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 August 2017

 

 

 

Commission File Number: 001-35729

 

 

 

YY Inc.

 

Building B-1, North Block of Wanda Plaza

No. 79 Wanbo Er Road, Nancun Town

Panyu District, Guangzhou 511442

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

 

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

 

Form 20-F þ   Form 40-F ¨

 

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

 

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

 

 

 

 

 

 

SIGNATURE 

 

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

 

  YY INC.
   
  By:   /s/ Bing Jin
    Name: Bing Jin
    Title: Chief Financial Officer

 

Date:August 14, 2017

 

 2 

 

 

EXHIBIT INDEX

 

Exhibit No.   Description
     
Exhibit 99.1   Unaudited Condensed Consolidated Interim Financial Statements
     
Exhibit 99.2   Audited Consolidated Annual Financial Statements
     
Exhibit 99.3   Consent of PricewaterhouseCoopers Zhong Tian LLP, independent registered public accounting firm, for the inclusion of reports in Form S-8 of YY Inc.

 

EX-101.INS XBRL Taxonomy Instance Document

EX-101.SCH XBRL Taxonomy Extension Schema Document

EX-101.CAL XBRL Taxonomy Calculation Linkbase Document

EX-101.DEF XBRL Taxonomy Extension Definition Linkbase Document

EX-101.LAB XBRL Taxonomy Label Linkbase Document

EX-101.PRE XBRL Taxonomy Presentation Linkbase Document

 

 3 

 

Exhibit 99.1

 

YY INC.

 

INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Contents Page  
   
Unaudited Interim Condensed Consolidated Balance Sheets as of December 31, 2016 and June 30, 2017 F-2
   
Unaudited Interim Condensed Consolidated Statements of Operations and Comprehensive Income for the Six Months Ended June 30, 2016 and 2017 F-4
   
Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2016 and 2017 F-6
   
Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2017 F-8
   
Notes to the Unaudited Interim Condensed Consolidated Financial Statements F-10

 

 F-1 

 

 

YY Inc.

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2016 AND JUNE 30, 2017

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

 

      As of
December 31,
   As of June 30, 
   Note 

2016

   2017   2017 
      RMB   RMB   US$ 
              (Note 2(c)) 
Assets                  
Current assets                  
Cash and cash equivalents  3   1,579,743    1,349,141    199,009 
Short-term deposits  4   3,751,519    1,890,000    278,790 
Restricted short-term deposits  5   -    1,000,000    147,508 
Short-term investments      -    14,070    2,075 
Accounts receivable, net  6   169,571    218,558    32,239 
Inventory      2,266    1,223    180 
Amount due from related parties  23   135,245    90,474    13,346 
Prepayments and other current assets  7   224,732    141,504    20,875 
                   
Total current assets      5,863,076    4,704,970    694,022 
                   
Non-current assets                  
Deferred tax assets      117,811    111,104    16,389 
Investments  8   918,602    1,105,771    163,110 
Property and equipment, net  9   838,750    921,561    135,937 
Land use right, net  10   1,872,394    1,848,440    272,659 
Intangible assets, net  11   58,926    35,050    5,170 
Goodwill  12   14,300    14,277    2,106 
Other non-current assets      101,933    73,192    10,796 
                   
Total non-current assets      3,922,716    4,109,395    606,167 
                   
Total assets      9,785,792    8,814,365    1,300,189 
                   
Liabilities, mezzanine equity and shareholders’ equity                  
Current liabilities                  
Short-term loans  15   -    609,756    89,944 
Convertible bonds  16   2,768,469    -    - 
Accounts payable      137,107    108,700    16,034 
Deferred revenue  13   430,683    506,806    74,758 
Advances from customers      56,152    65,149    9,610 
Income taxes payable      140,754    121,871    17,977 
Accrued liabilities and other current liabilities  14   1,066,038    1,051,400    155,091 
Amounts due to related parties  23   91,245    41,110    6,063 
                   
Total current liabilities      4,690,448    2,504,792    369,477 
                   
Non-current liabilities                  
Convertible bonds      -    6,775    999 
Deferred revenue  13   25,459    28,330    4,179 
Deferred tax liabilities      8,058    7,620    1,124 
                   
Total non-current liabilities      33,517    42,725    6,302 
                   
Total liabilities      4,723,965    2,547,517    375,779 
                   
Commitments and contingencies  25               

 

 F-2 

 

 

YY Inc.

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2016 AND JUNE 30, 2017 (CONTINUED)

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

 

      As of
December 31,
   As of June 30, 
   Note 

2016

   2017   2017 
      RMB   RMB   US$ 
              (Note 2(c)) 
Mezzanine equity      9,272    12,687    1,871 
                   
Shareholders’ equity                  
Class A common shares (US$0.00001 par value; 10,000,000,000 and 10,000,000,000 shares authorized, 750,115,028 and 773,115,328 shares issued and outstanding as of December 31, 2016 and June 30, 2017, respectively)  20   44    46    7 
Class B common shares (US$0.00001 par value; 1,000,000,000 and 1,000,000,000 shares authorized, 359,557,976 and 347,982,976 shares issued and outstanding as of December 31, 2016 and June 30, 2017, respectively)  20   26    25    4 
Additional paid-in capital      2,165,766    2,210,331    326,041 
Statutory reserves      58,857    58,857    8,682 
Retained earnings      2,728,736    3,845,598    567,256 
Accumulated other comprehensive income      93,066    95,391    14,071 
                   
Total YY Inc.’s shareholders’ equity      5,046,495    6,210,248    916,061 
                   
Non-controlling interests      6,060    43,913    6,478 
                   
Total shareholders’ equity      5,052,555    6,254,161    922,539 
                   
Total liabilities, mezzanine equity and shareholders’ equity      9,785,792    8,814,365    1,300,189 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-3 

 

 

YY Inc.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2017

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

 

      For the six months ended June 30, 
   Note  2016   2017   2017 
      RMB   RMB   US$ 
              (Note 2(c)) 
Net revenues(1)                  
Live streaming      3,018,664    4,430,824    653,581 
Online games      359,371    293,707    43,324 
Membership      141,442    97,625    14,400 
Others      110,618    53,793    7,935 
                   
Total net revenues      3,630,095    4,875,949    719,240 
                   
Cost of revenues(2)  17   (2,268,871)   (2,940,440)   (433,738)
                   
Gross profit      1,361,224    1,935,509    285,502 
                   
Operating expenses(2)                  
Research and development expenses      (351,876)   (332,920)   (49,108)
Sales and marketing expenses      (166,660)   (293,036)   (43,225)
General and administrative expenses      (173,562)   (181,197)   (26,728)
                   
Total operating expenses      (692,098)   (807,153)   (119,061)
                   
(Loss)/Gain on deconsolidation and disposal of subsidiaries      (23,474)   37,989    5,604 
Other income  18   31,412    49,986    7,373 
                   
Operating income      677,064    1,216,331    179,418 
                   
Foreign currency exchange gains/(losses), net      789    (1,574)   (232)
Gain on partial disposal of investments      -    45,861    6,765 
Interest expense      (39,970)   (24,727)   (3,647)
Interest income      23,551    58,348    8,607 
                   
Income before income tax expenses      661,434    1,294,239    190,911 
                   
Income tax expenses  19   (124,801)   (189,604)   (27,968)
                   
Income before share of income in equity method investments, net of income taxes      536,633    1,104,635    162,943 
                   
Share of income in equity method investments, net of income taxes      5,746    8,661    1,278 
                   
Net income      542,379    1,113,296    164,221 
                   
Less: Net loss attributable to the non-controlling interest shareholders and the mezzanine classified non-controlling interest shareholders      (9,246)   (3,566)   (526)
                   
Net income attributable to YY Inc.      551,625    1,116,862    164,747 
                   
Other comprehensive income / (loss):                  
Unrealized gain of available-for-sale securities, net of nil tax      177,152    2,418    357 
Foreign currency translation adjustments, net of nil tax      (1,109)   (93)   (14)
                   
Comprehensive income attributable to YY Inc.      727,668    1,119,187    165,090 

 

 F-4 

 

 

YY Inc.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2017 (CONTINUED)

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

 

      For the six months ended June 30, 
   Note  2016   2017   2017 
      RMB   RMB   US$ 
              (Note 2(c)) 
                
Net income per ADS*                  
—Basic  22   9.82    19.68    2.90 
—Diluted  22   9.65    19.21    2.83 
Weighted average number of ADS used in calculating net income per ADS                  
—Basic  22   56,153,766    56,757,452    56,757,452 
—Diluted  22   57,141,627    59,234,872    59,234,872 
                   
Net income per common share*                  
—Basic  22   0.49    0.98    0.15 
—Diluted  22   0.48    0.96    0.14 
Weighted average number of common shares used in calculating net income per common share                  
—Basic  22   1,123,075,313    1,135,149,038    1,135,149,038 
—Diluted  22   1,142,832,539    1,184,697,433    1,184,697,433 

 

* Each ADS represents 20 Class A common shares.
   
(1) Revenue presentation has been changed to live streaming, online games, membership and others since the third quarter of 2016, and the revenue presentation for the period ended June 30, 2016 has also been retrospectively changed.
   
