Washington, D.C. 20549
(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares
of each of the Issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
750,115,028
Class A common shares, par value US$0.00001 per share, and 359,557,976 Class B common shares, par value US$0.00001 per share, were
outstanding as of December 31, 2016.
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
x
No
¨
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. Yes
¨
No
x
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth
company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected
not to use the extended transition period for complying with any new or revised financial accounting standards† provided
pursuant to Section 13(a) of the Exchange Act.
¨
† The term “new or revised
financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17
¨
Item 18
¨
If this is an annual report, indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
(APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant
has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court. Yes
¨
No
x
Unless otherwise indicated and except where
the context otherwise requires, references in this annual report on Form 20-F to:
This annual report contains forward-looking
statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements.
These forward-looking statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation
Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify these forward-looking statements
by words or phrases such as “may,” “will,” “expect,” “is expected to,” “anticipate,”
“aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely
to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect our financial condition, results of operations,
business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:
You should thoroughly read this annual report
and the documents that we refer to herein with the understanding that our actual future results may be materially different from
and/or worse than what we expect. Other sections of this annual report, including the Risk Factors and Operating and Financial
Review and Prospects sections, discuss factors which could adversely impact our business and financial performance. Moreover, we
operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict
all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all
of our forward-looking statements by these cautionary statements.
You should not rely upon forward-looking
statements we make as predictions of future events. The forward-looking statements made in this annual report relate only to events
or information as of the date on which the statements are made in this annual report. We undertake no obligation to update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable
law.
PART I
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|
Not applicable.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
A. Selected Financial Data
The following table presents the selected
consolidated financial information for our company. The selected consolidated statements of operations data for the three years
ended December 31, 2014, 2015 and 2016 and the consolidated balance sheet data as of December 31, 2015 and 2016 have been derived
from our audited consolidated financial statements, which are included in this annual report beginning on page F-1. Our selected
consolidated statements of operation data for the years ended December 31, 2012 and 2013 and our consolidated balance sheet data
as of December 31, 2012, 2013 and 2014 have been derived from our audited consolidated financial statements not included in this
annual report. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally
accepted in the United States, or U.S. GAAP. Our historical results for any period are not necessarily indicative of results to
be expected for any future period. You should read the following selected financial information in conjunction with the consolidated
financial statements and related notes and the information under “Item 5. Operating and Financial Review and Prospects”
included elsewhere in this annual report.
|
|
For the Year Ended December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(All amounts in thousands, except share, ADS, per share and per ADS data)
|
|
Selected Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Live streaming
|
|
|
293,358
|
|
|
|
904,042
|
|
|
|
2,475,379
|
|
|
|
4,539,857
|
|
|
|
7,027,227
|
|
|
|
1,012,131
|
|
Online games
|
|
|
332,287
|
|
|
|
602,111
|
|
|
|
811,699
|
|
|
|
771,882
|
|
|
|
634,325
|
|
|
|
91,362
|
|
Membership
|
|
|
72,506
|
|
|
|
141,238
|
|
|
|
205,199
|
|
|
|
291,310
|
|
|
|
284,860
|
|
|
|
41,028
|
|
Others
|
|
|
121,880
|
|
|
|
176,077
|
|
|
|
186,091
|
|
|
|
294,200
|
|
|
|
257,638
|
|
|
|
37,108
|
|
Total net revenues
|
|
|
820,031
|
|
|
|
1,823,468
|
|
|
|
3,678,368
|
|
|
|
5,897,249
|
|
|
|
8,204,050
|
|
|
|
1,181,629
|
|
Cost of revenues
(2)
|
|
|
(416,133
|
)
|
|
|
(881,999
|
)
|
|
|
(1,849,149
|
)
|
|
|
(3,579,744
|
)
|
|
|
(5,103,430
|
)
|
|
|
(735,047
|
)
|
Gross profit
|
|
|
403,898
|
|
|
|
941,469
|
|
|
|
1,829,219
|
|
|
|
2,317,505
|
|
|
|
3,100,620
|
|
|
|
446,582
|
|
Operating expenses:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(176,725
|
)
|
|
|
(267,005
|
)
|
|
|
(431,188
|
)
|
|
|
(548,799
|
)
|
|
|
(675,230
|
)
|
|
|
(97,253
|
)
|
Sales and marketing expenses
|
|
|
(16,954
|
)
|
|
|
(24,955
|
)
|
|
|
(102,527
|
)
|
|
|
(312,870
|
)
|
|
|
(387,268
|
)
|
|
|
(55,778
|
)
|
General and administrative expenses
|
|
|
(109,788
|
)
|
|
|
(200,554
|
)
|
|
|
(223,019
|
)
|
|
|
(358,474
|
)
|
|
|
(482,437
|
)
|
|
|
(69,485
|
)
|
Goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(310,124
|
)
|
|
|
(17,665
|
)
|
|
|
(2,544
|
)
|
Fair value change of contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
292,471
|
|
|
|
—
|
|
|
|
—
|
|
Total operating expenses
|
|
|
(303,467
|
)
|
|
|
(492,514
|
)
|
|
|
(756,734
|
)
|
|
|
(1,237,796
|
)
|
|
|
(1,562,600
|
)
|
|
|
(225,060
|
)
|
Gain on deconsolidation and disposal of subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
103,960
|
|
|
|
14,973
|
|
Operating income
|
|
|
102,896
|
|
|
|
476,033
|
|
|
|
1,078,804
|
|
|
|
1,162,009
|
|
|
|
1,771,484
|
|
|
|
255,147
|
|
Income before income tax expenses
|
|
|
118,061
|
|
|
|
565,809
|
|
|
|
1,214,480
|
|
|
|
1,162,512
|
|
|
|
1,783,811
|
|
|
|
256,923
|
|
Net income attributable to YY Inc.
|
|
|
89,177
|
|
|
|
477,727
|
|
|
|
1,064,472
|
|
|
|
1,033,243
|
|
|
|
1,523,918
|
|
|
|
219,491
|
|
Decretion to convertible redeemable preferred shares redemption value
|
|
|
1,293,875
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Allocation of net income to participating preferred shareholders
|
|
|
(478,754
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income attributable to common shareholders
|
|
|
904,298
|
|
|
|
|
|
|
|
1,064,472
|
|
|
|
1,033,243
|
|
|
|
1,523,918
|
|
|
|
219,491
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Weighted average number of ADS used in calculating net income per ADS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,235,191
|
|
|
|
56,123,784
|
|
|
|
57,657,035
|
|
|
|
56,259,499
|
|
|
|
56,367,166
|
|
|
|
56,367,166
|
|
Diluted
|
|
|
49,623,442
|
|
|
|
59,056,065
|
|
|
|
59,927,174
|
|
|
|
57,541,558
|
|
|
|
60,805,566
|
|
|
|
60,805,566
|
|
Net
income per ADS
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29.91
|
|
|
|
8.51
|
|
|
|
18.46
|
|
|
|
18.37
|
|
|
|
27.04
|
|
|
|
3.89
|
|
Diluted
|
|
|
1.80
|
|
|
|
8.09
|
|
|
|
17.76
|
|
|
|
17.96
|
|
|
|
26.40
|
|
|
|
3.80
|
|
Weighted average number of common shares used in calculating net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
604,703,810
|
|
|
|
1,122,475,688
|
|
|
|
1,153,140,699
|
|
|
|
1,125,189,978
|
|
|
|
1,127,343,312
|
|
|
|
1,127,343,312
|
|
Diluted
|
|
|
992,468,836
|
|
|
|
1,181,121,297
|
|
|
|
1,198,543,473
|
|
|
|
1,150,831,163
|
|
|
|
1,216,111,329
|
|
|
|
1,216,111,329
|
|
Net income per common share
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.50
|
|
|
|
0.43
|
|
|
|
0.92
|
|
|
|
0.92
|
|
|
|
1.35
|
|
|
|
0.19
|
|
Diluted
|
|
|
0.09
|
|
|
|
0.40
|
|
|
|
0.89
|
|
|
|
0.90
|
|
|
|
1.32
|
|
|
|
0.19
|
|
|
(1)
|
For the year ended December 31, 2016, revenue presentation has been changed to live streaming, online games, membership and
others. We also have retrospectively changed the revenue presentation for the year ended December 31, 2012, 2013, 2014 and 2015.
|
|
(2)
|
Share-based compensation was allocated in cost of revenues and operating expenses as follows:
|
|
|
For the Year Ended December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Cost of revenues
|
|
|
8,407
|
|
|
|
9,860
|
|
|
|
18,037
|
|
|
|
23,963
|
|
|
|
15,894
|
|
|
|
2,289
|
|
Research and development expenses
|
|
|
35,441
|
|
|
|
39,587
|
|
|
|
54,141
|
|
|
|
70,951
|
|
|
|
78,816
|
|
|
|
11,352
|
|
Sales and marketing expenses
|
|
|
884
|
|
|
|
1,318
|
|
|
|
2,807
|
|
|
|
3,283
|
|
|
|
3,107
|
|
|
|
448
|
|
General and administrative expenses
|
|
|
55,619
|
|
|
|
66,331
|
|
|
|
59,647
|
|
|
|
87,175
|
|
|
|
59,469
|
|
|
|
8,565
|
|
Total
|
|
|
100,351
|
|
|
|
117,096
|
|
|
|
134,632
|
|
|
|
185,372
|
|
|
|
157,286
|
|
|
|
22,654
|
|
|
(3)
|
Each ADS represents 20 Class A common shares.
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Selected Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
504,702
|
|
|
|
729,598
|
|
|
|
475,028
|
|
|
|
928,934
|
|
|
|
1,579,743
|
|
|
|
227,530
|
|
Short-term deposits
|
|
|
897,698
|
|
|
|
1,432,863
|
|
|
|
4,214,576
|
|
|
|
1,894,946
|
|
|
|
3,751,519
|
|
|
|
540,331
|
|
Goodwill
|
|
|
1,604
|
|
|
|
1,577
|
|
|
|
300,382
|
|
|
|
151,638
|
|
|
|
14,300
|
|
|
|
2,060
|
|
Total assets*
|
|
|
1,696,189
|
|
|
|
2,597,947
|
|
|
|
6,820,519
|
|
|
|
7,302,754
|
|
|
|
9,785,792
|
|
|
|
1,409,447
|
|
Convertible bonds (current)**
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,768,469
|
|
|
|
398,742
|
|
Total current liabilities
|
|
|
366,417
|
|
|
|
701,313
|
|
|
|
1,090,558
|
|
|
|
1,384,414
|
|
|
|
4,690,448
|
|
|
|
675,565
|
|
Convertible bonds (non-current)
|
|
|
—
|
|
|
|
—
|
|
|
|
2,405,705
|
|
|
|
2,572,119
|
|
|
|
—
|
|
|
|
—
|
|
Long-term payable
|
|
|
—
|
|
|
|
—
|
|
|
|
183,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total mezzanine equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,833
|
|
|
|
9,272
|
|
|
|
1,335
|
|
Class A common shares (US$0.00001 par value; 10,000,000,000 shares authorized, 179,400,000, 622,658,738, 706,173,568, 728,227,848 and 750,115,028 shares issued and outstanding as of December 31, 2012, 2013, 2014, 2015, and 2016 respectively)
|
|
|
11
|
|
|
|
38
|
|
|
|
43
|
|
|
|
43
|
|
|
|
44
|
|
|
|
6
|
|
|
|
As of December 31,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Class B common shares (US$0.00001 par value; 1,000,000,000 shares authorized, 907,833,224, 485,831,386, 427,352,696, 369,557,976 and 359,557,976 shares issued and outstanding as of December 31, 2012, 2013, 2014, 2015, and 2016 respectively)
|
|
|
60
|
|
|
|
34
|
|
|
|
30
|
|
|
|
27
|
|
|
|
26
|
|
|
|
4
|
|
(Accumulated deficits) Retained earnings
|
|
|
(1,311,767
|
)
|
|
|
(874,697
|
)
|
|
|
173,963
|
|
|
|
1,207,168
|
|
|
|
2,728,736
|
|
|
|
393,020
|
|
Total shareholders’ equity
|
|
|
1,323,285
|
|
|
|
1,887,209
|
|
|
|
3,090,164
|
|
|
|
3,246,819
|
|
|
|
5,052,555
|
|
|
|
727,719
|
|
|
*
|
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, we retrospectively
reclassified RMB42.3 million and RMB25.3 million of issuance cost of bonds from other non-current assets into convertible bonds
as of December 31, 2014 and December 31, 2015, respectively.
|
|
**
|
Convertible bonds classified in current liabilities represent convertible senior notes which may
be redeemed within one year.
|
Exchange Rate Information
Our business is primarily conducted in China
and most of our revenues are denominated in RMB. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S.
dollars to RMB in this annual report were made at a rate of RMB6.9430 to US$1.00, the exchange rate on December 30, 2016 as set
forth in the H.10 statistical release published by the Federal Reserve Board. We make no representation that any RMB or U.S. dollar
amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate or at all.
The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB
into foreign currency and through restrictions on foreign exchange activities. On April 14, 2017, the exchange rate, as set forth
in the H.10 statistical release of the Federal Reserve Board, was RMB6.8835 to US$1.00.
The following table sets forth information
concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your
convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our
other periodic reports or any other information to be provided to you.
|
|
Noon Buying Rate
|
|
Period
|
|
Period End
|
|
|
Average(1)
|
|
|
High
|
|
|
Low
|
|
|
|
(RMB per US$1.00)
|
|
2012
|
|
|
6.2301
|
|
|
|
6.2990
|
|
|
|
6.3879
|
|
|
|
6.2221
|
|
2013
|
|
|
6.0537
|
|
|
|
6.1412
|
|
|
|
6.2438
|
|
|
|
6.0537
|
|
2014
|
|
|
6.2046
|
|
|
|
6.1704
|
|
|
|
6.2591
|
|
|
|
6.0402
|
|
2015
|
|
|
6. 4778
|
|
|
|
6.2830
|
|
|
|
6.4896
|
|
|
|
6.1870
|
|
2016
|
|
|
6.9430
|
|
|
|
6.6400
|
|
|
|
6.4480
|
|
|
|
6.9580
|
|
October
|
|
|
6.7735
|
|
|
|
6.7303
|
|
|
|
6.7819
|
|
|
|
6.6685
|
|
November
|
|
|
6.8837
|
|
|
|
6.8402
|
|
|
|
6.9195
|
|
|
|
6.7534
|
|
December
|
|
|
6.9430
|
|
|
|
6.9198
|
|
|
|
6.9580
|
|
|
|
6.8771
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
6.8768
|
|
|
|
6.8907
|
|
|
|
6.9575
|
|
|
|
6.8360
|
|
February
|
|
|
6.8665
|
|
|
|
6.8694
|
|
|
|
6.8517
|
|
|
|
6.8821
|
|
March
|
|
|
6.8832
|
|
|
|
6.8940
|
|
|
|
6.9132
|
|
|
|
6.8687
|
|
April (through April 14, 2017)
|
|
|
6.8835
|
|
|
|
6.8899
|
|
|
|
6.8988
|
|
|
|
6.8832
|
|
|
(1)
|
Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during
the relevant period.
|
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of
Proceeds
Not applicable.
D. Risk Factors
An investment in our capital stock involves
a high degree of risk. You should carefully consider the risks described below, together with all of the other information included
in this annual report, before making an investment decision. If any of the following risks actually occurs, our business, financial
condition or results of operations could suffer. In that case, the trading price of our capital stock could decline, and you may
lose all or part of your investment.
Risks Related to Our Business
Our business is based on a relatively
new business model in a relatively new market in which user demand may change or decrease substantially.
Many of the elements of our business are
unique, evolving and relatively unproven. The markets for our technology, especially our live streaming technology, and products
and services are relatively new and rapidly developing and are subject to significant challenges. Our business plan relies heavily
upon increased revenues from our live streaming, online games and membership services, as well as our ability to successfully monetize
our user base and products and services, and we may not succeed in any of these respects.
As the online live streaming industry in
China is relatively young and untested, there are few proven methods of projecting user demand or available industry standards
on which we can rely. Further more, some of our current monetization methods are in a relatively preliminary stage. For example,
if we fail to properly manage the supply and timing of our in-game virtual items and the appropriate price points for these products
and services, our users may be less likely to purchase in-game virtual items from us. For non-game virtual items, we consider industry
standards and expected user demand in determining how to most effectively optimize virtual item merchandizing. We cannot assure
you that our attempts to monetize our user base and products and services will continue to be successful, profitable or widely
accepted, and therefore the future revenue and income potential of our business are difficult to evaluate.
If we fail to effectively manage
our growth or implement our business strategies, our business and results of operations may be materially and adversely affected.
We have experienced a period of significant
rapid growth and expansion that has placed, and continues to place, significant strain on our management and resources. We cannot
assure you that this level of significant growth will be sustainable or achieved at all in the future. We believe that our continued
growth will depend on our ability to develop new sources of revenue, increase monetization, attract new users, retain and expand
paying users, encourage additional purchases by our paying users, continue developing innovative technologies in response to user
demand, increase brand awareness through marketing and promotional activities, react to changes in user access to and use of the
internet, expand into new market segments, integrate new devices, platforms and operating systems, develop new advertising and
promotion methods, attract new advertisers and retain existing advertisers and take advantage of any growth in the relevant markets.
We cannot assure you that we will achieve any of the above.
To manage our growth and maintain profitability,
we anticipate that we will need to continue to implement, from time to time, a variety of new and upgraded operational and financial
systems, procedures and controls on an as-needed basis, including the continued improvement of our accounting and other internal
management systems. We will also need to further expand, train, manage and motivate our workforce and manage our relationships
with users, third party game developers, advertisers and other business partners. All of these endeavors involve risks and will
require substantial management efforts and skills and significant additional expenditures. We cannot assure you that we will be
able to effectively manage our growth or implement our future business strategies, and failure to do so may materially and adversely
affect our business and results of operations.
We are a relatively young company,
and you should consider our prospects in light of the risks and uncertainties which early-stage companies in evolving industries
in China with limited operating histories may be exposed to or encounter, including possible volatility in the trading prices of
our ADSs.
We expect that we will continue to incur
significant costs and expenses in many aspects of our business, such as research and development costs to update existing services
and launch new services and rising bandwidth costs to support our video function, grow our user base and generally expand our business
operations. We have been profitable since 2012 and achieved accumulated profitability since 2014, but we may not generate sufficient
revenues to offset such costs to achieve or sustain profitability in the future. In addition, we expect to continue to invest heavily
in our operations to maintain our current market position, support our anticipated future growth and meet our expanded reporting
and compliance obligations as a public company.
Our profitability is also affected by other
factors beyond our control. The continued success of our business depends on our ability to identify which services will appeal
to our user base and to offer such services on commercially acceptable terms. Our ability to finance our planned expansion also
depends in part on our ability to convert active users into paying users and increase the average revenue per paying user, or ARPU,
and successfully compete in a very competitive market.
We have a limited operating history. We
introduced YY Client in July 2008 and have experienced a high growth rate since then. As a result of our relatively short history,
our historical results of operations may not provide a meaningful basis for evaluating our business, financial performance and
future prospects. We may not be able to achieve similar growth rates in future periods. Accordingly, you should not rely on our
results of operations for any prior periods as an indication of our future performance. We may again incur net losses in the future
and you should consider our prospects in light of the risks and uncertainties which early-stage companies in evolving industries
in China with limited operating histories such as ours may be exposed to or encounter, including risks associated with being a
public company with business operations located mainly in China. See “—Risks Related to Our ADSs—The trading
prices of our ADSs are likely to be volatile, which could result in substantial losses to investors.”
Our business is heavily dependent
on revenues from live streaming services. If our live streaming revenue declines in the future, our results of operations may be
materially and adversely affected.
Historically, a majority of our revenues
are from live streaming service, online games, and membership subscription fees. In the year ended December 31, 2016, revenues
from live streaming, online games and membership subscription fees constituted 96.9% of our total net revenue, with revenues from
live streaming alone accounting for 85.7% of our total net revenue. We expect that our business will continue to be dependent on
revenues from live streaming services in the future. Any decline in live streaming revenues may materially and adversely affect
our results of operations. See “—The revenue model for each of our live streaming and our membership program may not
remain effective, which may affect our ability to retain existing users and attract new users and materially and adversely affect
our business, financial condition and results of operations.”
We may be held liable for information
or content displayed on, retrieved from or linked to our platforms, or distributed to our users, and PRC authorities may impose
legal sanctions on us, including, in serious cases, suspending or revoking the licenses necessary to operate our platforms.
