated from mobile games on a gross basis if the Group acts as the principal in the mobile game arrangements under which the Group controls the specified services before they are provided to the customer. In addition, the Group is primarily responsible for fulfilling the promise to provide maintenance services and has discretion in setting the price for the services to the customer. Otherwise, the Group records revenue on a net basis based on the ratios
pre-determined
with the online game developers when all the revenue recognition criteria set forth in ASC 606 are met, which is generally when the user purchases virtual currencies issued by the game developers.
For transactions where the Group is the principal, the Group determines that the
in-game
virtual items are identified as performance obligations. The Group provides
on-going
services to the
end-users
who purchase virtual items to gain an enhanced game-playing experience. Accordingly, the Group recognizes revenues ratably over the estimated average playing period of these paying players, starting from the point in time when virtual items are delivered to the players’ accounts.
Contract balances
When either party to a revenue contract has performed, the Group presents the contract in the condensed consolidated balance sheets as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment.
Contract assets represent unbilled amounts related to the Group’s rights to consideration for advertising services delivered and are included in “Prepayments and other assets” on the condensed consolidated balance sheets. As of December 31, 2019, and September 30, 2020, contract assets were RMB1,875,704 and RMB1,590,327 (US$234,230), respectively, net of an allowance for credit losses of RMB7,225 and RMB11,389 (US$1,677), respectively.
Contract liabilities are the Group’s obligation to transfer goods or services to customers for which the Group has received consideration from customers, which
are
 comprised of: i) payments received for membership fees and other services; ii) virtual currency sold for which the corresponding
services have not yet been provided to
customers
;
and
iii) noncash credits granted to customers. Contract liabilities are primarily presented as “Customer advances and deferred revenue” on the condensed consolidated balance sheets. Balances of contract liabilities were RMB3,954,763 and RMB3,957,230 (US$582,837) as of December 31, 2019 and September 30, 2020, respectively. Revenue recognized for the nine months ended September 30, 2020 that was included in contract liabilities as of January 1, 2020 was RMB2,694,143 (US$396,804).
 
F-15

iQIYI, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)