(2) Share-based compensation was allocated in cost of revenues and operating expenses as follows:

 

      For the six months ended June 30, 
   Note  2016   2017   2017 
      RMB   RMB   US$ 
              (Note 2(c)) 
                
Cost of revenues     8,753    6,644    980 
Research and development expenses      53,773    21,896    3,230 
Sales and marketing expenses      1,780    812    120 
General and administrative expenses      31,113    16,706    2,464 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-5 

 

 

YY Inc.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2017

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

  

      Class A
common shares
  

Class B

common shares

   Additional           Accumulated
other
   Total YY Inc.’s       Total 
   Note  Number
of shares
   Amount   Number
of shares
   Amount   paid-in
capital
  

Statutory

reserves

   Retained
earnings
   comprehensive
(loss)/income
   shareholders’
equity
  

Non-controlling

interests

   shareholders’
equity
 
          RMB       RMB   RMB   RMB   RMB   RMB   RMB   RMB   RMB 
                                                
Balance as of December 31, 2015      728,227,848    43    369,557,976    27    2,011,799    56,507    1,207,168    (36,385)   3,239,159    7,660    3,246,819 
Issuance of common shares for exercised share options  21   104,380    -    -    -    3    -    -    -    3    -    3 
Issuance of common shares for vested restricted shares and restricted share units      3,999,560    -    -    -    -    -    -    -    -    -    - 
Share-based compensation
—restricted share units
  21   -    -    -    -    95,240    -    -    -    95,240    -    95,240 
Share-based compensation
—restricted shares to the founder of a subsidiary of a variable interest entity
      -    -    -    -    287    -    -    -    287    -    287 
Capital injection in subsidiaries from non-controlling interest shareholders      -    -    -    -         -    -    -    -    3,032    3,032 
Components of comprehensive income                                                          
Net income attributable to YY Inc. and non-controlling interest shareholders      -    -    -    -    -    -    551,625    -    551,625    (63)   551,562 
Unrealized gain of available-for-sales securities, net of nil tax      -    -    -    -    -    -    -    177,152    177,152    -    177,152 
Foreign currency translation adjustment, net of nil tax      -    -    -    -    -    -    -    (1,109)   (1,109)   -    (1,109)
                                                           
Balance as of June 30, 2016      732,331,788    43    369,557,976    27    2,107,329    56,507    1,758,793    139,658    4,062,357    10,629    4,072,986 

 

 F-6 

 

 

YY Inc.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2017 (CONTINUED)

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

 

      Class A
common shares
  

Class B

common shares

   Additional           Accumulated
other
   Total YY Inc.’s       Total 
   Note  Number
of shares
   Amount   Number
of shares
   Amount   paid-in
capital
  

Statutory

reserves

   Retained
earnings
   comprehensive
income
   shareholders’
equity
  

Non-controlling

interests

   shareholders’
equity
 
          RMB       RMB   RMB   RMB   RMB   RMB   RMB   RMB   RMB 
                                                
Balance as of December 31, 2016      750,115,028    44    359,557,976    26    2,165,766    58,857    2,728,736    93,066    5,046,495    6,060    5,052,555 
Issuance of common shares for exercised share options  21   73,160    -    -    -    8    -    -    -    8    -    8 
Issuance of common shares for vested restricted shares and restricted share units      11,352,140    1    -    -    -    -    -    -    1    -    1 
Share-based compensation
—restricted share units
  21   -    -    -    -    45,772    -    -    -    45,772    -    45,772 
Share-based compensation
—restricted shares to the founder of a subsidiary of a variable interest entity
      -    -    -    -    286    -    -    -    286    -    286 
Class B common shares converted to Class A common shares      11,575,000    1    (11,575,000)   (1)   -    -    -    -    -    -    - 
Deemed disposal of partial interest in an equity investment      -    -    -    -    (1,501)   -    -    -    (1,501)   -    (1,501)
Capital injection in subsidiaries from non-controlling interest shareholders      -    -    -    -    -    -    -    -    -    32,000    32,000 
Disposal of subsidiaries with noncontrolling interest shareholders      -    -    -    -    -    -    -    -    -    12,834    12,834 
Components of comprehensive income                                                          
Net income attributable to YY Inc. and non-controlling interest shareholders      -    -    -    -    -    -    1,116,862    -    1,116,862    (6,981)   1,109,881 
Unrealized gain of available-for-sales securities, net of nil tax      -    -    -    -    -    -    -    2,418    2,418    -    2,418 
Foreign currency translation adjustment, net of nil tax      -    -    -    -    -    -    -    (93)   (93)   -    (93)
                                                           
Balance as of June 30, 2017      773,115,328    46    347,982,976    25    2,210,331    58,857    3,845,598    95,391    6,210,248    43,913    6,254,161 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-7 

 

  

YY Inc.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2017

(All amounts in thousands) 

 

      For the six months ended June 30, 
   Note  2016   2017   2017 
      RMB   RMB   US$ 
              (Note 2(c)) 
Cash flows from operating activities                  
Net income      542,379    1,113,296    164,221 
Adjustments to reconcile net income to net cash provided by operating activities                  
Depreciation of property and equipment  9   84,199    90,206    13,306 
Amortization of acquired intangible assets and land use right  10,11   51,281    47,566    7,016 
Allowance for doubtful accounts      3,148    (267)   (39)
Loss on disposal of property and equipment      199    2,568    379 
Impairment of investments  8   4,583    20,334    2,999 
Impairment of intangible assets      1,057    -    - 
Share-based compensation      95,419    46,058    6,794 
Share of income in equity method investments, net of income taxes      (5,746)   (8,661)   (1,278)
Loss/(Gain) on deconsolidation and disposal of subsidiaries      23,474    (37,989)   (5,604)
Gain on partial disposal of investments      -    (45,861)   (6,765)
Deferred income taxes, net  19   20,998    6,269    925 
Foreign exchange (gains)/losses, net      (789)   1,574    232 
Changes in operating assets and liabilities, net of business acquisition and disposal of subsidiaries                  
Accounts receivable, net      (29,665)   (49,667)   (7,326)
Prepayments and other assets      (38,600)   38,162    5,629 
Amounts due from related parties      2,730    155    23 
Inventory      421    526    78 
Amounts due to related parties      2,396    (11,245)   (1,659)
Accounts payable      23,279    (15,818)   (2,333)
Deferred revenue      14,673    86,008    12,687 
Advances from customers      22,690    8,997    1,327 
Income taxes payable      (12,715)   (18,883)   (2,785)
Accrued liabilities and other current liabilities      (33,228)   8,195    1,208 
                   
Net cash provided by operating activities      772,183    1,281,523    189,035 
                   
Cash flows from investing activities                  
Placements of short-term deposits      (3,879,713)   (1,890,000)   (278,790)
Maturities of short-term deposits      2,686,016    3,739,652    551,628 
Placement of restricted short-term deposits      -    (1,000,000)   (147,508)
Maturities of restricted short-term deposits      389,221    -    - 
Placement of short-term investments      -    (14,070)   (2,075)
Purchase of property and equipment      (90,068)   (188,739)   (27,840)
Purchase of intangible assets and land use right      (65,392)   (1,841)   (272)
Purchase of other non-current assets      (1,688)   (10,003)   (1,476)
Cash paid for investments      (56,980)   (217,682)   (32,110)
Cash received from disposal of investments      3,000    81,792    12,065 
Cash dividend received from an equity investee      1,920    -    - 
Deconsolidation and disposal of subsidiaries, net of cash disposed      3,300    117,005    17,259 
Payment on behalf of related parties, net of repayment  23   15,092    34,616    5,106 
Loan to related parties  23   (30,620)   (44,992)   (6,637)
Loans to employees and third parties      (1,550)   (16,100)   (2,375)
Repayment of loans from employees and third parties      2,167    2,204    325 
Proceeds from disposal of property and equipment      116    187    28 
                   
Net cash (used in)/provided by investing activities      (1,025,179)   592,029    87,328 

 

 F-8 

 

 

YY Inc.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2017 (CONTINUED)

(All amounts in thousands) 

      For the six months ended June 30, 
   Note  2016   2017   2017 
      RMB   RMB   US$ 
              (Note 2(c)) 
Cash flows from financing activities                 
Proceeds from exercise of vested share options     3    8    1 
Repayment of convertible bonds      -    (2,753,630)   (406,182)
Proceed from bank borrowings      -    621,118    91,620 
Capital contributions from the non-controlling interests      3,032    32,000    4,720 
                   
Net cash provided by/(used in) financing activities      3,035    (2,100,504)   (309,841)
                   
Net decrease in cash and cash equivalents      (249,961)   (226,952)   (33,478)
Cash and cash equivalents at the beginning of the period      928,934    1,579,743    233,025 
Effect of exchange rate changes on cash and cash equivalents      166    (3,650)   (538)
                   
Cash and cash equivalents at the end of the period      679,139    1,349,141    199,009 

 

      For the six months ended June 30, 
   Note  2016   2017   2017 
      RMB   RMB   US$ 
              (Note 2(c)) 
Supplemental disclosure of cash flows information:                  
—Cash paid for interest, net of amounts capitalized     29,812    34,467    5,084 
—Acquisition of property and equipment in form of accounts payable      34,837    25,957    3,829 
—Income taxes paid      116,518    202,218    29,829 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-9 

 

 

YY Inc

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

1.Organization and principal activities

 

(a) Principal activities

 

YY Inc. (the "Company"), through its subsidiaries, its variable interest entities ("VIEs", also refer to VIEs and their subsidiaries as a whole, where appropriate) (collectively, the "Group") is principally engaged in operating a live streaming platform in the People's Republic of China (the "PRC" or "China") through its platform, YY Client and through its websites YY.com, Huya.com, Zhiniu8.com and Duowan.com.