Our live stream platforms enable users to
exchange information, generate content, advertise products and services, conduct business and engage in various other online activities.
However, our platforms do not require realname registration by our users and because a majority of the communications on our platforms
is conducted in real time, we are unable to verify the sources of all information posted thereon or examine the content generated
by users before they are posted. Therefore, it is possible that users may engage in illegal, obscene or incendiary conversations
or activities, including the publishing of inappropriate or illegal content that may be deemed unlawful under PRC laws and regulations
on our platforms. These issues exist on YY Client, YY.com, Huya.com, Duowan.com, 100.com and our other websites and mobile applications.
If any content on our platforms is deemed illegal, obscene or incendiary, or if appropriate licenses and third party consents have
not been obtained, claims may be brought against us for defamation, libel, negligence, copyright, patent or trademark infringement,
other unlawful activities or other theories and claims based on the nature and content of the information delivered on or otherwise
accessed through our platforms. For example, we have occasionally received fines for certain inappropriate materials placed by
third parties on our platforms, and may be subject to similar fines and penalties in the future. We also may face liability for
copyright or trademark infringement, fraud, and other claims based on the nature and content of the materials that are delivered,
shared or otherwise accessed through or published on our platforms. Defending any such actions could be costly and involve significant
time and attention of our management and other resources. In addition, if they find that we have not adequately managed the content
on our platforms, PRC authorities may impose legal sanctions on us, including, in serious cases, suspending or revoking the licenses
necessary to operate our platforms. See “Item 4. Information on the Company—B. Business Overview—PRC Regulation—Information
Security and Censorship” and “Item 4. Information on the Company—B. Business Overview—PRC Regulation—Intellectual
Property Rights.”
The revenue model for each of
our live streaming and our membership program may not remain effective, which may affect our ability to retain existing users and
attract new users and materially and adversely affect our business, financial condition and results of operations.
We operate YY Live and Huya broadcasting,
our live streaming platforms using a virtual items-based revenue model whereby users can listen to music and access other forms
of entertainment, participate in or watch online dating shows, watch shows that deliver financial news and information, and get
access to the live streaming of different game plays for free, and have the option of purchasing in-channel virtual items. We have
generated, and expect to continue to generate, a substantial majority of our live streaming revenues using this revenue model.
In 2016, revenues from live streaming contributed 85.7% of our total net revenues. Our live streaming business has experienced
significant growth in recent years, but we cannot assure you that we will continue to achieve a similar growth rate in the future,
as the user demand for this service may change, decrease substantially or dissipate, or we may fail to anticipate and serve user
demands effectively.
We may not be able to continue to successfully
implement the virtual items-based revenue model for live streaming, as popular performers, channel owners, famous professional
game teams and commentators may leave our platforms and we may be unable to attract new talent that can attract users or cause
such users to increase the amount of time spent engaging and money spent on purchasing in-channel virtual items on our platforms.
In addition, certain content on our live streaming platforms, such as certain online games owned by or licensed to certain gaming
companies or publishers, may not continue to be available to our users for live streaming purposes. Failure to keep our users engaged
in the live streaming service may result in reducing ARPU and the number of paying users, which may adversely affect our financial
condition and results of operations.
Furthermore, under our current arrangements
with certain popular performers, channel owners, famous professional game teams and commentators, we share with them a portion
of the revenues we derive from the sales of in-channel virtual items on our live streaming platform. We also cooperate with popular
professional game teams and commentators to make their game play available on our platforms by paying them fixed sponsorship fees.
In the future, the amount we pay to these performers, channel owners famous professional game teams and commentators may increase
or we may fail to reach mutually acceptable terms with these parties, which may adversely affect our revenues or cause these parties
to leave our platforms. In turn, this may affect the user and revenue growth in this business, which may materially and adversely
affect our financial condition and results of operations.
In addition, we have been a pioneer in offering
an online concert platform to music performers and YY users. We also continue to focus on the development of professionally-curated
user generated content, or PUGC, and professionally generated content, or PGC, as well as introduce more sports content on our
platforms. However, if our users decide to access live streaming content provided by our current or future competitors, our business,
financial condition and results of operations could be materially and adversely affected.
In our membership program, users pay a flat
monthly subscription fee in order to become members, and in exchange, we give them access to various privileges and enhanced features
on our channels, including additional video usage, priority entrance to certain live performances, and exclusive rights to access
VIP avatars, VIP ring-tones, VIP fonts and VIP emoticons. However, we may not be able to further build or maintain our membership
base in the future for various reasons—for example, if we fail to continue to provide innovative products and services that
are attractive to members, we may not be able to retain them and our business, financial condition and results of operations could
be adversely affected.
The revenue model we adopt for
online games may not remain effective, causing us to lose game players, which may materially and adversely affect our business,
financial condition and results of operations.
We currently operate substantially all of
our online games on YY using the virtual items-based revenue model, whereby players can play games for free, but have the option
of purchasing in-game virtual items and in-game accessories. We have generated, and expect to continue to generate, a substantial
majority of our online game revenues using this revenue model. However, we may not be able to continue successfully implementing
the virtual items-based revenue model as we may not be able to develop, obtain or maintain the rights to host online games that
attract game players or cause such game players to increase the amount of time spent playing and the amount of money spent on purchasing
in-game virtual items. The sale of virtual items requires us to closely track game players’ tastes and preferences and in-game
consumption patterns. If we fail to offer popular virtual items, we may not be able to effectively convert our game player base
into paying users or encourage existing paying users to spend more on YY.
In addition, PRC regulators have been implementing
regulations designed to reduce the amount of time that youths in China spend playing online games. See “Item 4. Information
on the Company—B. Business Overview—PRC Regulation—Anti-fatigue Compliance System and Real-name Registration
System.” A revenue model that does not charge for playing time may be viewed by the PRC regulators as inconsistent with this
goal. If we were to start charging for playing time, we may lose game players who may choose to play online games from other providers
and on other platforms or choose to engage in other alternative forms of entertainment, including traditional offline personal
computers, or PCs, or video games.
We cannot assure you that the revenue model
that we have adopted for any of our online games will continue to be suitable, or that we will not in the future need to change
our revenue model or introduce a new revenue model. We may change the revenue model for some of our online games if we believe
the existing models are not generating adequate revenues. A change in revenue model could result in various adverse consequences,
including disruptions of our online game operations, criticism from game players who have invested time and money in a game, a
decrease in the number of our game players and a decrease in the revenues we generate from our online games. Therefore, such a
change in revenue model may materially and adversely affect our business, financial condition and results of operations.
We generate a significant portion of
our revenues from a limited number of popular online games, most of which are PC-based online games. Due to the increasing
popularity of mobile online games, our online game business sector faces a weak PC-based online game market. If we cannot
continue to offer popular PC-based online games that retain existing players or attract new players, if the PC-based online
game market continues to remain weak or shrink, if we are unable to successfully develop or source new online games, in
particular mobile online games, if the terms of the revenue-sharing or exclusive license arrangements become less favorable,
or if the number of our paying users for online games declines or ceases to grow for any reason, our revenues from online
games may decrease, and our financial condition and results of operations may be materially and adversely affected
We generate a significant portion of our
revenues from a limited number of popular online games on YY, primarily through selling of game tokens to users for their purchase
of in-game virtual items. In 2016, the five most popular online games contributed approximately 37.2% of our total online game
revenues, as compared to 41.0% in 2015, representing a decrease in reliance on our top games. A majority of our popular online
games are created by third party game developers under revenue-sharing arrangements that typically last one to two years, and which
typically provide for automatic extension or renewal. A few of our online games are licensed to us by third party game developers
under exclusive license arrangements. If we fail to maintain or renew these contracts on acceptable terms or at all, we may be
unable to continue offering these popular online games, and our operating results will be adversely affected. For online games
licensed to us under exclusive license arrangements, we also have to devote additional resources to promoting these games on our
platforms or licensing such games to the appropriate third party operators. If our users decide to access any of our online games
through our competitors, or if they prefer other online games hosted by our competitors, our operating results could be materially
and adversely affected.
Our revenues from online games accounted
for 22.1%, 13.1% and 7.7% of our total net revenues in 2014, 2015 and 2016, respectively. We believe that most online games have
a limited commercial lifespan. We must continually source new online games that appeal to our game players. Hence, we must maintain
good relationships with our third party game developers to have access to new popular games with reasonable revenue-sharing or
exclusive licensing terms. Under most of our current revenue-sharing and exclusive license arrangements, we retain a majority of
the gross revenues generated from each particular game. In the future, we may not be able to achieve similarly attractive revenue-sharing
or other commercial terms, which may adversely affect our net revenues. Additionally, we depend upon these third party game developers
to provide the technical support necessary to operate their online games on our platforms and to develop updates and expansion
packs to sustain player interest in a game. Most of our third party game developers have limited operating histories and financial
resources, and the contracts we enter into with them do not clearly provide for remedies to us in the event they fail to deliver
the games or the promised updates and expansion packs as scheduled.
If we are not successful in sourcing and
providing popular new online games, our revenues from online games under revenue-sharing and exclusive licensing arrangements and
in-game virtual items may decrease. If this were to happen, our financial condition and results of operations may be materially
and adversely affected.
Our online education business
is a challenging business line. If we fail to properly handle the issues we encounter in our operation, our revenues may be adversely
affected.
Competition in the education market in China
is intense. Traditional offline education institutions and practitioners are still the mainstream that appeals to most students.
However, online education service providers have grown in number, size and popularity in the recent years, and are getting accepted
by more and more students. Many traditional offline education service providers are also trying to start their online business.
If we cannot provide services differentiated from these competitors, we may not attract or retain sufficient users and our financial
condition and results of operations could be adversely affected.
We generate a portion of our revenues
from online advertising and promotion. If we fail to attract more advertisers to our platforms or if advertisers are less willing
to advertise with us, our revenues may be adversely affected.
In 2014, 2015 and 2016, online advertising
and promotion accounted for 4.0%, 1.1% and 0.5%, respectively, of our total net revenues. Although we have become less dependent
upon online advertising and promotion revenues due to a shift in the majority of our revenues from online advertising and promotion
to live streaming service, our revenues still partly depend on the continual development of the online advertising industry in
China and advertisers’ allocation of budgets to internet advertising and promotion. In addition, companies that decide to
advertise or promote online may utilize more established methods or channels for online advertising and promotion, such as more
established Chinese internet portals or search engines, over advertising and promotion on our platforms. If the online advertising
market size does not increase from current levels, or if we are unable to capture and retain a sufficient share of that market,
our ability to maintain or increase our current level of online advertising and promotion revenues and our profitability and prospects
could be adversely affected.
We offer advertising and promotion services
substantially through contracts entered into with third party advertising agencies and by way of displaying advertisement on our
websites and platforms or providing promotion integrated in the programs, shows or other content offered on our live streaming
platforms. We cannot assure you that we will be able to retain existing direct advertisers or advertising agencies or attract new
direct advertisers and advertising agencies. Since our arrangements with third party advertising agencies typically involve one-year
framework agreements, these advertising arrangements may be easily amended or terminated without incurring liabilities. If we fail
to retain existing advertisers and advertising agencies or attract new direct advertisers and direct advertising agencies or any
of our current advertising methods or promotion activities becomes less effective, our business, financial condition and results
of operations may be adversely affected.
We have granted employee stock
options and other share-based awards in the past and are very likely to continue to do so in the future. We recognize share-based
compensation expenses in our consolidated statements of operations in accordance with the relevant rules under U.S. GAAP, which
have had and may continue to have a material and adverse effect on our results of operations.
We have granted share-based compensation
awards, including share options, restricted shares and restricted share units, to various employees, key personnel and other non-employees
to incentivize performance and align their interests with ours. Under our 2009 employee equity incentive scheme, or the 2009 Scheme,
we are authorized to grant options or restricted shares to purchase a maximum of 120,020,001 common shares. Under our 2011 share
incentive plan, or the 2011 Plan, we are authorized to grant options, restricted shares or restricted share units to purchase a
maximum of 43,000,000 common shares, plus an annual increase of 20,000,000 common shares on the first day of each fiscal year,
beginning from 2013, or such smaller number of Class A common shares as determined by our board of directors. As of March 31, 2017,
options to purchase 499,655 common shares, 8,370,112 restricted shares and 33,595,279 restricted share units were outstanding under
the 2009 Scheme and the 2011 Plan. As a result of these grants and potential future grants, we had incurred in the past and expect
to continue to incur significant share-based compensation expenses in the future. The amount of these expenses is based on the
fair value of the share-based awards. We account for compensation costs for certain share-based compensation awards granted in
the past using a graded-vesting method and recognize expenses in our consolidated statements of operations in accordance with the
relevant rules under U.S. GAAP. The expenses associated with share-based compensation materially increased our net losses or reduced
our net income in the past, and may reduce our net income in the future. In addition, any additional securities issued under share-based
compensation schemes will dilute the ownership interests of our shareholders, including holders of our ADSs. However, if we limit
the scope of the share-based compensation schemes, we may not be able to attract or retain key personnel who expect to be compensated
by options, restricted shares or restricted share units.
The number of active users we
have may fluctuate and we may fail to attract more paying users, which may materially and adversely affect our revenues growth,
results of operations and financial condition.
The number of our average monthly active
users increased by 23.2 million or 19.8% to 140.7 million for the three months ended December 31, 2015. For the three months ended
December 31, 2016, the number of average monthly active users of our PC clients and our mobile clients were 96.1 million and 56.0
million, respectively. We have experienced declines in growth rate of our average monthly active users, due to the increase in
the base number of the average monthly active users, and despite that, we continued to attract higher levels of new monthly active
users during such periods.
However, the number of our monthly active
users may substantially fluctuate from time to time. If we are unable to attract new users and retain them as active users and
convert non-paying active users into paying users, our revenues may fail to grow and our results of operations and financial condition
may suffer.
We may not be able to keep our
users highly engaged, which may reduce our monetization opportunities and materially and adversely affect our revenues, profitability
and prospects.
Our success depends on our ability to maintain
and grow our user base and keep our users highly engaged. In order to attract and retain users and remain competitive, we must
continue to innovate our products and services, implement new technologies and functionalities and improve the features of our
platforms in order to entice users to use our products and services more frequently and for longer durations.
The internet industry is characterized by
constant changes, including rapid technological evolution, continual shifts in customer demands, frequent introductions of new
products and services and constant emergence of new industry standards and practices. Thus our success will depend, in part, on
our ability to respond to these changes on a cost-effective and timely basis; failure to do so may cause our user base to shrink
and user engagement level to decline and our results of operations would be materially and adversely affected. For example, our
plan to more broadly support mobile-live broadcasting across our live streaming platform and retain the ability to offer high quality
delivery of voice and video data may cause us to incur significant additional costs and may not succeed.
Due to the intensified competitions among
live streaming platforms, users may leave us for competitors’ platforms more quickly than in other online sectors. A decrease
in the number of active YY users may reduce the diversity and vibrancy of our platforms’ online ecosystem and affect our
user-generated channels, which may in turn reduce our monetization opportunities and have a material and adverse effect on our
business, financial condition and results of operations.
We cannot assure you that our platforms
will continue to be sufficiently popular with our users to offset the costs incurred to operate and expand it. User satisfaction
is particularly difficult to predict as internet users in China may not be familiar with the concept of a live streaming platform
such as ours which enable users to interact in live online group activities through voice, text and video. We have historically
relied on word of mouth referrals to increase user awareness of our products and services and to expand our user base. If we decide
to engage in more conventional advertising or marketing campaigns, our sales and marketing expenses will increase, which could
have an adverse effect on our results of operations. Failure to maintain or grow our user base in a cost-effective manner, or at
all, and keep our users highly engaged would materially and negatively affect our results of operations.
We face competition in several
major aspects of our business. If we fail to compete effectively, we may lose users and advertisers which could materially and
adversely affect our business, financial condition and results of operations.
We face competition in several major
aspects of our business, particularly from companies that provide live streaming services and online games. Some of our
competitors may have longer operating histories and significantly greater financial, technical and marketing resources than
we do, and in turn may have an advantage in attracting and retaining users and advertisers. In addition, competitors in some
areas of our business may have significantly larger user bases and more established brand names than we do and may be able to
more effectively leverage their user bases and brand names to provide live streaming, internet communication, online games
and other products and services, and thereby increase their respective market shares. We may also face potential competition
from global live streaming service providers that seek to enter the China market, whether independently or through the
formation of alliances with, or acquisition of, PRC domestic internet companies.
In relation to our live streaming business
and our online advertising and promotion business, our competitors primarily include Momo,Yingke (Ingkee), DouyuTV.com, Huajiao,
Youku’s Laifeng, Yizhibo, NetEase’s Bobo and Kuaishou. For online games, our competitors include other major internet
companies that host games, such as 37.com, 4399.com, Tencent, Qihoo 360 and other private companies. We also have various competitors
in the online game media market in China. Duowan.com’s primary competitor among game media websites is 17173.com.
If we are not able to effectively compete
in any of our lines of business, our overall user base and level of user engagement may decrease, which could reduce our paying
users or make us less attractive to advertisers. We may be required to spend additional resources to further increase our brand
recognition and promote our products and services, and such additional spending could adversely affect our profitability. Furthermore,
if we are involved in disputes with any of our competitors that result in negative publicity to us, such disputes, regardless of
their veracity or outcome, may harm our reputation or brand image and in turn lead to reduced number of users and advertisers.
Any legal proceedings or measures we take in response to such disputes may be expensive, time-consuming and disruptive to our operations
and divert our management’s attention.
Our competitors may unilaterally decide
to adopt a wide range of measures targeted at us, including possibly designing their products to negatively impact our operations,
such as sending virus-like programs to attack elements of our platforms. Some competitors may also make their applications incompatible
with ours, effectively requiring users to either stop using our competitors’ products or uninstall our products, leading
to a reduction in our number of users. For example, in a widely publicized dispute between two of the largest companies providing
user-end software in China, one of the companies announced that it would disable its own software on computers that had installed
its rival’s products. As a result, a significant number of users stopped using products from either or both of these companies.
Due to the large number of internet users that were affected, the Ministry of Industry and Information Technology of China, or
the MIIT, ordered the parties to ensure the compatibility of the relevant products. Similar events may occur in the future between
our competitors and us, which may reduce our market share, negatively affect our brand and reputation, and materially and adversely
affect our business, financial condition and results of operations.
Spammers and malicious applications
may affect user experience, which could reduce our ability to attract users and advertisers and materially and adversely affect
our business, financial condition and results of operations.
Spammers may use YY to send targeted and
untargeted spam messages to users, which may affect user experience. As a result, our users may use our products and services less
or stop using them altogether. In spamming activities, spammers typically create multiple user accounts for the purpose of sending
spam messages. Although we attempt to identify and delete accounts created for spamming purposes, we may not be able to effectively
eliminate all spam messages from our platforms in a timely fashion. Any spamming activities could have a material and adverse effect
on our business, financial condition and results of operations.
We use third party services and
technologies in connection with our business, and any disruption to the provision of these services and technologies to us could
result in adverse publicity and a slowdown in the growth of our users, which could materially and adversely affect our business,
financial condition and results of operations.
Our business depends upon services provided
by, and relationships with, third parties. If we are unable to retain or attract popular talents such as performers, channel managers,
professional game players, commentators and hosts for our live streaming platform or if these talents cannot draw fans or participants,
our results of operations may be adversely affected. Also, if channel owners are unable to reach or maintain mutually satisfactory
cooperation arrangements with the performers on their channels on our live streaming platform, we may lose popular performers and
our business and operations may be adversely affected. Furthermore, if we are unable to obtain or retain rights to host popular
online games or popular in-game virtual items, or if we are required to share a bigger portion of our revenues with third party
game developers, we could be required to devote greater resources and time to obtain hosting rights for new games and applications
from other parties, and our results of operations may be impacted. In addition, some third party software we use in our operations
are currently publicly available without charge. If the owner of any such software decides to charge users or no longer makes the
software publicly available, we may need to incur significant cost to license the software, find replacement software or develop
it on our own. If we are unable to find or develop replacement software at a reasonable cost, or at all, our business and operations
may be adversely affected.
Some of the games offered by us run on a
complex network of servers located in and maintained by third party data centers throughout China and our overall network relies
on broadband connections provided by third party operators. We expect this dependence on third parties to continue. The networks
maintained and services provided by such third parties are vulnerable to damage or interruption, which could impact our results
of operations. See “—System failure, interruptions and downtime can result in adverse publicity for our products and
result in net revenue losses, a slowdown in the growth of our registered user accounts and a decrease in the number of our active
users. If any of these system disruptions occurs, our business, financial condition and results of operations may be materially
and adversely affected.”
