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

 

 

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

 

 

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

 

 

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

 

 

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.

 

 

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

 

 

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.

 

 

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

 

 

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.

 

  

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

 

 

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.

 

 

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

 

 

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.

 

 

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.

 

 

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.

 

 

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.

 

 

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.

 

 

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.

 

 

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

 

 

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.

 

 

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.

 

 

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

 

 

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.

 

 

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.

 

 

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

 

 

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.

 

 

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.

 

 

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

 

 

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.

 

 

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. 

 

 

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.

 

 

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

 

 

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.

 

 

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.

 

 

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

 

 

 

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.

 

 

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

 

 

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.

 

 

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.

 

 

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

 

 

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

 

 

 

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

 

 

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.

 

 

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

 

 

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.

 

 

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

 

 

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.

 

 

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

 

 

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	)