 

(b) Initial Public Offering

 

The Company completed its initial public offering (“IPO”) on November 21, 2012 on the NASDAQ Global Market and the underwriters subsequently exercised their over-allotment option on December 5, 2012. The Company issued and sold a total of 8,970,000 American Depositary shares (“ADSs”) in these transactions, representing 179,400,000 Class A common shares. Each ADS represents twenty Class A common shares. Upon the completion of the IPO, all of the Company’s 359,424,310 outstanding preferred shares and 548,408,914 outstanding common shares were converted into Class B common shares immediately as of the same date.

 

(c) Principal subsidiaries and VIEs

 

The details of the principal subsidiaries and VIEs through which the Company conducts its business operations as of June 30, 2017 are set out below: 

 

Name  Place of
incorporation
  Date of
incorporation or
acquisition
  % of direct
or indirect
economic
ownership
   Principal activities
              
Principal subsidiaries              
               
Duowan Entertainment Corporation (“Duowan BVI”)  British Virgin Islands(“BVI”)  November 6, 2007   100%  Investment holding
               
Huanju Shidai Technology (Beijing) Co., Ltd. (“Beijing Huanju Shidai” or “Duowan Entertainment”)  PRC  March 19, 2008   100%  Investment holding
               
Zhuhai Duowan Information Technology Co., Ltd. (“Zhuhai Duowan” or “Guangzhou Duowan”)  PRC  April 9, 2007   100%  Online advertising and software development
               
Guangzhou Huanju Shidai Information Technology Co., Ltd. (“Guangzhou Huanju Shidai”)  PRC  December 2, 2010   100%  Software development
               
Engage Capital Partners I, L.P. (“Engage L.P.”)  Cayman Islands  March 23, 2015   93.5%  Investment
               
HUYA Inc.  Cayman Islands  March 30, 2017   100%  Investment holding
               
Principal VIEs              
               
Guangzhou Huaduo Network Technology Co., Ltd. (“Guangzhou Huaduo”)  PRC  April 11, 2005   100%  Holder of internet content provider licenses and internet value added services
               
Zhuhai Huanju Huyu Technology Co., Ltd.  PRC  May 4, 2015   100%  Software development
               
Shanghai Yilian Equity Investment Partnership(LP) (“Shanghai Yilian”)  PRC  June 23, 2015   93.5%  Investment
               
Guangzhou Huya Information Technology Co.,Ltd. (“Guangzhou Huya”)  PRC  August 10, 2016   100%  Software development

 

 F-10 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

2.Summary of significant accounting policies

 

(a)Basis of presentation and use of estimates

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements as of December 31, 2016 and for the period ended December 31, 2016. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair statement of results for the periods presented, have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year or any other interim period. 

 

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. A change in facts or circumstances surrounding the estimate could result in a change to estimates and impact future operating results.

 

The unaudited condensed consolidated financial statements and related disclosures have been prepared with the presumption that users of the unaudited condensed consolidated financial statements have read or have access to the audited consolidated financial statements as of December 31, 2016 and for the period ended December 31, 2016. The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. GAAP. Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2016 and for the period ended December 31, 2016.

 

(b)Consolidation

 

The Group’s consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs for which the Company or its subsidiary is the primary beneficiary. All transactions and balances among the Company, its subsidiaries and VIEs have been eliminated upon consolidation.

 

A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting powers; or has the power to appoint or remove the majority of the members of the board of directors; or to cast a majority of votes at the meeting of directors; or has the power to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

 

A VIE is an entity in which the Company, or its subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity. In determining whether the Company or its subsidiaries are the primary beneficiary, the Company considered whether it has the power to direct activities that are significant to the VIEs economic performance, and also the Company’s obligation to absorb losses of the VIEs that could potentially be significant to the VIEs or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Beijing Huanju Shidai, Beijing Bilin Changxiang Information Technology Co., Ltd. and ultimately the Company hold all the variable interests of the VIEs and has been determined to be the primary beneficiary of the VIEs.

 

 F-11 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

2.Summary of significant accounting policies (continued)

 

(b)Consolidation (continued)

 

The Company established two funds entities, namely Engage L.P. and Shanghai Yilian, (collectively, the “Funds”), in March and June 2015, respectively. The Company holds 93.5% of interests in the Funds. The Company assesses that the Company exercises controls and is entitled to the various returns of the Funds and therefore the Funds have been accounted for as subsidiaries of and has been consolidated by the Company in accordance with ASC 810.

 

The Company deconsolidates its subsidiaries in accordance with ASC 810 as of the date the Company ceased to have a controlling financial interest in the subsidiaries.

 

The Company accounts for the deconsolidation of its subsidiaries by recognizing a gain or loss in net income/(loss) attributable to the Company in accordance with ASC 810. This gain or loss is measured at the date the subsidiaries are deconsolidated as the difference between (a) the aggregate of the fair value of any consideration received, the fair value of any retained non-controlling interest in the subsidiaries being deconsolidated, and the carrying amount of any non-controlling interest in the subsidiaries being deconsolidated, including any accumulated other comprehensive income/(loss) attributable to the non-controlling interest, and (b) the carrying amount of the assets and liabilities of the subsidiaries being deconsolidated.

 

(c)Convenience translation

 

Translations of amounts from RMB into US$ for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB6.7793 on June 30, 2017 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts could have been, or could be, converted into US$ at such rate.

 

(d)Statutory reserves

 

The Group did not make any appropriation to its general reserve fund, statutory surpluses fund, discretionary surplus fund, and the staff bonus and welfare fund for the six months ended June 30, 2016 and 2017, respectively.

 

(e)Segment reporting

 

Operating segments are defined as components of an enterprise engaging in business activities for which separate financial information is available that is regularly evaluated by the Group’s chief operating decision makers in deciding how to allocate resources and assess performance. The Group’s chief operating decision maker has been identified as the Chief Executive Officer, who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group.

 

 F-12 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

2.Summary of significant accounting policies (continued)

 

(f)Recently issued accounting pronouncements

 

In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers (Topic 606) which will replace requirements in U.S. GAAP. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The standard will be effective for the first quarter of 2018. The Company has set up an implementation team that is currently in the process of analyzing each of revenue streams in accordance with the new revenue standard to determine the impact on the Group’s consolidated financial statements. The Company plans to continue the evaluation, analysis, and documentation of its adoption of ASU 2014-09 (including those subsequently issued updates that clarify ASU 2014-09’s provisions) throughout 2017 as the Company works towards the implementation and finalizes its determination of the impact that the adoption will have on the Group’s consolidated financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as noncurrent on the balance sheet. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Additionally, the new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Group adopted this guidance retrospectively on January 1, 2017. Accordingly, the consolidated balance sheets as of June 30, 2017 and December 31, 2016 reflect the new classification. As a result of the adoption of this guidance, the Company retrospectively reclassified RMB107.3 million of deferred tax assets from current assets into non-current assets as of December 31, 2016.

 

In January 2016, the FASB issued ASU 2016-01: Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update make targeted improvements to generally accepted accounting principles (GAAP) as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities. 4) Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 5) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 6) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 7) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 8) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

 F-13 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

2.Summary of significant accounting policies (continued)

 

(f)Recently issued accounting pronouncements (continued)

 

In February 2016, the FASB issued ASU 2016-02: Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based compensation. This standard addresses several aspects of the accounting for share-based award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; (c) classification in the statement of cash flows; and (d) accounting for forfeitures of share-based awards. This guidance became effective for reporting periods beginning after December 15, 2016. The Company adopted this new guidance on January 1, 2017. The Company elected to continue to account for forfeitures by estimating expected forfeitures, and this standard does not have a material impact on its consolidated financial statements.

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13: Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15: Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

 F-14 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

2.Summary of significant accounting policies (continued)

 

(f)Recently issued accounting pronouncements (continued)

 

In November 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim period within those fiscal years. Early adoption is permitted, including adoption in an interim period. The standard should be applied using a retrospective transition method to each period presented. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In January 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The standard should be applied prospectively on or after the effective date. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

In January 2017, the FASB issued Accounting Standards Update (“ASU”) 2017-04: Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of evaluating the impact of the standard on its consolidated financial statements.

 

 F-15 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

3.Cash and cash equivalents

 

Cash and cash equivalents represent cash on hand and demand deposits placed with banks or other financial institutions. Cash and cash equivalents balance as of December 31, 2016 and June 30, 2017 primarily consist of the following currencies:

 

   December 31, 2016   June 30, 2017 
   Amount  

RMB

equivalent

   Amount  

RMB

equivalent

 
                 
RMB   1,536,947    1,536,947    1,181,314    1,181,314 
US$   6,171    42,796    24,771    167,827 
                     
Total        1,579,743         1,349,141 

 

4.Short-term deposits

 

Short-term deposits represent time deposits placed with banks with original maturities of less than one year. Short-term deposits balance as of December 31, 2016 and June 30, 2017 primarily consist of the following currencies:

 

   December 31, 2016   June 30, 2017 
   Amount  

RMB

equivalent

   Amount  

RMB

equivalent

 
                 
RMB   1,235,000    1,235,000    1,890,000    1,890,000 
US$   362,882    2,516,519    -    - 
                     
Total        3,751,519         1,890,000 

 

5.Restricted short-term deposits

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
           
Pledge short-term deposits for bank borrowing facilities(i)   -    1,000,000 

 

(i) As of June 30, 2017, the Group had restricted short-term deposits balance of RMB1,000 million representing pledged deposit with banks in China in order to obtain bank borrowing facilities amounting to US$160 million.