Furthermore, we generate substantially all
of our online advertising revenues through agreements entered into with various third party advertising agencies that represent
advertisers. We do not have long-term cooperation agreements or exclusive arrangements with these agencies and they may elect to
direct business opportunities to other advertising service providers. If we fail to retain and enhance our business relationships
with these third party advertising agencies, we may suffer from a loss of advertisers and our business and results of operations
may be materially and adversely affected.
In addition, we sell a significant portion
of our products and services through third party online payment systems. If any of these third party online payment systems suffer
from security breaches, users may lose confidence in such payment systems and refrain from purchasing our virtual items online,
in which case our results of operations would be negatively impacted. See “—The security of operations of, and fees
charged by, third party online payment platforms may have a material adverse effect on our business and results of operations.”
We exercise no control over the third parties
with whom we have business arrangements. If such third parties increase their prices, fail to provide their services effectively,
terminate their service or agreements or discontinue their relationships with us, we could suffer service interruptions, reduced
revenues or increased costs, any of which may have a material adverse effect on our business, financial condition and results of
operations.
System failure, interruptions
and downtime can result in adverse publicity for our products and result in net revenue losses, a slowdown in the growth of our
registered user accounts and a decrease in the number of our active users. If any of these system disruptions occurs, our business,
financial condition and results of operations may be materially and adversely affected.
Although we seek to reduce the possibility
of disruptions or other outages, our services may be disrupted by problems with our own technology and system, such as malfunctions
in our software or other facilities and network overload. Our systems may be vulnerable to damage or interruption from telecommunication
failures, power loss, computer attacks or viruses, earthquakes, floods, fires, terrorist attacks and similar events. We have experienced
system failures, including a partial system outage in 2009 caused by hackers hired by a competing business intending to maliciously
overwhelm and clog our servers and our routing system. Those responsible were subsequently found guilty and penalized by the PRC
courts and we have subsequently updated our system to make it more difficult for similar attacks to succeed in the future, but
we cannot assure you that there will be no similar failures in the future. Parts of our system are not fully redundant, and our
disaster recovery planning is not sufficient for all eventualities. Despite any precaution we may take, the occurrence of a natural
disaster or other unanticipated problems at our hosting facilities could result in lengthy interruptions in the availability of
our products and services. Any interruption in the ability of our users to use our products and services could reduce our future
revenues, harm our future profits, subject us to regulatory scrutiny and lead users to seek alternative forms of online social
interactions.
Our servers that process user payments experience
some downtime on a regular basis, which may negatively affect our brand and user perception of the reliability of our systems.
Any scheduled or unscheduled interruption in the ability of users to use our payment systems could result in an immediate, and
possibly substantial, loss of revenues.
Almost all internet access in China is maintained
through state-owned telecommunication operators under the control and supervision of the MIIT, and we use a limited number of telecommunication
service providers to provide us with data communications capacity through local telecommunications lines and internet data centers
to host our servers. Internet data centers in China are generally owned by telecommunication service providers with their own broadband
networks and are leased to various customers through third party agents. These third party agents negotiate the terms of the leases,
enter into lease agreements with end customers, handle customer interactions and manage the data centers on behalf of the data
center owners. In the past, we signed data center lease agreements with multiple third party agents. With the expansion of our
business, we may be required to purchase more bandwidth and upgrade our technology and infrastructure to keep up with the increasing
traffic on our websites and increasing user levels on our platforms overall. We cannot assure you that the telecommunications providers
whose networks we lease or the third party agents that operate our data centers would be able to accommodate all of our requests
for more bandwidth or upgraded infrastructure or network, or that the internet infrastructure and the fixed telecommunications
networks in China will be able to support the demands associated with the continued growth in our internet usage.
Our users may use our products or services
for critical transactions and communications, especially business communications. As a result, any system failures could result
in damage to such users’ businesses. These users could seek significant compensation from us for their losses. Even if unsuccessful,
this type of claim would likely be time consuming and costly for us to address.
We have limited control over the prices
of the services provided by telecommunication service providers and may have limited access to alternative networks or services.
If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be materially
and adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may
decline and our business may be harmed.
The respective number of our registered
user accounts, active users, paying users and unique visitors may overstate the number of unique individuals who register to use
our products and services, log on to our platforms, purchase virtual items or other products and services on our platforms or access
Duowan.com, respectively, and may therefore lead to an inaccurate interpretation of our average revenue per paying user metric
and of our business operations by our management and by investors, and may affect advertisers’ decisions on the amount spent
on advertising with us.
We do not operate our platforms on a real-name
basis and therefore we cannot and do not track the number of unique paying users. Instead, we track the number of registered user
accounts, active users, paying users and unique visitors. We calculate certain operating metrics in the following ways: (a) the
number of registered user accounts is the cumulative number of user accounts at the end of the relevant period that have logged
onto our platforms at least once after registration, (b) the number of active users is the cumulative number of user accounts at
the end of the relevant period that have signed onto our platforms at least once during the relevant period, (c) the number of
paying users is the cumulative number of registered user accounts that have purchased virtual items or other products and services
on our platforms at least once during the relevant period, and (d) the number of unique visitors is the number of visits to Duowan.com
from specific IP addresses for the relevant period, with each IP address counting as a separate unique visitor. The actual number
of unique individual users, however, is likely to be lower than that of registered user accounts, active users, paying users and
unique visitors, potentially significantly, for three primary reasons. First, each individual user may register more than once
and therefore have more than one account, and sign onto each of these accounts during a given period. For example, a user may (a)
create separate accounts for community and personal use and log onto each account at different times for different activities or
(b) if he or she lost his or her original username or password, he or she can simply register again and create an additional account.
Second, we experience irregular registration activities such as the creation of a significant number of improper user accounts
by a limited number of individuals, which may be in violation of our policies, including for the purpose of clogging our network
or posting spam to our channels. We believe that some of these accounts may also be created for specific purposes such as to increase
the number of votes for certain performers in various contests, but the number of registered user accounts, paying users and active
users do not exclude user accounts created for such purposes. We have limited ability to validate or confirm the accuracy of information
provided during the user registration process to ascertain whether a new user account created was actually created by an existing
user who is registering duplicative accounts. Third, each individual user may access Duowan.com from more than one IP address;
although subsequent visits from the same IP address do not add to our total unique visitors count, each new IP address used by
an individual would be counted as a different unique visitor to Duowan.com. For example, a user would be counted as a unique visitor
three times if he or she accessed Duowan.com from the user’s home computer, office computer and mobile phone. Thus, the respective
number of our registered user accounts, active users, paying users and unique visitors may overstate the number of unique individuals
who register on our platforms, sign onto our platforms, purchase virtual items or other products and services on our platforms
and access Duowan.com, respectively which may lead to an inaccurate interpretation of our average revenue per paying user metric.
In addition, we may be unable to track whether
we are successfully converting registered users or active users into paying users since we do not track the number of unique individuals
or operate our platforms on a real-name basis. If the growth in the number of our registered user accounts, active users, paying
users or unique visitors is lower than the actual growth in the number of unique individual registered, active or paying users
or unique visitors, our user engagement level, sales and our business may not grow as quickly as we expect, and advertisers may
reduce the amount spent on advertising with us, which may harm our business, financial condition and results of operations. In
addition, such overstatement may cause inaccurate evaluation of our business operations by our management and by investors, which
may also materially and adversely affect our business and results of operations.
If we are unable to continue to
successfully capture and retain the growing number of users that access internet services through mobile devices or successfully
monetize mobile users, our business, financial condition and results of operations may be materially and adversely affected.
An increasing number of users are
accessing our platforms through mobile devices, and we consider the rise of mobile-based business to be a general trend. We
have been taking measures to expand our success from PC-based products and services to the mobile platform. In 2010, we
introduced Mobile YY, our music and entertainment mobile application. In the second half of 2016, along with our transition
into a live streaming platform, we rebrand Mobile YY into YY Live APP, a mobile application for our YY Live platform. We also
have introduced Huya APP, a mobile application for our Huya broadcasting platform. In addition, we have launched several
other mobile applications over the years, including, among others, Xunhuan for online dating shows and Zhiniu for financial
news and analysis. Our mobile applications in aggregate, have contributed 49.6% of the total revenue generated from our live
streaming services in the fourth quarter of 2016, compared to 33.4% in the same period of 2015.
The ARPU of our
live streaming mobile applications has reached RMB292.7 (US$42.2) in the fourth quarter of 2016, compared to RMB428.6
(US$61.7), the average ARPU of our whole live streaming business. We have also developed numerous mobile applications for
other parts of our business. An important element of our strategy is to continue to develop and enhance mobile applications
to capture a greater share of the growing number of mobile users.
Nevertheless, since the user experience
and user habits on mobile devices are significantly different from those on PCs, there can be no assurance that we can succeed
in adapting our products and services to the expectation of mobile users. If we are unable to attract and retain the increasing
number of mobile users, or if we are slower than our competitors in developing attractive services adaptable for mobile devices,
we may fail to capture a significant share of an increasingly important portion of the market or may lose existing users. In addition,
even if we are able to retain the increasing number of mobile users, we may not be able to successfully monetize them in the future.
For example, because of the inherent limitations of mobile devices, such as a smaller display screen space as compared to PCs,
we may not be able to provide as many kinds of virtual items on our mobile applications as we can on YY Client, which may limit
the monetization potential of mobile users.
Furthermore, as new mobile devices and operating
systems are continually being released, it is difficult to predict the problems we may encounter in developing and updating versions
of our products and services for use on these devices and operating systems, and we have devoted, and expect to continue to devote,
significant resources to create, support and maintain these services. Devices providing access to our products and services are
not manufactured and sold by us, and we cannot assure you that the companies manufacturing or selling these devices would always
ensure that their devices perform reliably and are maximally compatible with our systems. Any faulty connection between these devices
and our products and services may result in consumer dissatisfaction with us, which could damage our brand and have a material
and adverse effect on our financial results. In addition, the lower resolution, functionality and memory associated with some mobile
devices make the use of our products and services through such devices more difficult and the versions of our products and services
we develop for these devices may fail to attract users. Manufacturers or distributors may establish unique technical standards
for their devices and, as a result, our mobile applications may not work or be viewable on these devices. Meanwhile, new social
platforms or services may emerge which are specifically created to function on mobile operating systems, whereas our platforms
were originally designed to be accessed from PCs. Such new entrants may operate more effectively on mobile devices than our mobile
applications do.
Due to the increasing importance of mobile-based
business, any of the above may have a material adverse effect on our business, financial condition and results of operations.
The development of mobile technology
and applications as a substitute for PC-based technology and applications may adversely affect our existing business, and in turn
our revenues and financial performance.
In recent years, the development of mobile
technology and application, such as increased speed and stability of mobile network and enhancement of mobile devices, allows performers,
content providers and other users to broadcast simply with a mobile device instead of relying on PC-based or other more complicated
devices. Due to the portability and affordability of mobile devices, mobile broadcasting is more diversified and spontaneous as
compared to online broadcasting on PC-based platforms. We believe that such innovation brings opportunities as well as challenges
for our business.
We launched our mobile broadcasting application,
ME Live, in February 2016, which competes with a few other mobile broadcasting applications, such as Yingke (Ingkee) released in
2015. Although we believe that our mobile application has some unique features and is competitive in the market, the industry is
new and we expect the competition to be intensive. Since mobile broadcasting is more diversified and spontaneous, our experience
in content organization and interaction on PC platforms may not satisfy the mobile users, we may hence fail to attract or retain
such mobile users. There can be no assurance that we will be able to gain as significant a market share as we do on PC-based platform.
Meanwhile, since the way to monetize mobile users is different from the way to monetize PC users, even if we are able to attract
and retain a considerable number of mobile users, we may not generate as much revenue as we do on PCs.
Although we believe that users, including
performers, are unlikely to entirely migrate to mobile applications and cease to use YY through PCs and that most of our mobile
users also access our platforms through PCs, we cannot assure you that the increasing usage of mobile application will not cause
our users to cease accessing our platforms from PCs. If a significant number of users migrate to mobile applications as a substitute
for accessing our platforms through PCs, or even turn to use mobile applications developed by our competitors, our business, results
of operations and financial condition would be negatively affected.
Concerns about collection and
use of personal data could damage our reputation and deter current and potential users from using our products and services, which
could lead to lower revenues.
Concerns about our practices with regard
to the collection, use or disclosure of personal information or other privacy-related matters, even if unfounded, could damage
our reputation and operating results. We apply strict management and protection for any information provided by users and, under
our privacy policy, without our users’ prior consent, we will not provide any of our users’ personal information to
any unrelated third party. While we strive to comply with our privacy guidelines as well as all applicable data protection laws
and regulations, any failure or perceived failure to comply may result in proceedings or actions against us by government entities
or others, and could damage our reputation. User and regulatory attitudes towards privacy are evolving, and future regulatory or
user concerns about the extent to which personal information is used or shared with advertisers or others may adversely affect
our ability to share certain data with advertisers, which may limit certain methods of targeted advertising. Concerns about the
security of personal data could also lead to a decline in general internet usage, which could lead to lower registered, active
or paying user numbers on our platforms. For example, if the PRC government authorities require real-name registration for YY Client
users or users of our mobile applications, the growth of our user numbers may slow and our business, financial condition and results
of operations may be adversely affected. See “—Risks Related to Our Corporate Structure and Our Industry—We may
be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet business and companies.”
A significant reduction in registered, active or paying user numbers could lead to lower revenues, which could have a material
and adverse effect on our business, financial condition and results of operations.
The security of operations of,
and fees charged by, third party online payment platforms may have a material adverse effect on our business and results of operations.
Currently, we sell almost all of our products
and services to our users through third party online payment systems. We expect that an increasing amount of our sales will be
conducted over the internet as a result of the growing use of online payment systems. In all these online payment transactions,
secured transmission of confidential information such as customers’ credit card numbers and personal information over public
networks is essential to maintain consumer confidence.
We do not have control over the security
measures of our third party online payment vendors, and security breaches of the online payment systems that we use could expose
us to litigation and possible liability for failing to secure confidential customer information and could, among other things,
damage our reputation and the perceived security of all of the online payment systems that we use. If a well-publicized internet
or mobile network security breach were to occur, users concerned about the security of their online financial transactions may
become reluctant to purchase our virtual items even if the publicized breach did not involve payment systems or methods used by
us. In addition, there may be billing software errors that would damage customer confidence in these online payment systems. If
any of the above were to occur and damage our reputation or the perceived security of the online payment systems we use, we may
lose paying users and users may be discouraged from purchasing our services, which may have a material adverse effect on our business.
In addition, there are currently only a
limited number of third party online payment systems in China. If any of these major payment systems decides to cease to provide
services to us, or significantly increase the percentage they charge us for using their payment systems for our virtual items and
other services, our results of operations may be materially and adversely affected.
Our core values of focusing on
user experience and satisfaction first and acting for the long-term may conflict with the short-term operating results of our business,
and also negatively impact our relationships with advertisers or other third parties.
One of our core values is to focus on user
experience and satisfaction, which we believe is essential to our success and serves the best, long-term interests of our company
and our shareholders. Therefore, we have made, and may make in the future, significant investments or changes in strategy that
we think will benefit our users, even if our decision negatively impacts our operating results in the short-term. For example,
in order to provide users of YY Client with uninterrupted entertainment options, we do not place significant advertising on YY
Client. While this decision adversely affects our operating results in the short-term, we believe it enables us to provide higher
quality user experience on YY Client, which will help us expand and maintain our current large user base and create better monetizing
potential in the long-term. In addition, this philosophy of putting our users first may also negatively impact our relationships
with advertisers or other third parties, and may not result in the long-term benefits that we expect, in which case the success
of our business and operating results could be harmed.
Trademarks registered, internet
search engine keywords purchased and domain names registered by third parties that are similar to our trademarks, brands or websites
could cause confusion to our users, divert online customers away from our products and services or harm our reputation.
Competitors and other third parties may
purchase (a) trademarks that are similar to our trademarks and (b) keywords that are confusingly similar to our brands or websites
in internet search engine advertising programs and in the header and text of the resulting sponsored links or advertisements in
order to divert potential customers from us to their websites. Preventing such unauthorized use is inherently difficult. If we
are unable to prevent such unauthorized use, competitors and other third parties may continue to drive potential online customers
away from our platforms to competing, irrelevant or potentially offensive platforms, which could harm our reputation and cause
us to lose revenue.
We may be subject to intellectual
property infringement claims or other allegations, which could result in our payment of substantial damages, penalties and fines,
removal of relevant content from our website or seeking license arrangements which may not be available on commercially reasonable
terms.
Third party owners or right holders of technology
patents, copyrights, trademarks, trade secrets and website content may assert intellectual property infringement or other claims
against us. In addition, content generated through our platforms, including real-time content, may also potentially cause disputes
regarding content ownership or intellectual property. For example, we could face copyright infringement claims with respect to
songs performed live, recorded or made accessible and online games being streamed live, recorded or made accessible on our live
streaming platforms. We generated 85.7% of our total net revenues in 2016 from live streaming services.
The validity, enforceability and scope of
protection of intellectual property rights in internet-related industries, particularly in China, are uncertain and still evolving.
As we face increasing competition and as litigation becomes a more common way to resolve disputes in China, we face a higher risk
of being the subject of intellectual property infringement claims. For example, Guangzhou NetEase Computer System Co., Ltd. has
initiated a lawsuit against us in Guangzhou in October 2014, claiming the infringement of its rights of reproduction concerning
the online game of
Fantasy Westward Journey
in the amount of RMB100 million. Although we believe that the claim is unjustified
and commercially motivated, if the outcome of the proceeding is unfavorable to us, we may suffer considerable damage to our financial
position and reputation.
Under relevant PRC laws and regulations, online service providers which provide storage
space for users to upload works or links to other services or content could be held liable for copyright infringement under various
circumstances, including situations where an online service provider knows or should reasonably have known that the relevant content
uploaded or linked to on its platform infringes the copyrights of others and the provider realizes economic benefits from such
infringement activities. The “knows or should reasonably have known” element would be fulfilled under some statutorily
specified circumstances. For example, online service providers are subject to liability if they fail to take necessary measures,
such as deletion, blocking or disconnection, after receiving notification from the legal right holders. In particular, there have
been cases in China in which the courts have found an online service provider to be liable for the copyrighted content posted by
users which were accessible and stored on such provider’s servers. On the other hand, to our knowledge, there is currently
no precedent or settled court practice which provides clear or potential guidance as to whether or to what extent a real-time online
platform such as YY would be held liable for the unauthorized posting or live performances of copyrighted content by our users.
See “Item 4. Information on the Company—B. Business Overview—PRC Regulation—Intellectual Property Rights.”
We have implemented procedures to reduce
the likelihood that we may use, develop or make available any content or applications without the proper licenses or necessary
third party consents; such procedures include requiring performers, channel owners and users to acknowledge and agree that they
would not perform or upload copyrighted content without proper authorization and that they will indemnify us for any relevant copyright
infringement claims. However, these procedures may not be effective in preventing unauthorized posting or use of copyrighted content
on our platforms or the infringement of other third party rights. Specifically, such acknowledgments and agreements by performers,
channel owners and users are not enforceable against third parties who may nevertheless file claims of copyright infringement against
us. Furthermore, individual performers or channel owners who generate content that may infringe on copyrights of third parties
on our platforms may not be easily traceable, if at all, by a plaintiff who may then choose to file a claim against us, and these
individual performers and channel owners may not have resources to fully indemnify us, if at all, for any such claims. In addition,
we have entered into revenue-sharing arrangements in the form of direct or indirect employment agreements with some of the popular
singers, performers or channel owners on our platforms, and we cannot assure you that PRC courts will not view these singers, performers
or channel owners as our employees or agents, deem us to have control over their activities on our platforms and the content they
upload or otherwise make available on our platforms, determine that we have knowingly uploaded such infringing content on our platforms
and hold us directly liable for their infringement activities on our platforms. Separately, as our business expands, the cost of
carrying out these procedures and obtaining authorization and licenses for the growing content on our platforms may increase, which
may potentially have material and adverse effects on our results of operations.
Although we have not been subject to claims
or lawsuits outside China, we cannot assure you that we will not become subject to intellectual property laws in other jurisdictions,
such as the United States, by virtue of our ADSs being listed on the Nasdaq Global Market, the ability of users to access our platforms
in the United States and other jurisdictions, the performance of songs and other content which are subject to copyright and other
intellectual property laws of countries outside China, including the United States, the ownership of our ADSs by investors in the
United States and other jurisdictions, or the extraterritorial application of foreign law by foreign courts or otherwise. In addition,
as a publicly listed company, we may be exposed to increased risk of litigation.