 

 F-16 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

6.Accounts receivable, net

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Accounts receivable, gross   224,791    274,439 
Less: allowance for doubtful receivables   (55,220)   (55,881)
           
Accounts receivable, net   169,571    218,558 

 

The following table presents movement of the allowance for doubtful receivables:

 

   For the six months ended June 30, 
   2016   2017 
   RMB   RMB 
         
Balance at the beginning of the period   (58,791)   (55,220)
Additions charged to general and administrative expenses, net   (1,385)   (676)
Write-off during the period   -    15 
           
Balance at the end of the period   (60,176)   (55,881)

 

7.Prepayments and other current assets

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Prepayments and deposits to vendors and content providers   70,347    60,141 
Interests receivable   17,050    31,056 
Rental and other deposits   13,015    14,846 
Receivables from disposal of investments   -    9,736 
Employee advances   12,245    8,857 
Receivables from disposal of a subsidiary   95,166    2,300 
Others   16,909    14,568 
           
Total   224,732    141,504 

 

 F-17 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

8.Investments

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Cost investments(i)   477,733    652,055 
Equity investments   252,272    268,017 
Available-for-sale securities   188,597    185,699 
           
Total   918,602    1,105,771 

 

  (i) In the first half year of 2017, the Group acquired minority stake of a number of privately-held entities with total consideration of RMB207,039. The investments are not investment in common stock or in-substance common stock and therefore have been precluded from applying the equity method of accounting. They have been accounted for as investments under cost method, since all of these equity securities do not have a readily determinable fair value.
     
  (ii) The Group assesses the existence of indicators for other-than-temporary impairment of the investments by considering factors including, but not limited to, current economic and market conditions, the operating performance of the entities including current earnings trends and other entity-specific information. For the six months ended June 30, 2016 and 2017, based on the Group's assessment, an impairment charge of RMB4,583 and RMB20,334 was recognized in general and administrative expenses, respectively, against the carrying value of the investments due to significant deterioration in earnings or unexpected changes in business prospects of the investees as compared to the original investment plans.

 

9.Property and equipment, net

 

Property and equipment consists of the following:

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Gross carrying amount          
Buildings   482,333    626,634 
Servers, computers and equipment   565,786    539,788 
Leasehold improvements   80,812    80,812 
Decoration of buildings   68,981    70,476 
Motor vehicles   24,016    27,494 
Furniture, fixture and office equipment   23,259    27,113 
Construction in progress   5,586    13,039 
           
Total   1,250,773    1,385,356 
Less: accumulated depreciation   (412,023)   (463,795)
           
Property and equipment, net   838,750    921,561 

 

Depreciation expense for the six months ended June 30, 2016 and 2017 were RMB84,199 and RMB90,206, respectively.

 

 F-18 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

10.Land use right, net

 

Land use right consists of the following:

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Gross carrying amount   1,916,309    1,916,309 
Less: accumulated amortization   (43,915)   (67,869)
           
Land use right, net   1,872,394    1,848,440 

 

Amortization expense for the six months ended June 30, 2016 and 2017 were RMB19,961 and RMB23,954, respectively.

 

11.Intangible assets, net

 

The following table summarizes the Group’s intangible assets:

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Gross carrying amount          
Operating rights for game broadcasting   58,655    58,655 
Operating rights for licensed games   40,274    40,274 
Software   30,632    30,549 
Domain names   27,311    26,800 
Technology   18,282    18,078 
Brand names   59,034    8,500 
Others   18,300    - 
           
Total of gross carrying amount   252,488    182,856 
           
Less: accumulated amortization          
Operating rights for game broadcasting   (46,855)   (58,655)
Operating rights for licensed games   (30,804)   (38,115)
Software   (13,110)   (15,813)
Domain names   (8,449)   (9,165)
Brand names   (21,810)   (8,500)
Technology   (9,457)   (10,128)
Others   (3,592)   - 
           
Total of accumulated amortization   (134,077)   (140,376)
           
Less: accumulated impairment   (59,485)   (7,430)
           
Intangible assets, net   58,926    35,050 

 

Amortization expense for the six months ended June 30, 2016 and 2017 were RMB31,320 and RMB23,612, respectively.

 

 F-19 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

11.Intangible assets, net (continued)

 

The estimated amortization expenses for each of the following five years as of June 30, 2017 are as follows:

 

Twelve months ended June 30  Amortization expense
of intangible assets
 
   RMB 
     
2018   9,785 
2019   6,472 
2020   5,576 
2021   2,720 
2022   1,781 

 

The weighted average amortization periods of intangible assets as of December 31, 2016 and June 30, 2017 are as below: 

 

   December 31,  June 30,
   2016  2017
       
Domain names  15 years  15 years
Technology  5 years  5 years
Software  5 years  5 years
Operating rights for licensed games  2 years  2 years
Operating rights for game broadcasting  1 year  1 year
Brand names  Not applicable  Not applicable
Others  Not applicable  Not applicable

 

12.Goodwill

 

The changes in the carrying amount of goodwill for the six months ended June 30, 2016 and 2017 are as follows:

 

   YY Live   100 Education   Total 
   RMB   RMB   RMB 
             
Balance as of January 1, 2016   37,452    114,186    151,638 
Decrease in goodwill related to disposal   (19,354)   -    (19,354)
Foreign currency translation adjustment   20    -    20 
Balance as of June 30, 2016   18,118    114,186    132,304 
                
Balance as of January 1, 2017   14,300    -    14,300 
Foreign currency translation adjustment   (23)   -    (23)
Balance as of June 30, 2017   14,277    -    14,277 

 

 F-20 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

13.Deferred revenue

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Deferred revenue, current :          
Live streaming   308,545    386,865 
Online games   61,589    53,489 
Membership   47,532    56,625 
Others   13,017    9,827 
Total current deferred revenue   430,683    506,806 
           
Deferred revenue, non-current :          
Live streaming   12,002    13,681 
Membership   6,273    8,291 
Others   7,184    6,358 
Total non-current deferred revenue   25,459    28,330 

 

14.Accrued liabilities and other current liabilities

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Accrued revenue sharing fees   521,654    577,925 
Accrued salaries and welfare   200,606    132,233 
Accrued bandwidth costs   86,186    100,807 
Market promotion expenses   68,243    93,989 
Deposits from content providers and suppliers   18,779    24,999 
License fees   22,725    18,899 
Value added taxes payable   38,161    16,394 
Other taxes payable   18,516    12,694 
Others   91,168    73,460 
           
Total   1,066,038    1,051,400 

 

15.Short-term loans

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
           
Short-term loan   -    609,756 

 

The Group entered into agreements with banks, pursuant to which the Group borrowed three loans with total principal amount of US$90 million within a credit facility of US$160 million. These loans were all with a maturity of less than one year and the annual interest rates of these loans ranged from 2.0% to 2.6%. Term deposit of RMB1,000 million was pledged as collateral for the loan.

 

 F-21 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

16.Convertible bonds

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Convertible Bond, current          
2019 Convertible Senior Notes   2,773,925    - 
Less: issuance cost   (5,456)   - 
    2,768,469    - 
           
Convertible Bond, non-current          
2019 Convertible Senior Notes   -    6,775 

 

On March 18, 2014, the Company issued Convertible Senior Notes due 2019 with principal amount of US$400 million (the "Notes"). The Notes bear interest at a rate of 2.25% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. The Notes will mature on April 1, 2019.

 

The Notes are not redeemable prior to the maturity date of April 1, 2019 except that The holders of the Notes (the “Holders”) have a non-contingent option to require the Company to repurchase for cash all or any portion of their Notes on April 1, 2017. The repurchase price will equal 100% of the principal amount of the Notes to be repurchased plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.

 

US$399 million aggregate principal amount of the Notes were redeemed on April 1, 2017. Following the repurchase, US$1 million aggregate principal amount of the Notes remains outstanding and will be due in 2019.

 

The value of the Notes is initially measured by the cash received and is subsequently stated at amortized cost. As of December 31, 2016 and June 30, 2017, RMB 2.8 billion (US$399 million) and RMB6.8 million (US$1 million) has been accounted for as the value of the Notes in current liabilities and non-current liabilities respectively.

 

Interest expense recognized for the six months ended June 30, 2016 and 2017 was RMB38,930 and RMB20,746.

 

 F-22 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

17.Cost of revenue

 

   For the six months ended June 30, 
   2016   2017 
   RMB   RMB 
         
Revenue sharing fees and content costs   1,600,955    2,294,239 
Bandwidth costs   333,558    354,162 
Salary and welfare   110,331    116,791 
Depreciation and amortization   85,348    85,941 
Payment handling costs   43,660    29,826 
Business tax and surcharges   19,406    23,285 
Share based compensation   8,753    6,644 
Other costs   66,860    29,552 
Total   2,268,871    2,940,440 

 

18.Other income

 

   For the six months ended June 30, 
   2016   2017 
   RMB   RMB 
         
Government grants   30,776    35,666 
Others   636    14,320 
           
Total   31,412    49,986 

 

 F-23 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

19.Income tax

 

(i) Cayman Islands (“Cayman”)

 

Under the current tax laws of Cayman Islands, the Company and its subsidiaries are not subject to tax on income or capital gains. Besides, upon payment of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.

 

(ii) BVI

 

Duowan BVI is exempted from income tax on its foreign-derived income in the BVI. There are no withholding taxes in the BVI.

 

(iii) Hong Kong profits tax

 

Entities incorporated in Hong Kong are subject to Hong Kong profits tax at a rate of 16.5% on the estimated assessable profit for six months ended June 30, 2016 and 2017.