If an infringement claim brought against
us in China, the United States or any other jurisdiction is successful, we may be required to pay substantial statutory penalties
or other damages and fines, remove relevant content from our platforms or enter into license agreements which may not be available
on commercially reasonable terms or at all. Litigation or other claims against us also subject us to adverse publicity which could
harm our reputation and affect our ability to attract and retain users, including channel owners, singers and other performers,
which could materially and adversely affect the popularity of our platforms and therefore, our business, financial condition, results
of operations and prospects may be materially and adversely affected.
We may not be able to successfully
halt the operations of platforms that aggregate our data as well as data from other companies, including social networks, or “copycat”
platforms that have misappropriated our data in the past or may misappropriate our data in the future. Those platforms may also
lure away some of our users or advertisers or reduce our market share, causing material and adverse effects on our business operations.
From time to time, third parties have misappropriated
our data through scraping our platforms, robots or other means and aggregated this data on their platforms with data from other
companies. In addition, “copycat” platforms or client applications have misappropriated data on our platforms, implanted
Trojan viruses in user PCs to steal user data from YY Client and attempted to imitate our brand or the functionality of our platforms.
When we became aware of such platforms, we employed technological and legal measures in an attempt to halt their operations. However,
we may not be able to detect all such platforms in a timely manner and, even if we could, technological and legal measures may
be insufficient to stop their operations. In those cases, our available remedies may not be adequate to protect us against such
platforms. Regardless of whether we can successfully enforce our rights against these platforms, any measures that we may take
could require significant financial or other resources from us. Those platforms may also lure away some of our users or advertisers
or reduce our market share, causing material and adverse effects to our business operations.
We may not be able to prevent
others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, service
marks, patents, domain names, trade secrets, proprietary technologies and similar intellectual property as critical to our
success, and we rely on trademark and patent law, trade secret protection and confidentiality and license agreements with our
employees and others to protect our proprietary rights. As of December 31, 2016, we had registered 208 domain names,
including YY.com, Huya.com, Zhiniu8.com, Duowan.com, 100.com and Chinaduo.com, 286 software copyrights and
other copyrights, 75 patents and 610 trademarks and service marks in China and overseas. In addition, as of December
31, 2016, we had filed 816 patent applications covering certain of our proprietary technologies and 451 trademark
applications in China and overseas.
It is often difficult to create and enforce
intellectual property rights in China. Patents, trademarks and service marks may also be invalidated, circumvented, or challenged.
Trade secrets are difficult to protect, and our trade secrets may be leaked or otherwise become known or be independently discovered
by others. Confidentiality agreements may be breached, and we may not have adequate remedies for any breach. Even where adequate,
relevant laws exist in China, it may not be possible to obtain swift and equitable enforcement of such laws, or to obtain enforcement
of a court judgment or an arbitration award delivered in another jurisdiction, and accordingly, we may not be able to effectively
protect our intellectual property rights or enforce agreements in China. Policing any unauthorized use of our intellectual property
is difficult and costly and the steps we have taken may be inadequate to prevent the misappropriation of our technologies. Given
the potential cost, effort, risks and downsides of obtaining patent protection, in some cases we have not and do not plan to apply
for patents or other forms of formal intellectual property protection for certain key technologies. If some of these technologies
are later proven to be important to our business and are used by third parties without our authorization, especially for commercial
purposes, our business and competitive position may be harmed.
As our patents may expire and
may not be extended, our patent applications may not be granted and our patent rights may be contested, circumvented, invalidated
or limited in scope, our patent rights may not protect us effectively. In particular, we may not be able to prevent others from
developing or exploiting competing technologies, which could have a material and adverse effect on our business operations, financial
condition and results of operations.
In China, the valid period of utility model
patent right or design patent right is ten years and is not extendable. Currently, we have patent applications pending in China,
but we cannot assure you that we will be granted patents pursuant to our pending applications. Even if our patent applications
succeed and we are issued patents in accordance with them, it is still uncertain whether these patents will be contested, circumvented
or invalidated in the future. The rights granted under any issued patents may not provide us with proprietary protection or competitive
advantages. Further, the claims under any patents that issue from our patent applications may not be broad enough to prevent others
from developing technologies that are similar or that achieve results similar to ours. It is also possible that the intellectual
property rights of others will bar us from licensing and from exploiting any patents that issue from our pending applications.
Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the fields in which we have developed
and are developing our technology. These patents and patent applications might have priority over our patent applications and could
subject our patent applications to invalidation. Finally, in addition to those who may claim priority, any of our existing or pending
patents may also be challenged by others on the basis that they are otherwise invalid or unenforceable.
If we fail to maintain and enhance
our brands, or if we incur excessive expenses in this effort, our business, results of operations and prospects may be materially
and adversely affected.
We believe that maintaining and enhancing
our brands is of significant importance to the success of our business. Well-recognized brands are important to increasing the
number of users and the level of engagement of our users and enhancing our attractiveness to advertisers. Since we operate in a
highly competitive market, brand maintenance and enhancement directly affect our ability to maintain our market position.
Although we have developed YY mostly through
word of mouth referrals, as we expand, we may conduct various marketing and brand promotion activities using various methods to
continue promoting our brands. We cannot assure you, however, that these activities will be successful or that we will be able
to achieve the brand promotion effect we expect. In addition, any negative publicity in relation to our products or services, regardless
of its veracity, could harm our brands and reputation.
We have sometimes received, and expect to
continue to receive, complaints from users regarding the quality of the products and services we offer. Negative publicity or public
complaints by users may harm our reputation and affect our ability to attract new users and retain existing users. If our users’
complaints are not addressed to their satisfaction, our reputation and our market position could be significantly harmed, which
may materially and adversely affect our business, results of operations and prospects.
Our business depends substantially
on the continuing efforts of our executive officers and key employees, and our business operations may be severely disrupted if
we lose their services.
Our future success depends substantially
on the continued efforts of our executive officers and key employees. If one or more of our executive officers or key employees
were unable or unwilling to continue their services with us, we might not be able to replace them easily, in a timely manner, or
at all. In addition, our executive officers and key employees hold the equity interests in Beijing Tuda Science and Technology
Co., Ltd., or Beijing Tuda, Guangzhou Huaduo Network Technology Co., Ltd., or Guangzhou Huaduo, and Beijing Bilin Online Information
Technology Co., Ltd., or Bilin Online, our PRC consolidated affiliated entities. In particular, Mr. David Xueling Li, our co-founder
and chairman, owns 97.7% of Beijing Tuda’s equity interests and 99% of Bilin Online’s equity interests. Mr. Li and
Beijing Tuda also own approximately 0.5% and 99.0% of Guangzhou Huaduo’s equity interests, respectively.
If
any of these executive officers and key employees terminates their services with us, we have the contractual right to appoint designees
to hold the PRC consolidated affiliated entities’ equity interests. However, our business may be severely disrupted, our
financial condition and results of operations may be materially and adversely affected and we may incur additional expenses to
recruit, train and retain personnel. If any of our executive officers or key employees joins a competitor or forms a competing
company, we may lose customers, know-how and key professionals and staff members. Each of our executive officers and key employees
has entered into an employment agreement and a non-compete agreement with us. However, as advised by our PRC counsel, Fangda Partners,
certain provisions under the non-compete agreement may not be deemed valid or enforceable under PRC laws. If any dispute arises
between our executive officers and key employees and us, we cannot assure you that we would be able to enforce these non-compete
agreements in China, where these executive officers reside, in light of uncertainties with China’s legal system. See “—Risks
Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could
limit the legal protections available to you and us.”
If we are unable to attract, train
and retain qualified personnel, our business may be materially and adversely affected.
Our future success depends, to a significant
extent, on our ability to attract, train and retain qualified personnel, particularly management, technical and marketing personnel
with expertise in the internet industry; inability to do so may materially and adversely affect our business. Since the internet
industry is characterized by high demand and intense competition for talent, we cannot assure you that we will be able to attract
or retain qualified staff or other highly skilled employees. As our company is relatively young, our ability to train and integrate
new employees into our operations may not meet the growing demands of our business which may materially and adversely affect our
ability to grow our business and hence our results of operations.
Our results of operations are
subject to substantial quarterly and annual fluctuations due to seasonality.
We experience seasonality in our business,
reflecting seasonal fluctuations in internet usage. As a result, comparing our operating results on a period-to-period basis may
not be meaningful. For example, online user numbers tend to be lower during school holidays and certain parts of the school year,
and advertising revenues tend to be lower during the Chinese New Year season, which negatively affects our cash flow for those
periods. We may also experience a reduction in active users in the third quarter of each year because a significant portion of
our users are students, and as the new school year begins, student access to computers and the internet are affected. Internet
usage and the rate of internet growth may also be expected to decline during the summer school holidays as some students lose regular
internet access. Furthermore, the number of paying users of our online music and entertainment platform correlates with the marketing
campaigns and promotional activities we conduct which coincide with popular western or Chinese festivals celebrated by young Chinese
people, many of which are in the fourth quarter and ending with the Chinese New Year holidays which typically fall in the first
quarter.
As a result, our operating results in future
quarters or years may fall below the expectations of securities analysts and investors. In such event, the trading price of our
ADSs would likely be materially and adversely affected. See “Item 4. Information on the Company—B. Business Overview—Seasonality”
for additional details regarding the effects of seasonality on our cash flow, operating performance and financial results.
Our business is sensitive to global
economic conditions. A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our
business, financial condition and results of operations.
The global macroeconomic environment is
facing challenges, including the escalation of the European sovereign debt crisis since 2011, the end of quantitative easing by
the U.S. Federal Reserve, the economic slowdown in the Eurozone in 2014 and the expected exit of The United Kingdom from the European
Union. The Chinese economy has slowed down since 2012 and such slowdown may continue. There is considerable uncertainty over the
long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some
of the world’s leading economies, including the United States and China. There have been concerns over unrest and terrorist
threats in the Middle East, Europe and Africa, which have resulted in volatility in oil and other markets, and over the conflicts
involving Ukraine and Syria. There have also been concerns on the relationship among China and other Asian countries, which may
result in or intensify potential conflicts in relation to territorial disputes. Economic conditions in China are sensitive to global
economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic
growth rate in China. Any sever or prolonged slowdown in the global or Chinese economy may materially and adversely affect our
business, results of operations and financial condition. In addition, continued turbulence in the international markets may adversely
affect our ability to access capital markets to meet liquidity needs.
Future strategic alliances or
acquisitions may have a material and adverse effect on our business, reputation and results of operations.
We may enter into strategic alliances, including
joint ventures or minority equity investments, with various third parties to further our business purpose from time to time. These
alliances could subject us to a number of risks, including risks associated with sharing proprietary information, non-performance
by the third party and increased expenses in establishing new strategic alliances, any of which may materially and adversely affect
our business. We may have limited ability to monitor or control the actions of these third parties and, to the extent any of these
strategic third parties suffers negative publicity or harm to their reputation from events relating to their business, we may also
suffer negative publicity or harm to our reputation by virtue of our association with any such third party.
In addition, although we have no current
acquisition plans, if appropriate opportunities arise, we may acquire additional assets, products, technologies or businesses that
are complementary to our existing business. Past and future acquisitions and the subsequent integration of new assets and businesses
into our own require significant attention from our management and could result in a diversion of resources from our existing business,
which in turn could have an adverse effect on our business operations. Acquired assets or businesses may not generate the financial
results we expect. Acquisitions could result in the use of substantial amounts of cash, potentially dilutive issuances of equity
securities, the occurrence of significant goodwill impairment charges, amortization expenses for other intangible assets and exposure
to potential unknown liabilities of the acquired business. Moreover, the costs of identifying and consummating acquisitions may
be significant. In addition to possible shareholders’ approval, we may also have to obtain approvals and licenses from relevant
government authorities for the acquisitions and to comply with any applicable PRC laws and regulations, which could result in increased
delay and costs.
If we fail to maintain an effective
system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud,
and investor confidence in our company and the market price of our ADSs may be adversely affected.
The SEC, as required by Section 404 of the
Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring most public companies to include a management report
on such company’s internal control over financial reporting in its annual report, which contains management’s assessment
of the effectiveness of the company’s internal control over financial reporting. In addition, when a company meets the SEC’s
criteria, an independent registered public accounting firm must report on the effectiveness of the company’s internal control
over financial reporting.
Our management and independent registered
public accounting firm have concluded that our internal control over financial reporting was effective as of December 31, 2016.
However, we cannot assure you that in the future our management or our independent registered public accounting firm will
not identify material weaknesses during the Section 404 of the Sarbanes-Oxley Act audit process or for other reasons. In addition,
because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
As a result, if we fail to maintain effective internal control over financial reporting or should we be unable to prevent or detect
material misstatements due to error or fraud on a timely basis, investors could lose confidence in the reliability of our financial
statements, which in turn could harm our business, results of operations and negatively impact the market price of our ADSs, and
harm our reputation. Furthermore, we have incurred and expect to continue to incur considerable costs and to use significant management
time and the other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
Some of our users may make sales
or purchases through unauthorized third party platforms of virtual items we offer for free on our platforms, which may affect our
revenue-generating opportunities and exert downward pressure on the prices we charge for our virtual items.
We, from time to time, offer virtual items
free of charge to attract users or encourage user participation in channels. Some of our users may sell or purchase such free virtual
items through unauthorized third party sellers in exchange for real currency. For example, fans of a performer may pay other users
to send flowers or gifts the latter have accumulated on our platforms to the performer, in order to show support and raise the
popularity ranking of the performer of their choice. These unauthorized transactions are usually arranged on third party platforms
which we do not and are unable to track or monitor. Accordingly, these unauthorized purchases and sales from third party sellers
may affect our revenue-generating opportunities and may impede our revenue and profit growth by, among other things, reducing the
revenues we could have generated and exerting downward pressure on the prices we charge for our virtual items.
We have limited business insurance
coverage, so that any uninsured occurrence of business disruption may result in substantial costs to us and the diversion of our
resources, which could have an adverse effect on our results of operations and financial condition.
Insurance companies in China currently do
not offer as extensive an array of insurance products as insurance companies do in more developed economies. We do not have any
business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks
and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have
such insurance. Any uninsured occurrence may disrupt our business operations, require us to incur substantial costs and divert
our resources, which could have an adverse effect on our results of operations and financial condition.
Risks Related to Our Corporate Structure
and Our Industry
If the PRC government finds that
the structure we have adopted for our business operations does not comply with PRC laws and regulations, or if these laws or regulations
or interpretations of existing laws or regulations change in the future, we could be subject to severe penalties, including the
shutting down of our platforms and our business operations.
Foreign ownership of internet-based businesses
is subject to significant restrictions under current PRC laws and regulations. The PRC government regulates internet access, the
distribution of online information and the conduct of online commerce through strict business licensing requirements and other
government regulations. These laws and regulations also limit foreign ownership in PRC companies that provide internet information
distribution services. Specifically, foreign ownership in an internet information provider or other value-added telecommunication
service providers may not exceed 50%. In addition, according to the Several Opinions on the Introduction of Foreign Investment
in the Cultural Industry promulgated by the Ministry of Culture, or the MOC, the State Administration of Radio, Film and Television,
or the SARFT, the General Administration of Press and Publication, or the GAPP, currently known as the State Administration of
Press Publication, Radio, Film and Television after combination of SARFT and GAPP, the National Development and Reform Commission
and the Ministry of Commerce, or the MOFCOM, in July 2005, foreign investors are prohibited from investing in or operating, among
others, any internet cultural operating entities and from engaging in the business of transmitting audio-visual programs through
information networks.
We are a Cayman Islands company and our
PRC subsidiaries, Guangzhou Huanju Shidai Information Technology Co., Ltd., or Guangzhou Huanju Shidai, and Huanju Shidai Technology
(Beijing) Co., Ltd., or Beijing Huanju Shidai, are each considered a wholly foreign owned enterprise. We conduct our operations
in China primarily through a series of contractual arrangements entered into among our PRC subsidiary, Beijing Huanju Shidai, our
major PRC consolidated affiliated entities, Guangzhou Huaduo and Beijing Tuda, and Guangzhou Huaduo and Beijing Tuda’s shareholders.
As a result of these contractual arrangements, we exert control over our major PRC consolidated affiliated entities and consolidate
each of their operating results in our financial statements under U.S. GAAP. All of the equity (net assets) or deficit (net liabilities)
and net income (loss) of the consolidated affiliated entities are attributed to us. In addition, we conduct the Bilin business,
a mobile instant communication application and its related business line, through contractual arrangements among our PRC subsidiary,
Bilin Changxiang, our PRC consolidated affiliated entity, Bilin Online, and Bilin Online’s shareholder. For a detailed description
of these contractual arrangements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party—Contractual
Arrangements with Beijing Tuda.”
On September 28, 2009, the GAPP, the National
Copyright Administration and the National Office of Combating Pornography and Illegal Publications, jointly issued a Notice on
Further Strengthening the Administration of Pre-examination and Approval of Online Games and the Examination and Approval of Imported
Online Games, or Circular 13. Circular 13 restates that foreign investors are not permitted to invest in online game-operating
businesses in China via wholly owned, equity joint venture or cooperative joint venture investments and expressly prohibits foreign
investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing
other joint venture companies or entering into contractual or technical arrangements such as the variable interest entity structural
arrangements we adopted for our consolidated affiliated entities. We are not aware of any companies that have adopted a corporate
structure that is the same as or similar to ours having been penalized or terminated under Circular 13 since the effective date
of the circular. Furthermore, the enforcement of Circular 13 is still subject to substantial uncertainty, including possible subsequent
joint actions by relevant authorities in charge, such as the MOC. The Regulation on Three Provisions stipulates that the MOC is
authorized to regulate the online game industry, while the GAPP is authorized to approve the publication of online games before
their launch on the internet. The Interpretation on Three Provisions further provides that once an online game is launched on the
internet, it will be completely under the regulation of the MOC, and that if an online game is launched on the internet without
obtaining prior approval from the GAPP, the MOC, instead of the GAPP, is directly responsible for investigating the game. In the
event that we, our PRC subsidiaries or PRC consolidated affiliated entities are found to be in violation of the prohibition under
Circular 13, the GAPP, in conjunction with the relevant regulatory authorities in charge, may impose applicable penalties, which
in the most serious cases may include suspension or revocation of relevant licenses and registrations. In addition, various media
sources have reported that the CSRC prepared a report proposing pre-approval by a competent central government authority of offshore
listings by China-based companies with variable interest entity structures, such as ours, that operate in industry sectors subject
to foreign investment restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher
level government authority or what any such report provides. Furthermore, on January 19, 2015, the MOFCOM issued a discussion draft
of the proposed Foreign Investment Law, which may place restrictions on variable interest entity structures adopted by us, but
the enactment timetable, interpretation, implementation and influence thereof remain unclear. See “—Risks Related to
Doing Business in China—Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation
of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance
and business operations.”
Based on understanding of current PRC laws,
rules and regulations of our PRC legal counsel, Fangda Partners, our current ownership structure for our business operations, the
ownership structure of our PRC subsidiaries and our PRC consolidated affiliated entities, the contractual arrangements among our
PRC subsidiaries, our PRC consolidated affiliated entities and their shareholders, as described in this annual report on Form 20-F,
are in compliance with existing PRC laws, rules and regulations. However, we were further advised by Fangda Partners that there
is substantial uncertainty regarding the interpretation and application of current or future PRC laws and regulations and these
laws or regulations or interpretations of these laws or regulations may change in the future. Furthermore, the relevant government
authorities have broad discretion in interpreting these laws and regulations. Accordingly, we cannot assure you that PRC government
authorities will not ultimately take a view contrary to the opinion of our PRC legal counsel.
If our ownership structure, contractual
arrangements and businesses of our company, our PRC subsidiaries or our PRC consolidated affiliated entities are found to be in
violation of any existing or future PRC laws or regulations, the relevant governmental authorities would have broad discretion
in dealing with such violation, including levying fines, confiscating our income or the income of our PRC subsidiaries or PRC consolidated
affiliated entities, revoking or suspending the business licenses or operating licenses of our PRC subsidiaries or PRC consolidated
affiliated entities, shutting down our servers or blocking our platforms, discontinuing or placing restrictions or onerous conditions
on our operations, requiring us to discontinue our operations, requiring us to undergo a costly and disruptive restructuring, restricting
or prohibiting our use of proceeds from our initial public offering to finance our business and operations in China, and taking
other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption
to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business,
financial condition and results of operations. In addition, if the imposition of any of these penalties causes us to lose the rights
to direct the activities of our PRC consolidated affiliated entities or our right to receive their economic benefits, we would
no longer be able to consolidate such entities. Our PRC consolidated affiliated entities contributed substantially all of our consolidated
net revenues in the years ended December 31, 2014, 2015 and 2016.
We rely on contractual arrangements
with our PRC consolidated affiliated entities and their shareholders for the operation of our business, which may not be as effective
as direct ownership. If our PRC consolidated affiliated entities and their shareholders fail to perform their obligations under
these contractual arrangements, we may have to resort to litigation to enforce our rights, which may be time-consuming, unpredictable,
expensive and damaging to our operations and reputation.
Because of PRC restrictions on foreign ownership
of internet-based businesses in China, we depend on contractual arrangements with our PRC consolidated affiliated entities in which
we have no ownership interest to conduct our business. These contractual arrangements are intended to provide us with effective
control over these entities and allow us to obtain economic benefits from them. Our PRC consolidated affiliated entities are owned
directly by Mr. David Xueling Li and certain other shareholders. For additional details on these ownership interests, see “—Risks
Related to Our Business—Our business depends substantially on the continuing efforts of our executive officers and key employees,
and our business operations may be severely disrupted if we lose their services” and “Item 4. Information on the Company—A.
History and Development of the Company.” However, these contractual arrangements may not be as effective in providing control
as direct ownership. For example, each of our PRC consolidated affiliated entities and their shareholders could breach their contractual
arrangements with us by, among other things, failing to operate our business in an acceptable manner or taking other actions that
are detrimental to our interests. If we were the controlling shareholder of these PRC consolidated affiliated entities with direct
ownership, we would be able to exercise our rights as shareholders to effect changes to their board of directors, which in turn
could implement changes at the management and operational level. However, under the current contractual arrangements, as a legal
matter, if our PRC consolidated affiliated entities or their shareholders fail to perform their obligations under these contractual
arrangements, we may have to incur substantial costs to enforce such arrangements, and rely on legal remedies under PRC law, including
contract remedies, which may not be sufficient or effective. In particular, the contractual arrangements provide that any dispute
arising from these arrangements will be submitted to the China International Economic and Trade Arbitration Commission for arbitration
in Beijing, the ruling of which will be final and binding. The legal framework and system in China, particularly those relating
to arbitration proceedings, is not as developed as other jurisdictions such as the United States. As a result, significant uncertainties
relating to the enforcement of legal rights through arbitration, litigation and other legal proceedings remain in China, which
could limit our ability to enforce these contractual arrangements and exert effective control over our consolidated affiliated
entities. If we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the
process of enforcing these contractual arrangements, our business and operations could be severely disrupted, which could materially
and adversely affect our results of operations and damage our reputation. See “—Risks Related to Doing Business in
China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections
available to you and us.”
Our existing shareholders have
substantial influence over our company and their interests may not be aligned with the interests of our other shareholders, which
may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to
receive a premium for their securities.
As of March 31, 2017, our management
group—including Mr. David Xueling Li, our co-founder and chairman, Mr. Zhou Chen, the chief executive officer of the
Company, and Mr. Rongjie Dong, the chief executive officer of Huya broadcasting, one of our business
units
—
and their respective affiliates, held 82.6% of the total voting power. Mr. Li and Beijing Tuda
together hold 99.5% of the equity interest in Guangzhou Huaduo and Mr. Li holds 97.7% of the equity interest in Beijing Tuda.
Guangzhou Huaduo and Beijing Tuda are our major variable interest entities.
Our management group has
substantial influence over our business, including decisions regarding mergers, consolidations and the sale of all or
substantially all of our assets, election of directors and other significant corporate actions. This concentration of
ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an
opportunity to receive a premium for their shares as part of any contemplated sale of our company and may reduce the price of
our ADSs. In addition, Messrs. Zhou Chen and Rongjie Dong could violate the terms of their non-compete or employment
agreements with us or their legal duties by diverting business opportunities from us, resulting in our loss of corporate
opportunities. These actions may take place even if they are opposed by our other shareholders.
Additionally, Mr. Jun Lei, our
major shareholder who beneficially owned 15.5% of our outstanding shares as of March 31, 2017, has delegated the voting
rights of the shares that he holds in our Company to Mr. Li. Mr. Lei is active in making investments in internet companies in
China and currently holds direct and indirect interests in Xiaomi and iSpeak, which competes with certain of our lines of
business, and other entities which may have businesses that compete with ours. Xiaomi is a mobile phone and smart appliances
manufacturer and internet value-added service provider directly invested by Mr. Lei, which has started offering online
performance and live broadcasting services recently. iSpeak is owned by Mr. Lei in part through Kingsoft Corporation Limited,
which is engaged in the research, development operation and distribution of online games, mobile games, casual game services
and internet software. Mr. Lei may, in the future, acquire additional interests in businesses that directly or indirectly
compete with some of our lines of business or that are our suppliers or customers. Furthermore, Mr. Lei may pursue
acquisitions or make further investments in our industries which may conflict with our interests. For more information
regarding the beneficial ownership of our company by our principal shareholders, see “Item 6. Directors, Senior
management and Employees—E. Share Ownership.”
We may lose the ability to use
and enjoy assets held by our PRC consolidated affiliated entities that are important to the operation of our business if such entities
go bankrupt or become subject to a dissolution or liquidation proceeding.
As part of our contractual arrangements
with our major PRC consolidated affiliated entities, Guangzhou Huaduo and Beijing Tuda, such entities hold certain assets, such
as patents for the proprietary technology that are essential to the operations of our platforms and important to the operation
of our business. If either Guangzhou Huaduo or Beijing Tuda goes bankrupt and all or part of its assets become subject to liens
or rights of third party creditors, we may be unable to continue some or all of our business activities, which could materially
and adversely affect our business, financial condition and results of operations. If Guangzhou Huaduo or Beijing Tuda undergoes
a voluntary or involuntary liquidation proceeding, the unrelated third party creditors may claim rights to some or all of these
assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial
condition and results of operations.
Our ability to enforce the equity
pledge agreements between us and our PRC variable interest entities’ shareholders may be subject to limitations based on
PRC laws and regulations.
Pursuant to the equity interest pledge agreements
between Beijing Huanju Shidai, our wholly owned subsidiary in China, and the shareholders of Guangzhou Huaduo, Beijing Tuda and
Bilin Online, our variable interest entities, or VIEs, each shareholders of each variable interest entities agrees to pledge its
equity interests in the VIE to our subsidiary to secure the relevant VIE’s performance of their obligations under the relevant
contractual arrangements. The equity interest pledges of shareholders of VIEs under these equity pledge agreements have been registered
with the relevant local branch of the SAIC. In addition, in the registration forms of the local branch of State Administration
for Industry and Commerce for the pledges over the equity interests under the equity interest pledge agreements, the aggregate
amount of registered equity interests pledged to Beijing Huanju Shidai represents 100% of the registered capital of Guangzhou Huaduo
and Beijing Tuda, and those pledged to Bilin Changxiang represents 100% of the registered capital of Bilin Online. The equity interest
pledge agreements with each of the VIEs’ shareholders provide that the pledged equity interest shall constitute continuing
security for any and all of the indebtedness, obligations and liabilities under all of the principal service agreements and the
scope of pledge shall not be limited by the amount of the registered capital of that VIE. However, it is possible that a PRC court
may take the position that the amount listed on the equity pledge registration forms represents the full amount of the collateral
that has been registered and perfected. If this is the case, the obligations that are supposed to be secured in the equity interest
pledge agreements in excess of the amount listed on the equity pledge registration forms could be determined by the PRC court as
unsecured debt, which takes last priority among creditors.
Our contractual arrangements with
our PRC consolidated affiliated entities may result in adverse tax consequences to us.
As a result of our corporate
structure and the contractual arrangements among our PRC subsidiaries, our PRC consolidated affiliated entities and their
shareholders, we are effectively subject to PRC turnover tax on revenues generated by our subsidiaries from our contractual
arrangements with our PRC consolidated affiliated entities. Such tax generally includes the PRC value added tax, or the VAT, at a rate of 6% or 17% along with related surcharges. The applicable turnover tax is determined by the
nature of the transaction generating the revenues subject to taxation. The PRC enterprise income tax law requires every
enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its
affiliates or related parties to the relevant tax authorities. These transactions may be subject to audit or challenge by the
PRC tax authorities within ten years after the taxable year during which the transactions are conducted. We may be subject to
adverse tax consequences if the PRC tax authorities were to determine that the contracts between us and our PRC consolidated
affiliated entities were not on an arm’s length basis and therefore constitute a favorable transfer pricing
arrangements. If this occurs, the PRC tax authorities could request that either of our PRC consolidated affiliated entities
adjust its taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by reducing
expense deductions recorded by either PRC consolidated affiliated entities and thereby increasing these entities’ tax
liabilities, which could subject these entities to late payment fees and other penalties for the underpayment of taxes. Our
consolidated net income may be materially and adversely affected if our PRC consolidated affiliated entities’ tax
liabilities increase or if it becomes subject to late payment fees or other penalties.
If our PRC consolidated affiliated
entities fail to obtain and maintain the requisite licenses and approvals required under the complex regulatory environment for
internet-based businesses in China, our business, financial condition and results of operations may be materially and adversely
affected.
The internet industry in China is highly
regulated. See “Item 4. Information on the Company—B. Business Overview—PRC Regulation.” Guangzhou Huaduo
and our other PRC consolidated affiliated entities are required to obtain and maintain applicable licenses or approvals
from different regulatory authorities in order to provide their current services. For example, an internet information service
provider shall obtain an operating license, or the ICP License, from MIIT or its local counterparts before engaging in any commercial
internet information services. An online game operator must also obtain an Internet Culture Operation License from the MOC and
an Internet Publishing License from the GAPP to distribute online games, in addition to filing its online games with the GAPP and
the MOC. Prior to February 2016, an educational website operator shall obtain approvals from the local education authorities. Prior
to July 2010, specific approvals on online bulletin board services were also required for the provision of BBS services. Guangzhou
Huaduo has obtained a valid ICP License for provision of internet and mobile network information services, an Internet Culture
Operation License for online games and music products, and an Internet Publishing License for publication of online games and mobile
phone games. In addition, Guangzhou Huaduo holds a valid License for Online Transmission of Audio-Visual Programs under the business
classification of converging and play-on-demand service for certain kinds of internet audio-visual programs—literary, artistic
and entertaining—as prescribed in the newly issued provisional categories. On October 8, 2011, Guangzhou Huaduo was granted
a License for Production and Operation of Radio and TV Programs, covering the production, reproduction and publication of TV dramas,
cartoons (excluding production), special subjects, special columns (excluding current political news category) and entertainment
programs. On January 1, 2015, Guangzhou Huaduo was granted a License for surveying and mapping, covering online map service. On
January 17, 2013 and January 16, 2014, we were granted permission by relevant authorities to provide online education content on
edu.YY.com and 100.com, respectively
.
In the fourth quarter of 2014, we acquired Beijing Huanqiu Xingxue Technology Development
Co., Ltd., or Beijing Xingxue, and Beijing Huanqiu Chuangzhi Software Co., Ltd., or Beijing Chuangzhi, which operated Edu24oL.com,
an online education website that is an online vocational training and language training platform, and Beijing Xingxue held an ICP
License and a Publication Operating License for the operation of Edu24oL.com. In the fourth quarter of 2016, we sold majority equity
interests in Beijing Xingxue and cease to consolidate financial results of Beijing Xingxue. In addition,
Zhuhai Huanju Entertainment has obtained a valid ICP License for provision of internet information services, an Internet Culture
Operation License for online games and music products, and a License for Production and Operation of Radio and TV Programs, covering
the production, reproduction and publication of broadcasting plays, TV dramas, cartoons (excluding production), special subjects,
special columns (excluding current political news category) and entertainment programs. These licenses or permits are essential
to the operation of our business and are generally subject to annual government review. However, we cannot assure you that we can
successfully renew these licenses annually or that these licenses are sufficient to conduct all of our present or future business.
As we further develop and expand our video
capabilities and functions, we will need to obtain additional qualifications, permits, approvals or licenses. In addition, with
respect to specific services offered online, we or the service or content providers may be subject to additional separate qualifications,
permits, approvals or licenses. For financial-related content offered on our channels, we are tightening our internal review of
the relevant qualifications of the content providers as instructed by the competent authorities, while complying with other statutory
requirements. We cannot assure you that we or the service or content providers will be granted such qualifications, permits, approvals
or licenses in a timely manner or at all. Prior to the receipt of such qualifications, permits, approvals or licenses, we may be
deemed as being in violation of relevant laws or regulations and be subject to penalties.
As the internet industry in China is still
at a relatively early stage of development, new laws and regulations may be adopted from time to time to address new issues that
come to the authorities’ attention. In the interpretation and implementation of existing and future laws and regulations
governing our business activities, considerable uncertainties still exist. We cannot assure you that we will not be found in violation
of any future laws and regulations or any of the laws and regulations currently in effect due to changes in the relevant authorities’
interpretation of these laws and regulations. In addition, we may be required to obtain additional license or approvals, and we
cannot assure you that we will be able to timely obtain or maintain all the required licenses or approvals or make all the necessary
filings in the future. If we fail to obtain or maintain any of the required licenses or approvals or make the necessary filings,
we may be subject to various penalties, such as confiscation of the net revenues that were generated through the unlicensed internet
activities, the imposition of fines and the discontinuation or restriction of our operations. Any such penalties may disrupt our
business operations and materially and adversely affect our business, financial condition and results of operations.
The shareholders of our PRC variable
interest entities may have potential conflicts of interest with us, and if any such conflicts of interest are not resolved in our
favor, our business may be materially and adversely affected.
Guangzhou Huaduo and Beijing Tuda are our
major variable interest entities. Mr. David Xueling Li and Beijing Tuda, together hold 99.5% of the equity interest in Guangzhou
Huaduo and Mr. Li holds 97.7% of the equity interest in Beijing Tuda. Besides Guangzhou Huaduo and Beijing Tuda, Bilin Online is
also our variable interest entity, which was acquired in August 2015 and is currently 99% held by Mr. Li. Mr. Li is a co-founder
and shareholder of our company. The interests of Mr. Li as the controlling shareholder of the VIEs may differ from the interests
of our company as a whole, as what is in the best interests of our VIEs may not be in the best interests of our company. We cannot
assure you that when conflicts of interest arise, Mr. Li will act in the best interests of our company or that conflicts of interests
will be resolved in our favor. In addition, Mr. Li may breach or cause Guangzhou Huaduo, Beijing Tuda and Bilin Online and their
respective subsidiaries to breach or refuse to renew the existing contractual arrangements with us. Currently, we do not have existing
arrangements to address potential conflicts of interest Mr. Li may encounter in his capacity as a shareholder or director of our
VIEs, on the one hand, and as a beneficial owner or director of our company, on the other hand;
provided
that we could,
at all times, exercise our option under the exclusive option agreement with Mr. Li to cause him to transfer all of his equity ownership
in Guangzhou Huaduo, Beijing Tuda or Bilin Online to a PRC entity or individual designated by us, and this new shareholder of Guangzhou
Huaduo, Beijing Tuda or Bilin Online could then appoint a new director of Guangzhou Huaduo, Beijing Tuda or Bilin Online to replace
the existing directors. In addition, if such conflicts of interest arise, Beijing Huanju Shidai, our wholly owned PRC subsidiary,
could also, in the capacity of attorney-in-fact for Mr. Li as provided under the relevant powers of attorney, directly appoint
a new director of Guangzhou Huaduo or Beijing Tuda to replace the existing directors. The same mechanism is also applicable to
Bilin Online. We rely on Mr. Li to comply with the laws of China, which protect contracts and provide that co-founder and chairman
owe a duty of loyalty to our company and require him to avoid conflicts of interest and not to take advantage of his position for
personal gains. We also rely on Mr. Li to abide by the laws of the Cayman Islands, which provide that directors have a duty of
care and a duty of loyalty to act honestly in good faith with a view toward our best interests. However, the legal frameworks of
China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict with another corporate governance
regime. If we cannot resolve any conflicts of interest or disputes between us and Mr. Li, we would have to rely on legal proceedings,
which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal
proceedings.
Implementation of the new labor
laws and regulations in China may adversely affect our business and results of operations.
Pursuant to the labor contract law that
took effect in January 2008, its implementation rules that took effect in September 2008 and its amendment that took effect in
July 2013, employers are subject to stricter requirements in terms of signing labor contracts, minimum wages, paying remuneration,
determining the term of employees’ probation and unilaterally terminating labor contracts. Due to lack of detailed interpretative
rules and uniform implementation practices and broad discretion of the local competent authorities, it is uncertain as to how the
labor contract law and its implementation rules will affect our current employment policies and practices. Our employment policies
and practices may violate the labor contract law or its implementation rules, and we may thus be subject to related penalties,
fines or legal fees. Compliance with the labor contract law and its implementation rules may increase our operating expenses, in
particular our personnel expenses. In the event that we decide to terminate some of our employees or otherwise change our employment
or labor practices, the labor contract law and its implementation rules may also limit our ability to effect those changes in a
desirable or cost-effective manner, which could adversely affect our business and results of operations. On October 28, 2010, the
Standing Committee of the National People’s Congress promulgated the PRC Social Insurance Law, or the Social Insurance Law,
which became effective on July 1, 2011. According to the Social Insurance Law, employees must participate in pension insurance,
work-related injury insurance, medical insurance, unemployment insurance and maternity insurance and the employers must, together
with their employees or separately, pay the social insurance premiums for such employees.
We expect our labor costs to increase due
to the implementation of these new laws and regulations. As the interpretation and implementation of these new laws and regulations
are still evolving, we cannot assure you that our employment practice will at all times be deemed in full compliance with labor-related
laws and regulations in China, which may subject us to labor disputes or government investigations. If we are deemed to have violated
relevant labor laws and regulations, we could be required to provide additional compensation to our employees and our business,
financial condition and results of operations could be materially and adversely affected.
Further, labor disputes, work stoppages
or slowdowns at our laboratories, patient service centers or any of our clients or suppliers could significantly disrupt our daily
operation or our expansion plans and have a material adverse effect on our business.
Currently there is no law or regulation
specifically governing virtual asset property rights and therefore it is not clear what liabilities, if any, online game operators
may have for virtual assets.
While playing online games or participating
on YY Client activities, players acquire and accumulate some virtual assets, such as special equipment and other accessories. Such
virtual assets can be important to online game players and have monetary value and, in some cases, are sold for actual money. In
practice, virtual assets can be lost for various reasons, often through unauthorized use of the game account of one user by other
users and occasionally through data loss caused by a delay of network service, a network crash or hacking activities. Currently,
there is no PRC law or regulation specifically governing virtual asset property rights. As a result, there is uncertainty as to
who the legal owner of virtual assets is, whether and how the ownership of virtual assets is protected by law, and whether an operator
of online games such as us would have any liability to game players or other interested parties (whether in contract, tort or otherwise)
for loss of such virtual assets. Based on recent PRC court judgments, the courts have typically held online game operators liable
for losses of virtual assets by game players, and ordered online game operators to return the lost virtual items to game players
or pay damages and losses. In case of a loss of virtual assets, we may be sued by our game players or users and held liable for
damages, which may negatively affect our reputation and business, financial condition and results of operations.
Compliance with the laws or regulations
governing virtual currency may result in us having to obtain additional approvals or licenses or change our current business model.
The issuance and use of “virtual currency”
in the PRC has been regulated since 2007 in response to the growth of the online game industry in China. On January 25, 2007, the
Ministry of Public Security, the MOC, the MIIT and the GAPP jointly issued a circular regarding online gambling which has implications
for the use of virtual currency. To curtail online games that involve online gambling, as well as address concerns that virtual
currency could be used for money laundering or illicit trade, the circular (a) prohibits online game operators from charging commissions
in the form of virtual currency in relation to winning or losing of games; (b) requires online game operators to impose limits
on use of virtual currency in guessing and betting games; (c) bans the conversion of virtual currency into real currency or property;
and (d) prohibits services that enable game players to transfer virtual currency to other players. On June 4, 2009, the MOC and
the MOFCOM jointly issued a notice regarding strengthening the administration of online game virtual currency, or the Virtual Currency
Notice. The MOC issued the Provisional Administrative Measures of Online Games, or the Online Games Measures, on June 3, 2010,
which provides, among other things, that virtual currency issued by online game operators may be only used to exchange its own
online game products and services and may not be used to pay for the products and services of other entities.