 

(iv) PRC Enterprise Income Tax (“EIT”)

 

The Company’s subsidiaries and VIEs in China are governed by the Enterprise Income Tax Law (“EIT Law”), which became effective on January 1, 2008. Pursuant to the EIT Law and its implementation rules, enterprises in China are generally subject to tax at a statutory rate of 25%. Certified High and New Technology Enterprises (“HNTE”) are entitled to a favorable statutory tax rate of 15%, and qualified software enterprises can enjoy an income tax exemption for two years beginning with their first profitable year and a 50% tax reduction to the applicable tax rate for the subsequent three years.

 

The Group’s PRC entities provided for enterprise income tax as follows: 

·For the six months ended June 30, 2016 and 2017, Guangzhou Huaduo accrued the EIT at a tax rate of 15% as a result of HNTE status.

·On December 31, 2013, Guangzhou Huanju Shidai was granted the qualification as a software enterprise and started to enjoy the zero preferential tax rate beginning from 2014 and 12.5% preferential tax rate beginning from 2016.

·Other PRC subsidiaries and VIEs were subject to 25% EIT for the periods reported.

 

According to a policy promulgated by the State Tax Bureau of the PRC and effective from 2008 onwards, enterprises engaged in research and development activities are entitled to claim 150% of the research and development expenses so incurred in a year as tax deductible expenses in determining its tax assessable profits for that year (“Super Deduction”). Certain subsidiaries and VIEs of the Group successfully claimed the Super Deduction in ascertaining the tax assessable profits for the periods reported.

 

In addition, according to the EIT Law and its implementation rules, foreign enterprises, which have no establishment or place in the PRC but derive dividends, interest, rents, royalties and other income (including capital gains) from sources in the PRC shall be subject to PRC withholding tax (“WHT”) at 10% (a further reduced WHT rate may be available according to the applicable double tax treaty or arrangement). The 10% WHT is applicable to any dividends to be distributed from the Group’s PRC subsidiaries and VIEs to the Group’s oversea companies.

 

 F-24 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

19.Income tax (continued)

 

Aggregate undistributed earnings and reserves of the Group entities located in the PRC that are available for distribution to the Company as of December 31, 2016 and June 30, 2017 are RMB4,784,432 and RMB5,991,538, respectively. The undistributed earnings and reserves of the Group entities located in the PRC are considered to be indefinitely reinvested, because the Group does not have any present plan to pay any cash dividends on its common shares in the foreseeable future and intends to retain most of its available funds and any future earnings for use in the operation and expansion of its business. Accordingly, no deferred tax liability on 10% WHT of aggregate undistributed earnings and reserves of the Company’s subsidiaries located in the PRC has been accrued that would be payable upon the distribution of those amounts to the Company as of December 31, 2016 and June 30, 2017.

 

In accordance with PRC Tax Administration Law on the Levying and Collection of Taxes, the PRC tax authorities generally have up to five years to claw back underpaid tax plus penalties and interest for PRC entities’ tax filings. In the case of tax evasion, which is not clearly defined in the law, there is no limitation on the tax years open for investigation. Accordingly, the PRC entities’ tax years from 2013 to 30 June 2017 remain subject to examination by the tax authorities. There were no ongoing examinations by tax authorities as of June 30, 2017.

 

The current and deferred portions of income tax expense included in the consolidated statements of operations are as follows:

 

   For the six months ended June 30, 
   2016   2017 
   RMB   RMB 
         
Current income tax expenses   103,803    183,335 
Deferred income tax expenses   20,998    6,269 
Income tax expense   124,801    189,604 

 

The reconciliation of total tax expense computed by applying the respective statutory income tax rate to pre-tax income is as follows:

 

   For the six months ended June 30, 
   2016   2017 
   RMB   RMB 
         
PRC Statutory income tax rate   (25.0)%   (25.0)%
Effect of preferential tax rate   12.8%   11.7%
Effect of tax-exempt entities   (2.0)%   (0.8)%
Permanent differences   (2.6)%   0.1%
Change in valuation allowance   (4.5)%   (3.5)%
Effect of Super Deduction available to the Group   2.6%   2.9%
Effective income tax rate   (18.7)%   (14.6)%

 

20.Common shares

 

As of June 30, 2017, 10,000,000,000 Class A common shares and 1,000,000,000 Class B common shares had been authorized, 773,115,328 Class A common shares and 347,982,976 Class B common shares had been issued and outstanding, respectively.

 

 F-25 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

21.Share-based compensation

 

(a)Share options

 

Pre-2009 Scheme Options

 

Grant of options

 

Before the adoption of the Employee Equity Incentive Scheme in 2009, 12,705,700 and 8,499,050 share options were granted to employees through individually signed share option agreements, to acquire common shares of Duowan BVI on a one-to-one basis on January 1, 2008 and 2009 respectively. In addition, on January 1, 2008, 3,832,290 share options were granted to one non-employee for the provision of consulting services to the Group (collectively defined as “Pre-2009 Scheme Options”).

 

Vesting of options

 

These Pre-2009 Scheme Options will vest over a four years’ service period, with 25% of the options vesting after the first anniversary of the vesting inception date and the remaining 75% in six equal installments over the following 36 months. The options may be exercised provided that both the service conditions and a performance condition are met. The performance condition is defined to be i) an initial public offering, ii) completion of a financing meeting certain criteria, iii) an internal reorganization, or iv) a voluntary winding up of Duowan BVI. The performance condition that is tied to completion of a financing fulfilling certain criteria was met in June 2008 or November 2009.

 

The following table summarizes the activities of the Pre-2009 Scheme Options for employees and non-employee for the six months ended June 30, 2016 and 2017:

 

   Number of
options
   Weighted
average
exercise
price (US$)
   Weighted
average
remaining
contractual life
(years)
   Aggregate
intrinsic
value
(US$)
 
                 
Outstanding, January 1, 2016   768,375    0.0067    2.99    2,395 
Exercised   (104,380)   0.0067    2.50      
                     
Outstanding, June 30, 2016   663,995    0.0067    2.48    1,120 
                     
Outstanding, January 1, 2017   533,655    0.0067    1.98    1,048 
Exercised   (73,160)   0.0066    1.36      
                     
Outstanding, vested and exercisable at June 30, 2017   460,495    0.0067    1.50    1,333 

 

 F-26 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

21.Share-based compensation (continued)

 

(a)Share options (continued)

 

Forfeitures are estimated at the time of grant. If necessary, forfeitures are revised in subsequent periods if actual forfeitures differ from those estimates.

 

The aggregate intrinsic value in the table above represents the difference between the fair value of the Company’s common shares as of June 30, 2016 and 2017 and the exercise price.

 

Upon the completion of the IPO, the fair value of share options granted to a non-employee with nil exercise price was assessed to be equivalent to the fair value of the Company’s common share. These share options were remeasured at the stock price of the Company’s common share as of June 30, 2016 and 2017.

 

The total intrinsic value of options exercised during the six months ended June 30, 2016 and 2017 amounted to RMB1,317 and RMB1,259, respectively. Since all the share options have been vested, no share based compensation expense related to share options were incurred for the six months ended June 30, 2016 and 2017.

 

 F-27 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

21.Share-based compensation (continued)

 

(b)Restricted Share Units

 

On September 16, 2011, the board of directors of the Company approved the 2011 Share Incentive Scheme. In October 2012, the board of directors of the Company resolved that the maximum aggregate number of Class A common shares which may be issued pursuant to all awards under the 2011 Share Incentive Scheme shall be 43,000,000 plus an annual increase of 20,000,000 on the first day of each fiscal year, or such lesser amount of Class A common shares as determined by the board of directors of the Company.

 

Prior to December 31, 2015, the Company granted 57,310,210 restricted share units to employees and 48,000 restricted share units to non-employee pursuant to the 2011 Share Incentive Plan.

 

During the six months ended June 30, 2016 and 2017, the Company granted 1,530,008 and 1,685,000 restricted share units to employees respectively pursuant to the 2011 Share Incentive Plan.

 

During the six months ended June 30, 2016 and 2017, the Company granted nil and 150,000 restricted share units to non-employees respectively pursuant to the 2011 Share Incentive Plan.

 

The following table summarizes the restricted share units activity for the six months ended June 30, 2016 and 2017:

 

   Number of
restricted
shares
  

Weighted
average

grant-date
fair value (US$)

 
         
Outstanding, January 1, 2016   36,283,602    2.3535 
Granted   1,530,008    1.8618 
Forfeited   (2,871,150)   2.7606 
Vested   (9,263,162)   2.3074 
           
Outstanding, June 30, 2016   25,679,298    2.2954 
           
Outstanding, January 1, 2017   20,955,720    2.4320 
Granted   1,835,000    2.6194 
Forfeited   (1,539,808)   2.7141 
Vested   (7,558,471)   2.3601 
           
Outstanding, June 30, 2017   13,692,441    2.4651 
           
Expected to vest at June 30, 2017   13,365,528    2.4676 

 

For the six months ended June 30, 2016 and 2017, the Company recorded share-based compensation of RMB95,240 and RMB45,772 using the graded-vesting attribution method.

 

As of June 30, 2017, total unrecognized compensation expense relating to the restricted share units was RMB91,092. The expense is expected to be recognized over a weighted average period of 0.95 year using the graded-vesting attribution method. 

 

 F-28 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

22.Basic and diluted net income per share

 

Basic and diluted net income per share for the six months ended June 30, 2016 and 2017 are calculated as follows:

 

   For the six months ended June 30, 
   2016   2017 
   RMB   RMB 
Numerator:        
Net income attributable to the Company   551,625    1,116,862 
Interest expenses of convertible notes(i)   -    20,746 
Numerator for diluted income per share   551,625    1,137,608 
           
Denominator:          
Denominator for basic calculation—weighted average number of Class A and Class B common shares outstanding   1,123,075,313    1,135,149,038 
Dilutive effect of share options   753,130    499,659 
Dilutive effect of restricted share units   19,004,096    12,824,802 
Dilutive effect of convertible bonds(i)   -    36,223,934 
Denominator for diluted calculation   1,142,832,539    1,184,697,433 
           
Basic net income per Class A and Class B common share   0.49    0.98 
Diluted net income per Class A and Class B common share   0.48    0.96 
Basic net income per ADS*   9.82    19.68 
Diluted net income per ADS*   9.65    19.21 

 

*Each ADS represents 20 Class A common shares.

 

(i) The Notes were included in the computation of diluted earnings per share for the six months ended June 30, 2017 because the inclusion of the impact of such instrument would be dilutive, while it was excluded for the six months ended June 30, 2016 because the inclusion of the impact of such instrument would be anti-dilutive.

 

 F-29 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

23.Related party transactions

 

The table below sets forth the related parties and their relationships with the Group:

 

Major related parties   Relationship with the Group
   
Guangzhou Shanghang Information Technology Co., Ltd. (“Shanghang”)   Significant influence exercised by a principal shareholder of the Company
Guangzhou Chenjun Equity Investment Limited Partnership (“Guangzhou Chenjun”)   Equity investment
Bigo Inc (“Bigo”)   Cost investment with significant influence
Zhuhai Qiao Youtinghui Co., Ltd.(“Zhuhai Qiao”)   Controlled by a principal shareholder of the Company
Shanghai Ansha Network Technology Co., Ltd.(“Shanghai Ansha”)   Cost investment with significant influence
Shanghai Rongyi Culture Development Co., Ltd.(“Shanghai Rongyi”)   Cost investment with significant influence
Guangzhou Kuyou Information Technology Co., Ltd.(“Guangzhou Kuyou”)   Equity investment
Beijing Huanqiu Xingxue Technology Development Co., Ltd.(“Xingxue”)(1)   Equity investment
Beijing Yunke Online Technology Development Co., Ltd.(“Yunke Online”)(2)   Equity investment

 

(1) Xingxue became the Group’s equity investment in December 2016.

(2) Yunke Online became the Group’s equity investment in February 2017.

 

During the six months ended June 30 2016 and 2017, significant related party transactions were as follows:

 

   For the six months ended June 30, 
   2016   2017 
   RMB   RMB 
         
Online games revenue shared from related parties   31,648    55,188 
Bandwidth service provided by Shanghang   46,320    51,981 
Loan to related parties   30,620    44,992 
Gain from disposal of an investment to Guangzhou Chenjun   -    35,160 
Payment on behalf of related parties, net of repayments   (15,092)   (34,616)
Others   4,051    7,262 

 

 F-30 

 

 

YY Inc.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

23.Related party transactions (continued)

 

As of December 31, 2016 and June 30, 2017, the amounts due from/to related parties were as follows:

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Amount due from related parties          
Due from Zhuhai Qiao   10,500    30,500 
Due from Xingxue   20,000    20,000 
Due from Yunke Online   -    20,000 
Due from Shanghai Rongyi   13,000    13,000 
Due from Guangzhou Chenjun   58,144    - 
Due from Bigo   31,528    - 
Others   2,073    6,974 
           
Total   135,245    90,474 
           
Amounts due to related parties          
Due to Shanghang   10,925    13,744 
Due to Shanghai Ansha   -    10,140 
Due to Guangzhou Kuyou   30,996    5,991 
Due to Xingxue   42,128    50 
Others   7,196    11,185 
           
Total   91,245    41,110 

 

The other receivables/payables from/to related parties are unsecured and payable on demand.

 

 F-31 

 

 

YY Inc.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

24.Fair value measurements

 

Fair value reflects the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the assets or liabilities.

 

The Group applies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. This guidance specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

 

Level 1—Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.

 

Level 2—Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.

 

Level 3—Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect the Group’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The fair value guidance describes three main approaches to measure the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset.

 

When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates. The Group did not have any other financial instruments that were required to be measured at fair value on a recurring basis as of June 30, 2017 except for two available-for-sale investments and one short-term investment.

 

 F-32 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

24.Fair value measurements (continued)

 

The following table summarizes the Company’s assets that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy as of December 31, 2016 and June 30, 2017:

 

   As of December 31, 2016 
   Level 1   Level 2   Level 3   Total 
                 
Assets                    
Investments:                    
Available-for-sale securities   182,480    -    6,117    188,597 

 

   As of June 30, 2017 
   Level 1   Level 2   Level 3   Total 
                 
Assets                    
Investments:                    
Short-term investments   14,070    -    -    14,070 
Available-for-sale securities   183,666    -    2,033    185,699 
    197,736         2,033    199,769 

 

The available-for-sale securities classified in level 3 represented investments in the redeemable preferred shares of private companies.

 

The roll forward of Level 3 investments are as following:

 

   Level 3 Available-for-sale securities 
     
     
Fair value as at January 1, 2016 and June 30, 2016   6,117 
      
Fair value as at January 1, 2017   6,117 
Other than temporary impairment   (6,117)
Addition   2,033 
Fair value as at June 30, 2017   2,033 

 

 

 F-33 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

25.Commitments and contingencies

 

(a) Operating lease commitments

 

The Group leases facilities in the PRC under non-cancellable operating leases expiring on different dates. Payments under operating leases are expensed on a straight-line basis over the periods of the respective leases.

 

Total office rental expenses under all operating leases were RMB33,534 and RMB25,725 for the six months ended June 30, 2016 and 2017, respectively.

 

As of June 30, 2017, future minimum payments under non-cancellable operating leases consist of the following:

 

Twelve months ended June 30,  Office rental 
   RMB 
     
2018   40,497 
2019   20,407 
2020   6,940 
2021 and thereafter   428 
    68,272 

 

(b) Capital commitment

 

As of June 30, 2017, the Group did not have any capital commitment.

 

(c) Litigation

 

In October 2014, Guangzhou NetEase Computer System Co., Ltd. (“NetEase”) brought a copyright infringement claim against the Group in the Intermediate People’s Court of Guangzhou, alleging that the Group’s live game broadcasting program has infringed the copyright of one of their online games called Fantasy Westward Journey. The claimant is seeking RMB100 million for their potential damages, requesting YY to cease the copyright infringement practices and apologize publicly. Up to the date of this report, the latest court hearing was held in April 2017 and there has been no judgement from the court yet. The Group is not able to make a reliable estimate of the potential loss, if any, at this stage.

 

 F-34 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

26.VIEs

 

The following consolidated financial information of the Group’s VIEs excluding the intercompany items with the Group’s subsidiaries was included in the accompanying consolidated financial statements as of and for the periods ended:

 

   December 31,   June 30, 
   2016   2017 
   RMB   RMB 
         
Assets          
Current assets          
Cash and cash equivalents   1,397,738    1,135,542 
Short-term deposits   1,235,000    1,890,000 
Restricted short-term deposits   -    1,000,000 
Short-term investments   -    14,070 
Accounts receivable, net   165,971    214,225 
Inventory   2,266    1,223 
Amounts due from related parties   135,245    85,573 
Prepayments and other current assets   207,245    128,436 
Total current assets   3,143,465    4,469,069 
           
Non-current assets          
Deferred tax assets   93,744    80,547 
Investments   496,870    483,081 
Property and equipment, net   261,915    357,712 
Intangible assets, net   27,241    6,327 
Land use right, net   1,872,394    1,848,440 
Goodwill   2,527    2,527 
Other non-current assets   85,583    64,000 
Total non-current assets   2,840,274    2,842,634 
           
Total assets   5,983,739    7,311,703 
           
Liabilities          
Current liabilities          
Accounts payable   117,917    96,562 
Deferred revenue   429,883    506,006 
Advances from customers   56,108    65,105 
Income taxes payable   112,779    99,987 
Accrued liabilities and other current liabilities   988,911    975,312 
Amounts due to related parties   91,245    38,440 
Total current liabilities   1,796,843    1,781,412 
           
Non-current liabilities          
Deferred revenue   19,125    22,396 
Deferred tax liabilities   4,777    4,777 
Total non-current liabilities   23,902    27,173 
           
Total liabilities   1,820,745    1,808,585 

 

 F-35 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

26.VIEs (continued)

 

   For the six months ended June 30, 
   2016   2017 
   RMB   RMB 
         
Net revenues   3,599,574    4,868,786 
Net income   751,336    1,235,658 

 

   For the six months ended June 30, 
   2016   2017 
   RMB   RMB 
         
Net cash provided by operating activities   950,863    1,432,245 
Net cash used in investing activities   (696,420)   (1,685,497)
Net cash provided by financing activities   1,593    32,000 
    256,036    (221,252)

 

27.Subsequent events

 

On May 16, 2017, YY entered into a definitive shares subscription agreement for a US$75 million Series A equity funding round for HUYA Inc., a subsidiary of YY, which is mainly engaged in the provision of online game broadcasting services. This transaction was completed in July 2017.

 

 F-36 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

28.Segment reporting

 

Starting from the first quarter of 2015, in order to better evaluate the Group’s business performance and better allocate resources the CODM began to review the Group’s business performance based on different operating segments.