We issue virtual currency and prepaid game
tokens to game players on our platforms for them to purchase various items to be used in online games and channels, including music
channels. We are in the process of adjusting the content of our platforms but we cannot assure you that our adjustments will be
sufficient to comply with the Virtual Currency Notice. Moreover, although we believe we do not offer online game virtual currency
transaction services, we cannot assure you that the PRC regulatory authorities will not take a view contrary to ours. For example,
certain virtual items we issue to users based on in-game milestones they achieve or time spent playing games are transferable and
exchangeable for our virtual currency or the other virtual items we issue to users. If the PRC regulatory authorities deem such
transfer or exchange to be a virtual currency transaction, then in addition to being deemed to be engaging in the issuance of virtual
currency, we may also be deemed to be providing transaction platform services that enable the trading of such virtual currency.
Simultaneously engaging in both of these activities is prohibited under the Virtual Currency Notice. In that event, we may be required
to cease either our virtual currency issuance activities or such deemed “transaction service” activities and may be
subject to certain penalties, including mandatory corrective measures and fines. The occurrence of any of the foregoing could have
a material adverse effect on our business, financial condition and results of operations.
In addition, the Virtual Currency Notice
prohibits online game operators from setting game features that involve the direct payment of cash or virtual currency by players
for the chance to win virtual items or virtual currency based on random selection through a lucky draw, wager or lottery. The notice
also prohibits game operators from issuing currency to game players through means other than purchases with legal currency. It
is unclear whether these restrictions would apply to certain aspects of our online games. Although we believe that we have rectified
and ceased such prohibited activities and have taken adequate measures to prevent any of the above-mentioned prohibited activities,
we cannot assure you that the PRC regulatory authorities will not take a view contrary to ours and deem such feature as prohibited
by the Virtual Currency Notice, thereby subjecting us to penalties, including mandatory corrective measures and fines. For example,
we were previously fined by a local authority in Guangzhou found that our games contained lucky draws. The occurrence of any of
the foregoing could materially and adversely affect our business and results of operations.
Non-compliance on the part of
third parties with which we conduct business could restrict our ability to maintain or increase our number of users or the level
of traffic to our platforms.
Our third party game developers or other
business partners may be subject to regulatory penalties or punishments because of their regulatory compliance failures, which
may disrupt our business. Although we conduct a rigid review of legal formalities and certifications before entering into contractual
relationship with other businesses such as third party game developers and landlords, we cannot be certain whether such third party
has or will infringe any third parties’ legal rights or violate any regulatory requirements. We regularly identify irregularities
or noncompliance in the business practices of any parties with whom we pursue existing or future cooperation and we cannot assure
you that any of these irregularities will be corrected in a prompt and proper manner. The legal liabilities and regulatory actions
on our commercial partners may affect our business activities and reputation and in turn, our results of operations. For example,
according to PRC regulations, all lease agreements are required to be registered with the local housing authorities. We presently
lease properties at approximately 17 different locations for daily operations and certain other properties serving as dormitories
and canteens in China, and the landlords of some of these properties are still completing the registration of their ownership rights
or the registration of our leases with the relevant authorities. Failure to complete these required registrations may expose our
landlords, lessors and us to potential monetary fines. Some of our lessors have not provided us with appropriate title certificates,
which may adversely affect the validity of the leases if the lessors do not have proper title. We cannot assure you that such certificates
or registration will be obtained in a timely manner or at all, and in case of failures, we may be subject to monetary fines, have
to relocate our offices and suffer economic losses.
In addition, we allow providers of some
online services, such as online education and financial services, to establish channels on our platforms. The online service providers
and the producers of content on our platforms may be required to meet specific qualifying standards, evidenced by approvals, permits
or certificates, and to comply with various requirements when conducting business. We cannot predict if any noncompliance on the
part of such commercial partners may cause potential liabilities to us and in turn disrupt our operations.
Intensified government regulation
of the internet industry in China could restrict our ability to maintain or increase our user level or the level of user traffic
to our platforms.
The PRC government has, in recent years,
intensified regulation on various aspects of the internet industry in China. For example, the PRC government adopted more stringent
policies to monitor the online game industry due to adverse public reaction to perceived addiction to online games, particularly
in children and minors. On April 15, 2007, eight PRC government authorities, including the GAPP, the Ministry of Education, the
Ministry of Public Security and the MIIT issued a notice requiring all Chinese online game operators to adopt an “anti-fatigue
system” in an effort to curb addiction to online games by minors. To help game operators identify which game players are
minors, online game players in China are now required to register their names and identity card numbers before playing an online
game, which information was to be submitted to and verified by the National Citizen Identity Information Center, a subordinate
public institution of the Ministry of Public Security, as of October 1, 2011. These restrictions could limit our ability to increase
our online game business among minors. See “Item 4. Information on the Company—B. Business Overview—PRC Regulation—Anti-fatigue
Compliance System and Real-name Registration System.” In order to comply with these anti-fatigue rules, we set up our system
so that after three hours of playing our online games, minors only receive half of the virtual items or other in-game benefits
they would otherwise earn, and after playing for more than five hours, receive no in-game benefits. Failure to implement these
restrictions, if detected by the relevant government agencies, may result in fines and other penalties for us, including the shutting
down of our online game operations and license revocation. Furthermore, if these restrictions were expanded to apply to adult game
players in the future, our online game business could be materially and adversely affected.
In addition, on February 15, 2007, 14 PRC
regulatory authorities jointly promulgated a circular to further strengthen the oversight of internet cafes, one of the primary
venues from which our platforms is accessed. In recent years, a large number of unlicensed internet cafes have been closed, and
the PRC government has imposed higher capital and facility requirements for the establishment of internet cafes. Governmental authorities
may from time to time impose stricter requirements on internet cafes, such as customer age limits and regulated hours of operation.
Since a substantial portion of our users access our platforms from internet cafes, any reduction in the number, or slowdown in
the growth, of internet cafes in China, or any new regulatory restrictions on their operations, could limit our ability to maintain
or increase our revenues.
More stringent governmental regulations
such as the ones outlined above may discourage game players from playing our games and have a material effect on our business operations.
Risks Related to Doing Business in China
Uncertainties in the interpretation
and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.
The PRC legal system is based on written
statutes and prior court decisions have limited value as precedents. Each of our PRC subsidiaries, Beijing Huanju Shidai and Guangzhou
Huanju Shidai, is a foreign-invested enterprise and is subject to laws and regulations applicable to foreign-invested enterprises
as well as various Chinese laws and regulations generally applicable to companies incorporated in China. However, since these laws
and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations
and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
From time to time, we may have to resort
to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have
significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the
outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems.
Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in
a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies
and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual,
property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede
our ability to continue our operations.
Changes in China’s economic,
political or social conditions or government policies could have a material adverse effect on our business, financial condition
and results of operations.
Substantially all of our assets and almost
all of our customers are located in China. Accordingly, our business, financial condition, results of operations and prospects
may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic
growth in China as a whole.
The Chinese economy differs from the economies
of most developed countries in many respects, including the level of government involvement, level of development, growth rate,
control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the
utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment
of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by
the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development
by imposing industrial policies. The Chinese government also exercises significant control over the Chinese economic growth through
allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential
treatment to particular industries or companies.
While the Chinese economy has experienced
significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy.
The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some
of these measures benefit the overall Chinese economy, but may also have a negative effect on us. The Chinese government has implemented
certain measures to control the pace of economic growth. These measures may cause decreased economic activity in China, which could
in turn reduce the demand for our products and services and adversely affect our business, financial condition and results of operations.
We may be adversely affected by
the complexity, uncertainties and changes in PRC regulation of internet business and companies.
The PRC government extensively regulates
the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the
internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement
involve significant uncertainty. As a result, in certain circumstances it may be difficult to determine what actions or omissions
may be deemed to be in violations of applicable laws and regulations. Issues, risks and uncertainties relating to PRC regulation
of the internet business include, but are not limited to, the following:
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We only have contractual control over our platforms. Guangzhou Huaduo, our PRC consolidated affiliated entity, owns our platforms
due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including
internet content provision services. If Guangzhou Huaduo breaches its contractual arrangements with us and no longer remains under
our control, this may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual
arrangements, or have other harmful effects on us.
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There are uncertainties relating to the regulation of the internet business in China, including evolving licensing practices
and the requirement for real-name registrations. Permits, licenses or operations at some of our subsidiaries and PRC consolidated
affiliated entities levels may be subject to challenge, or we may fail to obtain permits or licenses that may be deemed necessary
for our operations or we may not be able to obtain or renew certain permits or licenses. See “—Risks Related to Our
Corporate Structure and Our Industry—If our PRC consolidated affiliated entities fail to obtain and maintain the requisite
licenses and approvals required under the complex regulatory environment for internet-based businesses in China, our business,
financial condition and results of operations may be materially and adversely affected” and “Item 4. Information on
the Company—B. Business Overview—PRC Regulation.” In addition, although we currently have a real-name registration
system in place for our online games in strict compliance with the relevant PRC regulations, we are currently not required by PRC
law to ask users for their real name and personal information when they register for a YY user account. We cannot assure you that
PRC regulators would not require us to implement compulsory real-name registration on our platforms in the future. In late 2011,
for example, the Beijing municipal government required microbloggers in China to implement real-name registration for all of their
registered users. If we were required to implement real-name registration on YY, we may lose large numbers of registered user accounts
for various reasons, because users may no longer maintain multiple accounts and users who dislike giving out their private information
may cease to use our products and services altogether.
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The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For
example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office
(with the involvement of the State Council Information Office, or the SCIO, the MIIT and the Ministry of Public Security). The
primary role of this new agency is to facilitate the policy-making and legislative development in this field to direct and coordinate
with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters
in relation to the internet industry. We are unable to determine what policies this new agency or any new agencies to be established
in the future may have or how they may interpret existing laws, regulations and policies and how they may affect us. Further, new
laws, regulations or policies may be promulgated or announced that will regulate internet activities, including online video and
online advertising businesses. If these new laws, regulations or policies are promulgated, additional licenses may be required
for our operations. If our operations do not comply with these new regulations after they become effective, or if we fail to obtain
any licenses required under these new laws and regulations, we could be subject to penalties.
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On July 13, 2006, the MIIT issued the Notice
of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications
Services. This notice prohibits domestic telecommunication service providers from leasing, transferring or selling telecommunication
business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign
investor for their illegal operation of a telecommunication business in China. According to this notice, either the holder of a
value-added telecommunication business operating license or its shareholders must be the registered holders of the domain names
or trademarks used by such license holders in their provision of value-added telecommunication services. The notice also requires
each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such
facilities in the regions covered by its license. Currently, all contracts with telecommunication carriers and other service providers
to host the servers used in our business were entered into by Guangzhou Huaduo, our PRC consolidated affiliated entity, and such
arrangements are in compliance with this notice. Guangzhou Huaduo also owns the related domain names and trademarks, and holds
the ICP License necessary to conduct our operations in China.
On June 3, 2010, the MOC promulgated the
Provisional Administration Measures of Online Games, or the Online Games Measures, which became effective on August 1, 2010. The
Online Games Measures provide that any entity engaging in online game operation activities shall obtain the Internet Culture Operation
License and must meet certain requirements such as minimum registered capital. Online game developers are generally involved in
the purchase of servers and bandwidth, the control and management of game data, the maintenance of game systems and certain other
maintenance tasks in our operation of online games. The Guangzhou branch of the MOC has confirmed that such outsourcing and cooperation
activities are not considered conducting online game operation activities, and that online game developers do not have to obtain
the Internet Culture Operation License in accordance with the Online Games Measures. However, due to lack of detailed interpretative
rules and uniform implementation practices and broad discretion of the local competent authorities, there are still uncertainties
on the MOC’s interpretation and implementation of these measures. If the MOC determines in the future that such qualifications
or requirements apply to the online game developers for their involvement in the online game operations, we may have to terminate
our revenue-sharing arrangements with certain unqualified online game developers and may even be subject to various penalties,
which may negatively impact our results of operations and financial condition.
The interpretation and application of existing
PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created
substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities
of, internet businesses in China, including our business. There are also risks that we may be found to violate the existing or
future laws and regulations given the uncertainty and complexity of China’s regulation of internet business.
Content posted or displayed on
our platforms may be found objectionable by PRC regulatory authorities and may subject us to penalties and other severe consequences.
The PRC government has adopted regulations
governing internet access and the distribution of information over the internet. Under these regulations, internet content providers
and internet publishers are prohibited from posting or displaying over the internet content that, among other things, violates
PRC laws and regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, fraudulent
or defamatory. Furthermore, internet content providers are also prohibited from displaying content that may be deemed by relevant
government authorities as “socially destabilizing” or leaking “state secrets” of the PRC. Failure to comply
with these requirements may result in the revocation of licenses to provide internet content and other licenses, the closure of
the concerned platforms and reputational harm. The operator may also be held liable for such censored information displayed on
or linked to their platform. For a detailed discussion, see “Item 4. Information on the Company—B. Business Overview—PRC
Regulation.”
We allow visitors to our portal websites
to upload written materials, images, pictures, and other content on the forums on our websites, and also allow users to share,
link to and otherwise access audio, video, games and other content from third parties through our platforms. For a description
of how content can be accessed on or through our live streaming platform, and what measures we take to lessen the likelihood that
we will be held liable for the nature of such content, see “Item 4. Information on the Company—B. Business Overview—Technology,”
“Item 4. Information on the Company—B. Business Overview—Intellectual Property,” and “—Risks
Related to Our Business—We may be subject to intellectual property infringement claims or other allegations, which could
result in our payment of substantial damages, penalties and fines, removal of relevant content from our website or seeking license
arrangements which may not be available on commercially reasonable terms.”
Since our inception, we have worked closely
with relevant government authorities to monitor the content on our platforms and to make the utmost effort in complying with relevant
laws and regulations. However, it may not be possible to timely determine in all cases the types of content that could result in
our liability as an internet operator, and if any of our internet content is deemed by the PRC government to violate any content
restrictions, we would not be able to continue to display such content and could become subject to penalties, including confiscation
of income, fines, suspension of business and revocation of required licenses, which could materially and adversely affect our business,
financial condition and results of operations. We may also be subject to potential liability for any unlawful actions of our users
or third party service providers on our platforms or for content we distribute that is deemed inappropriate. For example, we have
previously been subject to a few warnings and fines each of RMB43,000 or less for having inappropriate content on our platforms.
Although we corrected these non-compliances and undertook measures to prevent the recurrence of such instances, it may
be difficult to determine the type of content or actions that may result in liability to us, and if we are found to be liable,
we may be prevented from operating our business in China. Moreover, the costs of compliance with these regulations may continue
to increase as a result of more content being uploaded or made available by an increasing number of users and third party partners
and developers, which may adversely affect our results of operations. Although we have adopted internal procedures to monitor content
uploaded to our website and to remove offending content once we become aware of any potential or alleged violation, we may not
be able to identify all the content that may violate relevant laws and regulations or third party intellectual property rights
and even if we manage to identify and remove offending content, we may still be held liable for such third-party content. Users
may upload content or images containing copyright violations and other illegal content and we may be subject to claims or become
involved in litigation proceedings. As a result, our reputation, business and results of operations may be materially and adversely
affected.
Advertisements shown on our platforms
may subject us to penalties and other administrative actions.
Under PRC advertising laws and regulations,
we are obligated to monitor the advertising content shown on our platforms to ensure that such content is true and accurate and
in full compliance with applicable laws and regulations. In addition, where a special government review is required for specific
types of advertisements prior to internet posting, such as advertisements relating to pharmaceuticals, medical instruments, agrochemicals
and veterinary pharmaceuticals, we are obligated to confirm that such review has been performed and approval has been obtained.
Violation of these laws and regulations may subject us to penalties, including fines, confiscation of our advertising income, orders
to cease dissemination of the advertisements and orders to publish an announcement correcting the misleading information. In circumstances
involving serious violations by us, PRC governmental authorities may force us to terminate our advertising operations or revoke
our licenses.
While we have made significant efforts to
ensure that the advertisements shown on our platforms are in full compliance with applicable PRC laws and regulations, we cannot
assure you that all the content contained in such advertisements or offers is true and accurate as required by the advertising
laws and regulations, especially given the uncertainty in the interpretation of these PRC laws and regulations. If we are found
to be in violation of applicable PRC advertising laws and regulations, we may be subject to penalties and our reputation may be
harmed, which may have a material adverse effect on our business, financial condition, results of operations and prospects.
Under the PRC enterprise income
tax law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to
us and our shareholders and have a material adverse effect on our results of operations and the value of your investment.
Under the PRC enterprise income tax law
that became effective on January 1, 2008, an enterprise established outside the PRC with “de facto management bodies”
within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject
to a uniform 25% enterprise income tax rate on its worldwide income. On April 22, 2009, the State Administration of Taxation, or
the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident
Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining
whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China.
Further to SAT Circular 82, on August 3, 2011, the SAT issued the Administrative Measures of Enterprise Income Tax of Chinese-Controlled
Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, which became effective on September 1, 2011, to provide
more guidance on the implementation of SAT Circular 82. SAT Bulletin 45 clarified certain issues in the areas of resident status
determination, post-determination administration and competent tax authorities.
According to SAT Circular 82, an offshore
incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered as a PRC tax resident enterprise
by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its
worldwide income only if all of the following conditions are met: (a) the senior management and core management departments in
charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions
are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals,
and minutes and files of its board and shareholders’ meetings are located or kept in the PRC; and (d) more than half of the
enterprise’s directors or senior management with voting rights habitually reside in the PRC. SAT Bulletin 45 further clarifies
the resident status determination, post-determination administration, as well as competent tax authorities. It also specifies that
when provided with a copy of Chinese tax resident determination certificate from a resident Chinese controlled offshore incorporated
enterprise, the payer should not withhold 10% income tax when paying the Chinese-sourced dividends, interest, royalties, etc. to
the Chinese controlled offshore incorporated enterprise.
Although SAT Circular 82 and SAT Bulletin
45 only apply to offshore incorporated enterprises controlled by PRC enterprises or PRC enterprise group instead of those controlled
by PRC individuals or foreigners, the determination criteria set forth therein may reflect SAT’s general position on how
the term “de facto management body” could be applied in determining the tax resident status of offshore enterprises,
regardless of whether they are controlled by PRC enterprises, individuals or foreigners.
We do not meet all of the conditions above;
therefore, we believe that we should not be treated as a “resident enterprise” for PRC tax purposes even if the standards
for “de facto management body” prescribed in the SAT Circular 82 are applicable to us. For example, our minutes and
files of the resolutions of our board of directors and the resolutions of our shareholders are maintained outside the PRC. In addition,
we are not aware of any offshore holding companies with a corporate structure similar to ours ever having been deemed to be a PRC
“resident enterprise” by the PRC tax authorities.
However, it is possible that the PRC tax
authorities may take a different view. If the PRC tax authorities determine that our Cayman Islands holding company is a PRC resident
enterprise for PRC enterprise income tax purposes, then our world-wide income could be subject to PRC tax at a rate of 25%, which
could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations.
Although dividends paid by one PRC tax resident
to another PRC tax resident should qualify as “tax-exempt income” under the enterprise income tax law, we cannot assure
you that dividends by our PRC subsidiaries to our Cayman Islands holding company will not be subject to a 10% withholding tax,
as the PRC foreign exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have
not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises
for PRC enterprise income tax purposes.
Foreign ADS holders may also be subject
to PRC withholding tax on dividends payable by us and gains realized on the sale or other disposition of ADSs or common shares,
if such income is sourced from within the PRC. Although our holding company is incorporated in the Cayman Islands, it remains unclear
whether dividends received and gains realized by our foreign ADS holders will be regarded as income from sources within the PRC
if we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.