 

In 2016, the Group had 3 operating segments, namely, YY Live, Huya and 100 Education.

 

As the Company has disposed of a great majority of its online education business before the end of 2016 and disposed of the remaining portion of its online education business in the beginning of 2017, 100 Education ceased to be an operating segment starting from the first quarter of 2017.

 

In addition, the Company revamped its internal organization and one sub-business stream previously presented and reviewed under YY Live was changed to be presented and reviewed under Huya from the first quarter of 2017. Segment information of comparative periods has been restated accordingly.

 

The CODM assesses the performance of the operating segments mainly based on net revenues, gross profit/(loss), operating income/(loss) of each reporting segment. Net revenues, gross profit/loss and operating income/(loss) of YY Live, Huya and 100 education are presented for the CODM’s review separately.

 

As the Group’s long-lived assets and revenue are substantially located in and derived from the PRC, no geographical segments are presented.

 

The Group currently does not allocate assets to all of its segments, as its CODM does not use such information to allocate resources or evaluate the performance of the operating segments.

 

 F-37 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

28.Segment reporting (continued)

 

The following table presents summary information by segment:

 

For the six months ended June 30, 2017:

 

   YY Live   Huya   Total 
   RMB   RMB   RMB 
Net revenues               
Live streaming   3,606,355    824,469    4,430,824 
Online games   280,741    12,966    293,707 
Membership   93,790    3,835    97,625 
Others   34,800    18,993    53,793 
                
Total net revenues   4,015,686    860,263    4,875,949 
                
Cost of revenues(1)   (2,153,787)   (786,653)   (2,940,440)
                
Gross profit   1,861,899    73,610    1,935,509 
                
Operating expenses(1)               
Research and development expenses   (255,392)   (77,528)   (332,920)
Sales and marketing expenses   (256,490)   (36,546)   (293,036)
General and administrative expenses   (153,140)   (28,057)   (181,197)
                
Total operating expenses   (665,022)   (142,131)   (807,153)
Gain on deconsolidation and disposal of subsidiaries   37,989    -    37,989 
Other income   40,455    9,531    49,986 
Operating income / (loss)   1,275,321    (58,990)   1,216,331 

 

(1)Share based compensation was allocated in cost of revenues and operating expenses as follows:

 

   YY Live   Huya   Total 
   RMB   RMB   RMB 
             
Cost of revenues   4,752    1,892    6,644 
Research and development expenses   16,578    5,318    21,896 
Sales and marketing expenses   587    225    812 
General and administrative expenses   11,440    5,266    16,706 

 

 F-38 

 

 

YY Inc.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

28.Segment reporting (continued)

 

The following table presents summary information by segment:

 

For the six months ended June 30, 2016:

 

   YY Live   Huya   100 Education   Total 
   RMB   RMB   RMB   RMB 
Net revenues                    
Live streaming  2,757,913   260,751   -   3,018,664 
Online games   359,371    -    -    359,371 
Membership   141,442    -    -    141,442 
Others   58,793    -    51,825    110,618 
                     
Total net revenues   3,317,519    260,751    51,825    3,630,095 
                     
Cost of revenues(1)   (1,791,554)   (427,682)   (49,635)   (2,268,871)
                     
Gross profit / (loss)   1,525,965    (166,931)   2,190    1,361,224 
                     
Operating expenses(1)                    
Research and development expenses   (243,888)   (87,701)   (20,287)   (351,876)
Sales and marketing expenses   (110,652)   (27,979)   (28,029)   (166,660)
General and administrative expenses   (132,107)   (35,168)   (6,287)   (173,562)
                     
Total operating expenses   (486,647)   (150,848)   (54,603)   (692,098)
Loss on deconsolidation and disposal of subsidiaries   (23,474)   -    -    (23,474)
Other income   31,412    -    -    31,412 
Operating income / (loss)   1,047,256    (317,779)   (52,413)   677,064 

 

(1) Share based compensation was allocated in cost of revenues and operating expenses as follows:

 

   YY Live   Huya   100 Education   Total 
   RMB   RMB   RMB   RMB 
                 
Cost of revenues   5,685    2,849    219    8,753 
Research and development expenses   37,592    11,769    4,412    53,773 
Sales and marketing expenses   1,507    273    -    1,780 
General and administrative expenses   15,417    15,789    (93)   31,113 

 

 F-39 

 

 

Exhibit 99.2

 

YY INC.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Contents Page
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets as of December 31, 2015 and 2016 F-3
   
Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2014, 2015 and 2016 F-5
   
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2014, 2015 and 2016 F-7
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2015 and 2016 F-10
   
Notes to Consolidated Financial Statements F-12

 

F - 1

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of YY Inc.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, of changes in shareholders’ equity and of cash flows, present fairly, in all material respects, the financial position of YY Inc. (the “Company”) and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Report appearing under Item 15 of the Annual Report on Form 20-F for the year ended December 31, 2016. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers Zhong Tian LLP

Guangzhou, the People’s Republic of China

 

April 20, 2017, except for the change in the
composition of reportable segments discussed
in Note 29 and the classification of deferred taxes
discussed in Note 20 to the consolidated
financial statements, as to which the date is
August 14, 2017.

 

F - 2

 

 

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND 2016

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

 

      As of December 31, 
   Notes  2015   2016   2016 
      RMB   RMB   US$ 
              (Note2(e)) 
Assets                  
Current assets                  
Cash and cash equivalents  5   928,934    1,579,743    227,530 
Short-term deposits  6   1,894,946    3,751,519    540,331 
Restricted short-term deposits  7   389,221    -    - 
Accounts receivable, net  8   132,353    169,571    24,423 
Inventory      14,385    2,266    326 
Amounts due from related parties  24   5,297    135,245    19,479 
Prepayments and other current assets  9   147,823    224,732    32,369 
                   
Total current assets      3,512,959    5,863,076    844,458 
                   
Non-current assets                  
Deferred tax assets  20   120,284    117,811    16,969 
Investments  10   567,557    918,602    132,306 
Property and equipment, net  11   843,449    838,750    120,805 
Land use right, net  12   -    1,872,394    269,681 
Intangible assets, net  13   146,437    58,926    8,487 
Goodwill  14   151,638    14,300    2,060 
Other non-current assets      1,960,430    101,933    14,681 
                   
Total non-current assets      3,789,795    3,922,716    564,989 
Total assets      7,302,754    9,785,792    1,409,447 
                   
Liabilities, mezzanine equity and shareholders’ equity                  
Current liabilities                  
Convertible bonds (including convertible bonds of the consolidated variable interest entity without recourse to the Company of nil and nil as of December 31, 2015 and 2016, respectively)(1)  17   -    2,768,469    398,742 
Accounts payable (including accounts payable of the consolidated variable interest entity without recourse to the Company of RMB108,500 and RMB117,917 as of December 31, 2015 and 2016, respectively)      129,819    137,107    19,748 
Deferred revenue (including deferred revenue of the consolidated variable interest entity without recourse to the Company of RMB385,300 and RMB429,883 as of December 31, 2015 and 2016, respectively)  15   385,300    430,683    62,031 
Advances from customers (including advances from customers of the consolidated variable interest entity without recourse to the Company of RMB 45,189 and RMB56,108 as of December 31, 2015 and 2016, respectively)      55,086    56,152    8,088 
Income taxes payable (including income taxes payable of the consolidated variable interest entity without recourse to the Company of RMB80,978 and RMB112,779 as of December 31, 2015 and 2016, respectively)      107,403    140,754    20,273 
Accrued liabilities and other current liabilities (including accrued liabilities and other current liabilities of the consolidated variable interest entity without recourse to the Company of RMB579,760 and RMB988,911 as of December 31, 2015 and 2016, respectively)  16   681,889    1,066,038    153,541 
Amounts due to related parties (including amounts due to related parties of the consolidated variable interest entity without recourse to the Company of RMB23,684 and RMB91,245 as of December 31, 2015 and 2016, respectively)  24   24,917    91,245    13,142 
                   
Total current liabilities      1,384,414    4,690,448    675,565 
                   
Non-current liabilities                  
Convertible bonds (including convertible bonds of the consolidated variable interest entity without recourse to the Company of nil and nil as of December 31, 2015 and 2016, respectively)(2)  17   2,572,119    -    - 
Deferred revenue(including deferred revenue of the consolidated variable interest entity without recourse to the Company of RMB20,752 and RMB19,125 as of December 31, 2015 and 2016, respectively)  15   20,752    25,459    3,667 
Deferred tax liabilities (including deferred tax liabilities of the consolidated variable interest entity without recourse to the Company of RMB12,592 and RMB4,777 as of December 31, 2015 and 2016, respectively)  20   16,817    8,058    1,161 
                   
Total non-current liabilities      2,609,688    33,517    4,828 
                   
Total liabilities      3,994,102    4,723,965    680,393 
                   
Commitments and contingencies  26               

 

F - 3

 

 

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND 2016 (CONTINUED)

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

 

      As of December 31, 
   Notes  2015   2016   2016 
      RMB   RMB   US$ 
              (Note 2(e)) 
                
Mezzanine equity      61,833    9,272    1,335 
                   
Shareholders’ equity                  
Class A common shares (US$0.00001 par value; 10,000,000,000 shares authorized, 728,227,848 shares issued and outstanding as of December 31, 2015 and 750,115,028 shares issued and outstanding as of December 31, 2016)  21   43    44    6 
Class B common shares (US$0.00001 par value; 1,000,000,000 shares authorized, 369,557,976 shares issued and outstanding as of December 31, 2015 and 359,557,976 shares issued and outstanding as of December 31, 2016)  21   27    26    4 
Additional paid-in capital      2,011,799    2,165,766    311,935 
Statutory reserves  2(ff)   56,507    58,857    8,477 
Retained earnings      1,207,168    2,728,736    393,020 
Accumulated other comprehensive (loss)/income      (36,385)   93,066    13,404 
                   
Total YY Inc.’s shareholders’ equity      3,239,159    5,046,495    726,846 
                   
Non-controlling interests      7,660    6,060    873 
                   
Total shareholders’ equity      3,246,819    5,052,555    727,719 
                   
Total liabilities, mezzanine equity and shareholders’ equity      7,302,754    9,785,792    1,409,447 

 

(1) Convertible bonds classified in current liabilities represent Convertible Senior Notes which may be redeemed within one year.

 

(2) Effectively January 2016, ASU 2015-3 issued by FASB requires entities to present the issuance costs of bonds in the balance sheet as a direct deduction from the related bonds rather than assets. Accordingly, the Company retrospectively reclassified RMB25.3 million of issuance cost of bonds from other non-current assets into convertible bonds as of December 31, 2015.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F - 4

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016

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

 

      For the year ended December 31, 
   Note  2014   2015   2016   2016 
      RMB   RMB   RMB   US$ 
                  (Note2(e)) 
Net revenues (1)                       
Live streaming      2,475,379    4,539,857    7,027,227    1,012,131 
Online games      811,699    771,882    634,325    91,362 
Membership      205,199    291,310    284,860    41,028 
Others      186,091    294,200    257,638    37,108 
                        
Total net revenues      3,678,368    5,897,249    8,204,050    1,181,629 
                        
Cost of revenues (2)  18   (1,849,149)   (3,579,744)   (5,103,430)   (735,047)
                        
Gross profit      1,829,219    2,317,505    3,100,620    446,582 
                        
Operating expenses (2)                       
Research and development expenses      (431,188)   (548,799)   (675,230)   (97,253)
Sales and marketing expenses      (102,527)   (312,870)   (387,268)   (55,778)
General and administrative expenses      (223,019)   (358,474)   (482,437)   (69,485)
Goodwill impairment  14   -    (310,124)   (17,665)   (2,544)
Fair value change of contingent consideration  14   -    292,471    -    - 
                        
Total operating expenses      (756,734)   (1,237,796)   (1,562,600)   (225,060)
Gain on deconsolidation and disposal of subsidiaries      -    -    103,960    14,973 
Other income  19   6,319    82,300    129,504    18,652 
                        
Operating income      1,078,804    1,162,009    1,771,484    255,147 
                        
Gain on partial disposal of associates      999    -    25,061    3,610 
Interest expense      (56,607)   (97,125)   (81,085)   (11,679)
Interest income      164,969    137,892    67,193    9,678 
Foreign currency exchange (losses) / gains, net      (10,399)   (38,099)   1,158    167 
Other non-operating income / (expenses)      36,714    (2,165)   -    - 
                        
Income before income tax expenses      1,214,480    1,162,512    1,783,811    256,923 
                        
Income tax expenses  20   (154,283)   (178,327)   (280,514)   (40,402)
                        
Income before share of income in equity method investments, net of income taxes      1,060,197    984,185    1,503,297    216,521 
                        
Share of income in equity method investments, net of income taxes      4,275    14,120    8,279    1,192 
                        
Net income      1,064,472    998,305    1,511,576    217,713 
                        
Less: Net loss attributable to the non-controlling interest shareholders and the mezzanine classified non-controlling interest shareholders      -    (34,938)   (12,342)   (1,778)
                        
Net income attributable to YY Inc.      1,064,472    1,033,243    1,523,918    219,491 
                        
Other comprehensive income / (loss):                       
Unrealized gain of available-for-sale securities, net of nil tax      -    -    134,768    19,411 
Foreign currency translation adjustments, net of nil tax      3,638    4,414    (5,317)   (766)
                        
Comprehensive income attributable to YY Inc.      1,068,110    1,037,657    1,653,369    238,136 

 

F - 5

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016 (CONTINUED)

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

 

      For the year ended December 31, 
   Note  2014   2015   2016   2016 
      RMB   RMB   RMB   US$ 
                  (Note2(e)) 
Net income per ADS*                       
—Basic  23   18.46    18.37    27.04    3.89 
—Diluted  23   17.76    17.96    26.40    3.80 
Weighted average number of ADS used in calculating net income per ADS                       
—Basic  23   57,657,035    56,259,499    56,367,166    56,367,166 
—Diluted  23   59,927,174    57,541,558    60,805,566    60,805,566 
                        
Net income per common share*                       
—Basic  23   0.92    0.92    1.35    0.19 
—Diluted  23   0.89    0.90    1.32    0.19 
Weighted average number of common shares used in calculating net income per common share                       
—Basic  23   1,153,140,699    1,125,189,978    1,127,343,312    1,127,343,312 
—Diluted  23   1,198,543,473    1,150,831,163    1,216,111,329    1,216,111,329 

 

* Each ADS represents 20 Class A common shares.
   
(1) For the year ended December 31, 2016, revenue presentation has been changed to live streaming, online games, membership and others, and the revenue presentation for the year ended December 31, 2015 and 2014 has also been retrospectively changed.
   
(2) Share-based compensation was allocated in cost of revenues and operating expenses as follows:

 

      For the year ended December 31, 
   Note  2014   2015   2016   2016 
      RMB   RMB   RMB   US$ 
                  (Note2(e)) 
                        
Cost of revenues      18,037    23,963    15,894    2,289 
Research and development expenses      54,141    70,951    78,816    11,352 
Sales and marketing expenses      2,807    3,283    3,107    448 
General and administrative expenses      59,647    87,175    59,469    8,565 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F - 6

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016

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

 

      Class A common shares   Class B Common shares   Additional       (Accumulated
deficits)
   Accumulated
other
   Total 
   Notes  Number
of shares
   Amount   Number
of shares
   Amount   paid-in
capital
   Statutory
reserves
   / Retained
Earnings
   comprehensive
loss
   shareholders’
equity
 
          RMB       RMB   RMB   RMB   RMB   RMB   RMB 
                                        
Balance as of December 31, 2013      622,658,738    38    485,831,386    34    2,765,614    40,657    (874,697)   (44,437)   1,887,209 
Issuance of common shares for exercised share options  21   5,841,660    -    -    -    213    -    -    -    213 
Issuance of common shares for vested restricted shares and restricted share units  21   19,194,480    1    -    -    (1)   -    -    -    - 
Class B common shares converted to Class A common shares  21   58,478,690    4    (58,478,690)   (4)   -    -    -    -    - 
Share based compensation- restricted shares  22   -    -    -    -    3,771    -    -    -    3,771 
Share based compensation- restricted share units  22   -    -    -    -    130,718    -    -    -    130,718 
Share based compensation - restricted shares to the founder of a subsidiary of a variable interest entity  22   -    -    -    -    143    -    -    -    143 
Appropriation to statutory reserves  2(ff)   -    -    -    -    -    15,812    (15,812)   -    - 
Components of comprehensive income                                                
Net income      -    -    -    -    -    -    1,064,472    -    1,064,472 
Foreign currency translation adjustment, net of nil tax      -    -    -    -    -    -    -    3,638    3,638 
                                                 
Balance as of December 31, 2014      706,173,568    43    427,352,696    30    2,900,458    56,469    173,963    (40,799)   3,090,164 

 

F - 7

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2014, 2015 AND 2016 (CONTINUED)

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

 

     

Class A

common shares

  

Class B

Common shares

   Additional           Accumulated
other
           Total 
   Notes  Number
of shares
   Amount   Number
of shares
   Amount   paid-in
capital
  

Statutory

reserves

  

Retained

earnings

   comprehensive
loss
   Total YY Inc.’s
shareholders’ equity
   Non-controlling
interests
   shareholders’
equity
 
          RMB       RMB   RMB   RMB   RMB   RMB   RMB   RMB   RMB 
                                                
Balance as of December 31, 2014      706,173,568    43    427,352,696    30    2,900,458    56,469    173,963    (40,799)   3,090,164    -    3,090,164 
Issuance of common shares for exercised share options  21   6,611,970    -    -    -    245    -    -    -    245    -    245 
Issuance of common shares for vested restricted shares and restricted share units  21   19,498,710    1    -    -    (1)   -    -    -    -    -    - 
Class B common shares converted to Class A common shares  21   57,794,720    3    (57,794,720)   (3)   -    -    -    -    -    -    - 
Repurchase of Class A common shares  21   (61,851,120)   (4)   -    -    (1,041,682)   -    -    -    (1,041,686)   -    (1,041,686)
Share based compensation- restricted share units  22   -    -    -    -    152,205    -    -    -    152,205    -    152,205 
Share based compensation - restricted shares to the founder of a subsidiary of a variable interest entity  22   -    -    -    -    574    -    -    -    574    -    574 
Appropriation to statutory reserves  2(ff)   -    -    -    -    -    38    (38)   -    -    -    - 
Set-up subsidiaries with non-controlling interest shareholders      -    -    -    -    -    -    -    -    -    7,798    7,798 
Components of comprehensive income                                                          
Net income / (loss) attributable to YY Inc. and non-controlling interest shareholders      -    -    -    -    -    -    1,033,243    -    1,033,243    (138)   1,033,105 
Foreign currency translation adjustment, net of nil tax      -    -    -    -    -