Finally, we face uncertainties on the reporting
and consequences on private equity financing transactions, private share transfers and share exchange involving the transfer of
shares in our company by non-resident investors. According to the Notice on Strengthening Administration of Enterprise Income Tax
for Share Transfers by Non-PRC Resident Enterprises issued by the PRC State Administration of Taxation on December 10, 2009, with
retroactive effect from January 1, 2008, or SAT Circular 698, and the Notice on Several Issues Concerning Enterprise Income Tax
for Indirect Share Transfer by Non-PRC Resident Enterprises, issued by the PRC State Administration of Taxation on February 3,
2015, or SAT Circular 7, an “indirect transfer” of assets of a PRC resident enterprise, including equity interests
in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable
properties, if such transaction arrangement lacks reasonable commercial purpose and was established for the purpose of reducing,
avoiding or deferring PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise
income tax, and tax filing or withholding obligations may be triggered, depending on the nature of the PRC taxable properties being
transferred. According to SAT Circular 7, “PRC taxable properties” include assets of a PRC establishment or place of
business, real properties in the PRC, and equity investments in PRC resident enterprises, in respect of which gains from their
transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining
if there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration
include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable properties;
whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income
mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable properties
have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business
model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable properties; and the
tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect of an indirect offshore
transfer of assets of a PRC establishment or place of business of a foreign enterprise, the resulting gain is to be included with
the annual enterprise filing of the PRC establishment or place of business being transferred, and would consequently be subject
to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to PRC real properties or to equity investments
in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a
PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or
similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Where the payor
fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the competent tax authority by itself
within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Currently, neither
SAT Circular 698 nor SAT Circular 7 applies to the sale of shares by investors through a public stock exchange where such shares
were acquired from a transaction through a public stock exchange.
We cannot assure you that the PRC tax authorities
will not, at their discretion, adjust any capital gains and impose tax return filing and withholding or tax payment obligations
on the transferors and transferees, while our PRC subsidiaries may be requested to assist in the filing. Any PRC tax imposed on
a transfer of our shares or any adjustment of such gains would cause us to incur additional costs and may have a negative impact
on the value of your investment in our company.
If our preferential tax treatments
are revoked or become unavailable or if the calculation of our tax liability is successfully challenged by the PRC tax authorities,
we may be required to pay tax, interest and penalties in excess of our tax provisions, and our financial condition and results
of operations could be materially and adversely affected.
The Chinese government has provided various
tax incentives to our subsidiaries in China. These incentives include reduced enterprise income tax rates. For example, under the
PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008 and subsequently amended on February
24, 2017, the statutory enterprise income tax rate is 25%. However, Guangzhou Huaduo, our PRC consolidated affiliated entity in
the PRC, renewed its qualification as a high and new technology enterprise, or HNTE, as of December 9, 2016 and, subject to the
approval of an annual review by competent tax authorities in Guangdong, would be entitled to enjoy a preferential enterprise income
tax rate of 15% for three years, from 2016 through 2018. In addition, Guangzhou Huanju Shidai has been recognized as a software
enterprise since 2013, and is therefore entitled to a two-year exemption from enterprise income tax followed by three years at
50% of the standard enterprise income tax rate starting from 2014, the first profit-making year. However, if either Guangzhou Huaduo
or Guangzhou Huanju Shidai fails to maintain its qualification for preferential tax treatments, its applicable enterprise income
tax rate may increase to 25%, which could materially and adversely affect our financial condition and results of operations.
China’s M&A Rules and
certain other PRC regulations establish complex procedures for certain acquisitions of Chinese companies by foreign investors,
which could make it more difficult for us to pursue growth through acquisitions in China.
Six PRC regulatory agencies promulgated
regulations effective on September 8, 2006, subsequently amended on June 22, 2009, that are commonly referred to as the M&A
Rules. See “Item 4. Information on the Company—B. Business Overview—PRC Regulation—New M&A Regulations
and Overseas Listings.” The M&A Rules establish procedures and requirements that could make some acquisitions of Chinese
companies by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified
in advance of any change-of-control transaction in which a foreign investor takes control of a Chinese domestic enterprise or a
foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification
of Concentrations of Undertakings, issued by the State Council on August 3, 2008, are triggered. Moreover, the Anti-Monopoly Law
promulgated by the Standing Committee of the National People’s Congress on August 30, 2007 which became effective on August
1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds (for
example, during the previous fiscal year, (i) the total global turnover of all operators participating in the transaction exceeds
RMB10 billion (US$1.4 billion) and at least two of these operators each had a turnover of more than RMB400 million (US$57.6 million)
within China, or (ii) the total turnover within China of all the operators participating in the concentration exceeded RMB2 billion
(US$0.3 billion) and at least two of these operators each had a turnover of more than RMB400 million (US$57.6 million) within China)
must be cleared by the MOFCOM before they can be completed. In addition, on February 3, 2011, the General Office of the State Council
promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors, or the Circular No. 6, which officially established a security review system for mergers and acquisitions of domestic
enterprises by foreign investors. Under Circular No. 6, a security review is required for mergers and acquisitions by foreign investors
having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire
the “de facto control” of domestic enterprises with “national security” concerns.
In the future, we may grow our business
by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules
to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the
MOFCOM or its local counterparts, may delay or inhibit our ability to complete such transactions. It is unclear whether our business
would be deemed to be in an industry that raises “national defense and security” or “national security”
concerns. However, MOFCOM or other government agencies may publish explanations in the future determining that our business is
in an industry subject to the security review, in which case our future acquisitions in the PRC, including those by way of entering
into contractual control arrangements with target entities, may be closely scrutinized or prohibited. Our ability to expand our
business or maintain or expand our market share through future acquisitions would as such be materially and adversely affected.
PRC regulations relating to offshore
investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase their registered capital or distribute
profits to us or otherwise expose us to liability and penalties under PRC law.
The PRC State Administration of Foreign
Exchange, or SAFE, has promulgated regulations, including the Notice on Relevant Issues Relating to Domestic Residents’ Investment
and Financing and Round-Trip Investment through Special Purpose Vehicles, or SAFE Circular No. 37, effective on July 4, 2014, and
its appendixes, that require PRC residents, including PRC institutions and individuals, to register with local branches of SAFE
in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment
and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets
or interests, referred to in SAFE Circular No. 37 as a “special purpose vehicle.” SAFE Circular No. 37 further requires
amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase
or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In
the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration,
the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent
and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in
their ability to contribute additional capital into its PRC subsidiary. Further, failure to comply with the various SAFE registration
requirements described above could result in liability under PRC law for foreign exchange evasion, including (i) the requirement
by SAFE to return the foreign exchange remitted overseas within a period specified by SAFE, with a fine of up to 30% of the total
amount of foreign exchange remitted overseas and deemed to have been evasive and (ii) in circumstances involving serious violations,
a fine of no less than 30% of and up to the total amount of remitted foreign exchange deemed evasive. Furthermore, the persons-in-charge
and other persons at our PRC subsidiaries who are held directly liable for the violations may be subject to criminal sanctions.
Our PRC resident shareholders, Messrs. David
Xueling Li and Jun Lei, had registered with the local SAFE branch in relation to our existing private placement financings by the
end of 2011 as required by the SAFE regulations, and had subsequently filed amendments to update their registrations reflecting
shareholding changes in our company resulting from our initial public offering in March 2015.
Since SAFE Circular
No. 37 was recently issued, there remains uncertainty with respect to its interpretation and implementation, and we cannot predict
how such SAFE regulations will affect our business operations. For example, our present and prospective PRC subsidiaries’
ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings,
may be subject to compliance with the SAFE regulations by our PRC resident shareholders. In addition, in some cases, we may have
little control over either our present or prospective direct or indirect PRC resident shareholders or the outcome of such registration
procedures. A failure by our current or future PRC resident shareholders to comply with the SAFE regulations, including but not
limited to any delay in subsequent filings, could subject us to fines or other legal sanctions, restrict our cross-border investment
activities, limit our subsidiary’s ability to make distributions or pay dividends or affect our ownership structure, which
could adversely affect our business and prospects.
On February 15, 2012, SAFE promulgated the
Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans
of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange
Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed
Companies issued by SAFE on March 28, 2007. Under the Stock Option Rules and other relevant rules and regulations, PRC residents
who participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local
branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified
PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by
such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of
its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their
exercise of stock options, the purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC
agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the
stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. We and our PRC employees who
have been granted stock options, restricted shares and restricted share units are subject to these regulations, and are preparing
to complete such SAFE registrations. Failure of our PRC stock option holders, restricted shareholders or restricted share units
holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our
ability to contribute additional capital into our PRC subsidiaries, limited our PRC subsidiaries’ ability to distribute dividends
to us, or otherwise materially and adversely affect our business.
PRC regulation of direct investment
and loans by offshore holding companies to PRC entities may delay or limit us from using the proceeds of our initial public offering
to make additional capital contributions or loans to our PRC subsidiaries.
We are an offshore holding company conducting
our operations in China through our PRC subsidiaries and variable interest entities. We may make loans to our PRC subsidiaries
and variable interest entities, or we may make additional capital contributions to our PRC subsidiaries.
Any capital contributions or loans that
we, as an offshore entity, make to our PRC subsidiaries, including from the proceeds of our initial public offering, are subject
to PRC regulations. For example, none of our loans to a PRC subsidiary can exceed the difference between its total amount of investment
and its registered capital approved under relevant PRC laws, and the loans must be registered with the local branch of SAFE. Our
capital contributions to our PRC subsidiaries must be approved by the MOFCOM or its local counterpart.
In August 2008, SAFE issued the Circular
on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency
Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign
currency-registered capital into RMB by restricting how the converted RMB may be used. In addition, SAFE promulgated Circular 45
on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142 and Circular 45, the RMB
capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within
the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In
addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital
of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital
may not in any case be used to repay RMB loans if the proceeds of such loans have not been used.
Since SAFE Circular 142 has been in place
for more than five years, in 2014, SAFE decided to further reform the foreign exchange administration system in order to satisfy
and facilitate the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues
Concerning the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested
Enterprises in Certain Areas on July 4, 2014, or SAFE Circular 36. SAFE Circular 36 suspends the application of SAFE Circular 142
in certain areas and allows a foreign-invested enterprise registered in such areas to use the RMB capital converted from foreign
currency registered capital for equity investments within the scope of business, which will be regarded as the reinvestment of
foreign-invested enterprise. On March 30, 2015, SAFE issued the Circular on the Reforming of the Management Method of the Settlement
of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 19, took effect on June 1, 2015, and replaced SAFE
Circular 142 and SAFE Circular 36. Under SAFE Circular 19, a foreign-invested enterprise, within the scope of business, may also
choose to convert its registered capital from foreign currency to RMB on a discretionary basis, and the RMB capital so converted
can be used for equity investments within PRC, which will be regarded as the reinvestment of foreign-invested enterprise.
In light of the various requirements imposed
by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we
will be able to complete the necessary registration or obtain the necessary approval on a timely basis, or at all. If we fail to
complete the necessary registration or obtain the necessary approval, our ability to make loans or equity contributions to our
PRC subsidiaries may be negatively affected, which could adversely affect our PRC subsidiaries’ liquidity and their ability
to fund their working capital and expansion projects and meet their obligations and commitments.
Our PRC subsidiaries and PRC consolidated
affiliated entities are subject to restrictions on paying dividends or making other payments to us, which may restrict our ability
to satisfy our liquidity requirements.
We are a holding company incorporated in
the Cayman Islands. We rely on dividends from our PRC subsidiaries as well as consulting and other fees paid to us by our PRC consolidated
affiliated entities for our cash and financing requirements, such as the funds necessary to pay dividends and other cash distributions
to our shareholders, including holders of our ADSs, and service any debt we may incur. Current PRC regulations permit our PRC subsidiaries
to pay dividends to us only out of their accumulated after-tax profits upon satisfaction of relevant statutory condition and procedures,
if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our PRC subsidiaries is
required to set aside at least 10% of its accumulated profits each year, if any, to fund certain reserve funds until the total
amount set aside reaches 50% of its registered capital. As of December 31, 2016, appropriations to statutory reserves amounting
to RMB58.9 million were made by eight of our PRC consolidated affiliated entities. These reserves are not distributable as cash
dividends. Furthermore, if our PRC subsidiaries and PRC consolidated affiliated entities incur debt on their own behalf in the
future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us, which may
restrict our ability to satisfy our liquidity requirements.
In addition, the EIT Law, and its implementation
rules provide that withholding tax rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident
enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments
of other countries or regions where the non-PRC-resident enterprises are incorporated.
Fluctuations in exchange rates
could have a material adverse effect on our results of operations and the value of your investment.
The value of the RMB against the U.S. dollar
and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange
policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to
the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008
and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band.
Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015,
the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies
that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to
be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the
Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging
U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards
interest rate liberalization and Renminbi internationalisation, the PRC government may in the future announce further changes to
the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against
the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange
rate between the RMB and the U.S. dollar in the future.
There remains significant international
pressure on the Chinese government to adopt a flexible currency policy to allow the Renminbi to appreciate against the U.S. dollar.
Significant revaluation of the Renminbi may have a material adverse effect on your investment. Substantially all of our revenues
and costs are denominated in Renminbi. Any significant revaluation of Renminbi may materially and adversely affect our revenues,
earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. To the extent that we
need to convert U.S. dollars into RMB for capital expenditures and working capital and other business purposes, appreciation of
the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely,
a significant depreciation of the Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings,
which in turn could adversely affect the price of our ADSs, and if we decide to convert RMB into U.S. dollars for the purpose of
making payments for dividends on our common shares or ADSs, strategic acquisitions or investments or other business purposes, appreciation
of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an
effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the
future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure
or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability
to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your
investment.
Governmental control of currency
conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes control on the
convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items,
including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign
currencies without prior SAFE approval by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able
to pay dividends in foreign currencies to us without prior approval from SAFE. However, approval from or registration with appropriate
government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict
access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us
from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign
currencies to our shareholders, including holders of our ADSs.
If the custodians or authorized
users of controlling non-tangible assets of our company, including our corporate chops and seals, fail to fulfill their responsibilities,
or misappropriate or misuse these assets, our business and operations could be materially and adversely affected.
Under PRC law, legal documents for corporate
transactions, including contracts such as revenue-sharing contracts with online game developers which are important to our business,
are executed using the chops or seal of the signing entity or with the signature of a legal representative whose designation is
registered and filed with the relevant branch of the Administration of Industry and Commerce.
Although we usually utilize chops to enter
into contracts, the designated legal representatives of each of our PRC subsidiaries and consolidated affiliated entities have
the apparent authority to enter into contracts on behalf of such entities without chops and bind such entities. All designated
legal representatives of our PRC subsidiaries and consolidated affiliated entities are members of our senior management team who
have signed employment agreements with us or our PRC subsidiaries and consolidated affiliated entities under which they agree to
abide by various duties they owe to us. In order to maintain the physical security of our chops and chops of our PRC entities,
we generally store these items in secured locations accessible only by the authorized personnel in the legal or finance department
of each of our subsidiaries and consolidated affiliated entities. Although we monitor such authorized personnel, there is no assurance
such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized personnel misuse or misappropriate
our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities and experience
significant disruption to our operations. If a designated legal representative obtains control of the chops in an effort to obtain
control over any of our PRC subsidiaries or consolidated affiliated entities, we or our PRC subsidiary and consolidated affiliated
entity would need to pass a new shareholder or board resolution to designate a new legal representative and we would need to take
legal action to seek the return of the chops, apply for new chops with the relevant authorities, or otherwise seek legal redress
for the violation of the representative’s fiduciary duties to us, which could involve significant time and resources and
divert management attention away from our regular business. In addition, the affected entity may not be able to recover corporate
assets that are sold or transferred out of our control in the event of such a misappropriation if a transferee relies on the apparent
authority of the representative and acts in good faith.
Our auditor, like other independent
registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting
Oversight Board, and as such, investors may be deprived of the benefits of such inspection.
The independent registered public accounting
firm that issues the audit reports included in this annual report, as an auditor of companies that are traded publicly in the United
States and a firm registered with PCAOB, is required by the laws of the United States to undergo regular inspections by PCAOB to
assess its compliance with the laws of the United States and professional standards. Because our auditor is located in China, a
jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC authorities, our auditor, like
other independent registered public accounting firms operating in China, is currently not inspected by PCAOB. On May 24, 2013,
PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory
Commission, or the CSRC, and the Ministry of Finance which establishes a cooperative framework between the parties for the production
and exchange of audit documents relevant to investigations in the United States and China. PCAOB continues to be in discussions
with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB
and audit Chinese companies that trade on U.S. exchanges.
Inspections of other firms that PCAOB has
conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures,
and such deficiencies may be addressed as part of the inspection process to improve future audit quality.
The inability of PCAOB to conduct inspections
of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our
auditor’s audit procedures or quality control procedures, and to the extent that such inspections might have facilitated
improvements in our auditor’s audit procedures and quality control procedures, investors may be deprived of such benefits.
Additional remedial measures could
be imposed on certain PRC-based accounting firms, including our independent registered public accounting firm, in administrative
proceedings instituted by the SEC, as a result of which our financial statements may be determined to not be in compliance with
the requirements of the Exchange Act, if at all.
In December 2012, the SEC brought administrative
proceedings against the PRC-based affiliates of the Big Four accounting firms, including our independent registered public accounting
firm, alleging that they had violated U.S. securities laws by failing to provide audit work papers and other documents related
to certain other PRC-based companies under investigation by the SEC. On January 22, 2014, an initial administrative law decision
was issued, censuring and suspending these accounting firms from practicing before the SEC for a period of six months. The decision
was neither final nor legally effective until reviewed and approved by the SEC, and on February 12, 2014, the PRC-based accounting
firms appealed to the SEC against this decision. In February 2015, each of the four PRC-based accounting firms agreed to a censure
and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The settlement
requires the firms to follow detailed procedures to seek to provide the SEC with access to such firms’ audit documents via
the CSRC. If the firms do not follow these procedures or if there is a failure in the process between the SEC and the CSRC, the
SEC could impose penalties such as suspensions, or it could restart the administrative proceedings.
In the event that the SEC restarts the administrative
proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult
or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined
to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about
the proceedings against these audit firms may cause investor uncertainty regarding PRC-based, United States-listed companies and
the market price of our ADSs may be adversely affected.
If our independent registered public accounting
firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered
public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined
not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting
of our common shares from the Nasdaq Global Market or deregistration from the SEC, or both, which would substantially reduce or
effectively terminate the trading of our ADSs in the United States.
Substantial uncertainties exist
with respect to the enactment timetable, interpretation and implementation of the draft PRC Foreign Investment Law and how it may
impact the viability of our current corporate structure, corporate governance and business operations.
The MOFCOM published a discussion draft
of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of existing laws regulating
foreign investment in China, namely,
the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint
Venture Enterprise Law
and
the Wholly Foreign-invested Enterprise Law
, together with their implementation rules and
ancillary regulations. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment
regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements
for both foreign and domestic investments. The MOFCOM is currently soliciting comments on this draft and substantial uncertainties
exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted
as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations
in many aspects.
Among other things, the draft Foreign Investment
Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether
a company is considered a foreign-invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities
established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity set up in a foreign
jurisdiction would nonetheless be, upon market entry clearance by the Ministry of Commerce, treated as a PRC domestic investor
provided that the entity is “controlled” by PRC entities and/or citizens. In this connection, “control”
is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% of more of the voting rights
of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at
least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to exert material influence
on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive
influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects
of business operations. Once an entity is determined to be an FIE and its investment amount exceeds certain thresholds or its business
operation falls within a “negative list,” to be separately issued by the State Council in the future, market entry
clearance by the MOFCOM or its local counterparts will be required. Otherwise, all foreign investors may make investments on the
same terms as domestic investors without being subject to additional approval from the government authorities as mandated by the
existing foreign investment legal regime.
The “variable interest entity”
structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits
in the industries that are currently subject to foreign investment restrictions in China. See “—Risks Relating to Our
Corporate Structure—If the PRC government finds that the structure we have adopted for our business operations does not comply
with PRC laws and regulations, or if these laws or regulations or interpretations of existing laws or regulations change in the
future, we could be subject to severe penalties, including the shutting down of our platform and our business operations”,
“—Risks Relating to Our Corporate Structure—If our PRC consolidated affiliated entities fail to obtain and maintain
the requisite licenses and approvals required under the complex regulatory environment for internet-based businesses in China,
our business, financial condition and results of operations may be materially and adversely affected”, and “Item 4.
Information on the Company—C. Organizational Structure.” Under the draft Foreign Investment Law, variable interest
entities that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled”
by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is on the “negative
list,” the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either
PRC companies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable
interest entities will be treated as FIEs and any operation in the industry category on the “negative list” without
market entry clearance may be considered as illegal.
It is likely that we would be considered
ultimately controlled by Chinese parties, as our management group, including Mr. David Xueling Li, our co-founder and chairman,
Mr. Zhou Chen, the chief executive officier of the Company, Mr. Rongjie Dong, the chief executive officer of Huya broadcasting,
one of our business units, and their respective affiliates, together held 82.6% of the total voting power of our company as of
March 31, 2017.
However, the draft Foreign Investment Law has not taken a position on what actions shall be taken
with respect to the existing companies with a VIE structure, whether or not these companies are controlled by Chinese parties,
while it is soliciting comments from the public on this point. Moreover, it is uncertain whether the Internet content and other
Internet value-added service industry, in which our variable interest entities operate, will be subject to the foreign investment
restrictions or prohibitions set forth in the “negative list” to be issued. If the enacted version of the Foreign Investment
Law and the final “negative list” mandate further actions, such as MOFCOM market entry clearance, to be completed by
companies with existing VIE structure like us, we face uncertainties as to whether such clearance can be timely obtained, or at
all, and our business and financial condition may be materially and adversely affected.
The draft Foreign Investment Law, if enacted
as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the
draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and
the applicable FIEs. Aside from investment implementation report and investment amendment report that are required at each investment
and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are
required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may
potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject
to criminal liabilities.
Risks Related to Our ADSs
The trading prices of our ADSs are likely
to be volatile, which could result in substantial losses to investors.
The daily closing trading prices of our
ADSs ranged from US$32.07 to US$63.53 in 2016. The trading price of our ADSs is likely to be volatile and could fluctuate widely
due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation
in the market prices or the underperformance or deteriorating financial results of other similarly situated companies in China
that have listed their securities in the United States in recent years. The securities of some of these companies have experienced
significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading
prices of their securities. The trading performances of these Chinese companies’ securities after their offerings, including
companies in internet and social networking businesses, may affect the attitudes of investors toward Chinese companies listed in
the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.
In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting or other
practices at other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general,
including us, regardless of whether we have engaged in such practices. Furthermore, securities markets may from time to time experience
significant price and volume fluctuations that are not related to our operating performance, which may have a material adverse
effect on the market price of our ADSs.
In addition to market and industry factors,
the price and trading volume for our ADSs may be highly volatile due to specific factors, including the following:
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variations in our net revenues, earnings and cash flow;
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announcements of new investments, acquisitions, strategic partnerships, or joint ventures;
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announcements of new services and expansions by us or our competitors;
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changes in financial estimates by securities analysts;
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changes in the number of our registered or active users;
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fluctuations in the number of paying users or other operating metrics;
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failure on our part to realize monetization opportunities as expected;
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additions or departures of key personnel;
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release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities;
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detrimental negative publicity about us, our competitors or our industry; and
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potential litigation or regulatory proceedings or changes.
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Any of these factors may result in large
and sudden changes in the volume and price at which our ADSs will trade.
If securities or industry analysts
do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the
market price for our ADSs and trading volume could decline.
The trading market for our ADSs will be
influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who
cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover
us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which, in turn, could cause the
market price or trading volume for our ADSs to decline.
The sale or availability for sale,
or perceived sale or availability for sale, of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs
in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could
materially impair our ability to raise capital through equity offerings in the future. Our ADSs are freely tradable by persons
other than our affiliates without restriction or further registration under the Securities Act of 1933, as amended, or the Securities
Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions
in Rule 144 and Rule 701 under the Securities Act. In addition, common shares subject to our outstanding share-based awards, including
options, restricted shares and restricted share units, are eligible for sale in the public market to the extent permitted by the
provisions of various vesting agreements, Rules 144 and 701 under the Securities Act. We may also issue additional options in the
future which may be exercised for additional common shares and additional restricted shares and restricted share units which may
vest. As of March 31, 2017, we had 1,113,079,204 common shares outstanding. We cannot predict what effect, if any, market sales
of securities held by our significant shareholders or any other shareholder or the availability of these securities for future
sale will have on the market price of our ADSs.
We may be classified as a passive
foreign investment company, or PFIC, for United States federal income tax purposes, which could subject United States holders of
our ADSs or common shares to significant adverse United States income tax consequences.
We will be classified as a “passive
foreign investment company,” or “PFIC” for United States federal income tax purposes for any taxable year, if
either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or
more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year produce or
are held for the production of passive income. Although the law in this regard is unclear, we treat Guangzhou Huaduo, Beijing Tuda
and Bilin Online as being owned by us for United States federal income tax purposes, not only because we exercise effective control
over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a
result, we consolidate their operating results in our consolidated financial statements.
Assuming that we are treated as owning Guangzhou
Huaduo, Beijing Tuda and Bilin Online for United States federal income tax purposes, we do not believe that we were a PFIC for
United States federal income tax purposes for the taxable year ended December 31, 2016, and do not anticipate becoming a PFIC in
future taxable years. However, because PFIC status is a factual determination made annually after the close of each taxable year
on the basis of the composition of our income and assets, there can be no assurance that we will not be a PFIC for the current
taxable year or any future taxable year. The value of our assets for purposes of the PFIC test will generally be determined by
reference to the market price of our ADSs. Accordingly, fluctuations in the market price of our ADSs may cause us to become a PFIC
for the current taxable year or future taxable years. The determination of whether we will be or become a PFIC will also be affected
by how, and how quickly, we use our liquid assets. Under circumstances where we determine not to deploy significant amounts of
cash for active purposes our risk of being classified as a PFIC may substantially increase. It is also possible that the Internal
Revenue Service may challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result
in our company being or, becoming classified as, a PFIC for the current or future taxable years. The determination of whether we
will be or become a PFIC will also depend, in part, upon the nature of our income and assets over time, which are subject to change
from year to year. There can be no assurance our business plans will not change in a manner that will affect our PFIC status.
If we are classified as a PFIC in any taxable
year, a U.S. holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal Income
Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition
of the ADSs or common shares and on the receipt of distributions on the ADSs or common shares to the extent such gain or distribution
is treated as an “excess distribution” under the United States federal income tax rules. Further, if we are classified
as a PFIC for any year during which a U.S. holder holds our ADSs or common shares, we generally will continue to be treated as
a PFIC for all succeeding years during which such U.S. holder holds our ADSs or common shares. Alternatively, U.S. holders of PFIC
shares can sometimes avoid the rules described above by making certain elections, including a “mark-to-market” election
or electing to treat a PFIC as a “qualified electing fund.” However, U.S. holders will not be able to make an election
to treat us as a “qualified electing fund” because, even if we were to be or become a PFIC, we do not intend to comply
with the requirements necessary to permit U.S. holders to make such election. Each U.S. holder is urged to consult its tax advisor
concerning the United States federal income tax considerations relating to the ownership and disposition of our ADSs or common
shares if we are treated as a PFIC for our current taxable year ending December 31, 2017 or any future taxable year (including
the possibility of making a “mark-to-market” election and the unavailability of an election to treat us as a qualified
electing fund). For more information see “Item 10. Additional Information—E. Taxation— United States Federal
Income Tax Considerations—Passive Foreign Investment Company Rules.”
Our dual class common share structure
with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any
change of control transactions that holders of our Class A common shares and ADSs may view as beneficial.
Our common shares are divided into Class
A common shares and Class B common shares. Holders of Class A common shares are entitled to one vote per share, while holders of
Class B common shares are entitled to ten votes per share, voting together as one class on all matters requiring a shareholders’
vote. Each Class B common share is convertible into one Class A common share at any time by the holder thereof. Class A common
shares are not convertible into Class B common shares under any circumstances. Upon any transfer of Class B common shares by a
holder thereof to any person or entity that is not an affiliate of such holder, such Class B common shares will be automatically
and immediately converted into an equal number of Class A common shares.
Due to the disparate voting powers attached
to these two classes of common shares, as of March 31, 2017, Messrs. David Xueling Li, Zhou Chen and Rongjie Dong and their respective
affiliates, held 82.6% of the total voting power of our company and have considerable influence over all matters requiring a shareholders’
vote, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets.
This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any
potential merger, takeover or other change of control transactions that holders of Class A common shares and ADSs may view as beneficial.
Our articles of association contain
anti-takeover provisions that could have a material adverse effect on the rights of holders of our common shares and ADSs.
Our articles of association contain provisions
to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These
provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction.
For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in
one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special
rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms
of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our common shares,
in the form of ADSs or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in
control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares,
the price of our ADSs may fall and the voting and other rights of the holders of our common shares and ADSs may be materially and
adversely affected.
You may face difficulties in protecting
your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman
Islands law.
We are a company limited by shares incorporated
under the laws of the Cayman Islands. Our corporate affairs are governed by our amended and restated memorandum and articles of
association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and the common law of
the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary
responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman
Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands
as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a
court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands
law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States.
In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as
Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, shareholders
of a Cayman Islands company may not have standing to initiate a shareholder derivative action in a federal court of the United
States.
Unlike many jurisdictions in the United
States, Cayman Islands law does not generally provide for shareholder appraisal rights on an approved arrangement and reconstruction
of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation
or to require that the offeror give you additional consideration if you believe the consideration offered is insufficient. Moreover,
holders of our ADSs are not entitled to appraisal rights under Cayman Islands law. ADS holders that wish to exercise their appraisal
or dissentient rights must convert their ADSs into our Class A common shares by surrendering their ADSs to the depositary and paying
the ADS depositary fee.
Shareholders of Cayman Islands exempted
companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of
shareholders of these companies. Our directors have discretion under our existing articles of association to determine whether
or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them
available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts
necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, public
shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the
board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.
Judgments obtained against us
by our shareholders may not be enforceable in our home jurisdiction.
We are a Cayman Islands company and all
of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In
addition, a significant majority of our current directors and officers are nationals and residents of countries other than the
United States and substantially all of their assets are located outside the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in the United States in the event that you believe
that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in
bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against
our assets or the assets of our directors and officers.
There are uncertainties as to whether Cayman
Islands courts would:
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recognize or enforce against us judgments of courts of the United States based on certain civil liability provisions of U.S.
securities laws; and
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impose liabilities against us, in original actions brought in the Cayman Islands, based on certain civil liability provisions
of U.S. securities laws that are penal in nature.
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There is no statutory recognition in the
Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will in certain circumstances
recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
We are a foreign private issuer within
the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States
domestic public companies.
Because we qualify as a foreign private
issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States
that are applicable to U.S. domestic issuers, including:
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the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on
Form 8-K;
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the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security
registered under the Exchange Act;
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the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities
and liability for insiders who profit from trades made in a short period of time; and
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the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
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We are required to file an annual report
on Form 20-F within four months of the end of each fiscal year. In addition, we publish our results on a quarterly basis as press
releases, distributed pursuant to the rules and regulations of the NYSE. Press releases relating to financial results and material
events are also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC
are less extensive and less timely as compared to that required to be filed with the SEC by United States domestic issuers. As
a Cayman Islands company listed on the NYSE, we are subject to the NYSE corporate governance listing standards. However, NSYE rules
permit a foreign private issuer like us to follow certain corporate governance practices of its home country. Certain corporate
governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance
listing standards.
We relied on the exemption available to
foreign private issuers to the requirement that each member of the compensation committee be an independent director. Currently,
the chairman of our compensation committee, Mr. David Xueling Li, is not an independent director. We may also continue to rely
on this and other exemptions available to foreign private issuers in the future, and to the extent that we choose to do so in the
future, our shareholders may be afforded less protection than they otherwise would under the NYSE corporate governance listing
standards applicable to U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which
would be made available to you, were you investing in a United States domestic issuer.
The voting rights of holders of
ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class A common
shares.
As a holder of our ADSs, you will only be
able to exercise the voting rights with respect to the underlying Class A common shares in accordance with the provisions of the
deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of
your voting instructions, the depositary will vote the underlying Class A common shares in accordance with these instructions.
You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares
from the depositary. Under our second amended and restated memorandum and articles of association, the minimum notice period required
for convening a general meeting is at least ten clear days. When a general meeting is convened, you may not receive sufficient
advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask
for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to
you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to
vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or
for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and
you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
The depositary for our ADSs will
give us a discretionary proxy to vote our Class A common shares underlying your ADSs if you do not vote at shareholders’
meetings, except in limited circumstances, which could adversely affect your interests.
Under the deposit agreement for the ADSs,
if you do not vote, the depositary will give us a discretionary proxy to vote our Class A common shares underlying your ADSs at
shareholders’ meetings unless:
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we have failed to timely provide the depositary with notice of meeting and related voting materials;
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we have instructed the depositary that we do not wish a discretionary proxy to be given;
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we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
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a matter to be voted on at the meeting would have a material adverse impact on shareholders; or
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the voting at the meeting is to be made on a show of hands.
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The effect of this discretionary proxy is
that if you do not vote at shareholders’ meetings, you cannot prevent our Class A common shares underlying your ADSs from
being voted, except under the circumstances described above. This may make it more difficult for shareholders to influence the
management of our company. Holders of our common shares are not subject to this discretionary proxy.
You may not receive dividends
or other distributions on our common shares and you may not receive any value for them, if it is illegal or impractical to make
them available to you.
The depositary of our ADSs has agreed to
pay to you the cash dividends or other distributions it or the custodian receives on Class A common shares or other deposited securities
underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of
Class A common shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical
to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of
ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed
under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain
property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these
cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws
any ADSs, common shares, rights or other securities received through such distributions. We also have no obligation to take any
other action to permit the distribution of ADSs, common shares, rights or anything else to holders of ADSs. This means that you
may not receive distributions we make on our common shares or any value for them if it is illegal or impractical for us to make
them available to you. These restrictions may cause a material decline in the value of our ADSs.
You may be subject to limitations
on transfer of your ADSs.
Your ADSs are transferable on the books
of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection
with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in
connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number
of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and
public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register
or the books of the depositary are closed, or at any time if we or the depositary thinks that it is advisable to do so because
of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any
other reason in accordance with the terms of the deposit agreement. As a result, you may be unable to transfer your ADSs when you
wish to.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A. History and Development of the
Company
We commenced operations in April 2005 with
the establishment of Guangzhou Huaduo in China. Guangzhou Huaduo later became one of our PRC consolidated affiliated entities through
the contractual arrangements described below.
We established Dokhi Investments Limited
in the British Virgin Islands, or BVI, in July 2006 and changed its name to Duowan Limited in September 2006. In August 2006, we
established Double Top Limited, which is wholly owned by Dokhi Investments Limited, in Hong Kong and changed its name to Duowan
(Hong Kong) Limited in September 2006. In April 2007, we established Guangzhou Duowan Information Technology Co., Ltd., or Guangzhou
Duowan, which was wholly owned by Duowan (Hong Kong) Limited. Guangzhou Duowan entered into a series of contractual arrangements
with Guangzhou Huaduo and its shareholders, which were subsequently amended solely to reflect updated shareholder equity interests
in Guangzhou Huaduo, through which Guangzhou Duowan exercised effective control over the operations of Guangzhou Huaduo.
In November 2007, we established Duowan
Entertainment Corporation, or Duowan BVI, in the BVI. In March 2008, we established Huanju Shidai Technology (Beijing) Co., Ltd.,
formerly known as Duowan Entertainment Information Technology (Beijing) Co., Ltd., or Beijing Huanju Shidai, which is wholly owned
by Duowan BVI. Beijing Huanju Shidai purchased all the equity interests in Guangzhou Duowan from Duowan (Hong Kong) Limited in
August 2008, and entered into a series of contractual arrangements with Guangzhou Huaduo and its shareholders through which Beijing
Huanju Shidai exercises effective control over the operations of Guangzhou Huaduo. Duowan (Hong Kong) Limited was deregistered
as a company and ceased to operate in May 2010.
In December 2008, Duowan BVI entered into
an agreement with Morningside Technology Investments Limited and two individuals, through which Duowan BVI purchased all the equity
interests in NeoTasks Inc. from Morningside Technology Investments Limited.
In March 2009, Beijing Huanju Shidai entered
into an agreement with NeoTasks New Age International Media Technology (Beijing) Co., Ltd., or NeoTasks Beijing, through which
NeoTasks Beijing was merged into Beijing Huanju Shidai. After the merger and additional capital contribution, Beijing Huanju Shidai
became 96.5% held by Duowan BVI, and 3.5% held by NeoTasks Limited (formerly known as Enlight Online Entertainment Limited), a
Hong Kong company, which in turn was the shareholder of NeoTasks Beijing before the merger. NeoTasks Limited is 100% owned by NeoTasks
Inc., a Cayman Islands company. In August 2009, Guangzhou Duowan was renamed Zhuhai Duowan Information Technology Co., Ltd.
In December 2009, Beijing Huanju Shidai
entered into a series of contractual agreements with Beijing Tuda and its shareholders, which were subsequently amended solely
to reflect updated shareholder equity interests in Beijing Tuda, through which agreements Beijing Huanju Shidai exercises effective
control over the operations of Beijing Tuda.
In December 2010, we established Guangzhou
Huanju Shidai, formerly known as Zhuhai Duowan Technology Co., Ltd., which is 100% directly owned by Duowan BVI.
Our current holding company, YY Inc., was
incorporated in July 2011 as a limited liability company in the Cayman Islands. The corporate affairs of YY Inc. are governed by
the memorandum and articles of association, the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated and revised) of the Cayman
Islands and the common law of the Cayman Islands. Through a share exchange on September 6, 2011, the shareholders of Duowan BVI
exchanged all of their outstanding common and preferred shares in Duowan BVI for common and preferred shares of YY Inc. on a pro
rata basis. No additional consideration was paid in connection with the share exchange. As a result, Duowan BVI became a wholly
owned subsidiary of YY Inc.
In October 2013, we established Guangzhou
Juhui Information Technology Co., Ltd., which is 100% directly owned by Guangzhou Huaduo.
In November 2013, we established Zhuhai
Huanju Shidai, which is 100% directly owned by NeoTasks Limited.Zhuhai Huanju Shidai ceased to operate in 2015 and was deregistered
in March 2016.
In April 2014, we established Guangzhou
Huanju Media Co., Ltd., which is 100% directly owned by Guangzhou Huaduo.
In September 2014, Guangzhou Huaduo
acquired 100% of the equity interests in Guangzhou Zhuque Information Technology Co., Ltd., which engages in online game
development.
In the fourth quarter of 2014, Guangzhou
Huaduo acquired 100% of the equity interests in both Beijing Huanqiu Xingxue Technology Development Co., Ltd, or Beijing Xingxue,
and Beijing Huanqiu Chuangzhi Software Co., Ltd., which operate the online education website Edu24oL.com, an online vocational
training and language training platform. In addition, we acquired 100% of the equity interests in both Zhengrenqiang and His Partners
Education Technology (Beijing) Co., Ltd., which was later renamed 100-Online Education Technology (Beijing) Co., Ltd., or 100-Online,
a company specializing in providing preparation courses for the International English Language Testing System, or IELTS, which
is an English language proficiency test, and Beijing Dubooker Culture Communication Co., Ltd., or Dubooker, a language education
publisher. In the fourth quarter of 2016, we sold majorty equity interests in Beijing Xingxue following which we hold 33.14% of
equity interests in Beijing Xingxue. We dissolved Dubooker and 100-Online in October 2016 and January 2017, respectively.
In the first quarter of 2015,
Guangzhou Huaduo acquired 70% of the equity interests in Shanghai Beifu Culture Communication Co., Ltd., or Shanghai Beifu,
which principally engages in providing e-commerce platform to professional game teams and commentators. Shanghai Beifu
established two wholly-owned subsidiaries, Shanghai Lanyu Trading Co., Ltd. and Shanghai Fulan Electronic Technology Co.,
Ltd., in August 2015, to expand and assist the e-commerce business of Shanghai Beifu. In June 2016, we entered into an
agreement to dispose of 60% equity interest in Shanghai Beifu, following which we hold 10% equity interest in Shanghai
Beifu.
In the first quarter of 2015, Duowan BVI
established and became a limited partner holding 93.5% equity interests of, Engage Capital Partners I, L.P., which is a private
equity fund registered in the Cayman Islands. In June 2015, as a limited partner holding 93.5% equity interests, Guangzhou Huaduo
established Shanghai Yilian Equity Investment Partnership (Limited Partnership), a private equity fund registered in China.
In May 2015, we established Zhuhai Huanju
Interactive Entertainment Technology Co., Ltd., which is 100% directly owned by Guangzhou Huaduo.
In July 2015, we established Guangzhou Huanju
Electronic Commerce Co., Ltd., which aims to engage in e-commerce business as a wholly owned subsidiary of Guangzhou Huaduo.
In August 2015, Duowan BVI acquired
55.05% of the equity interests in BiLin Information Technology Co., Ltd., or BiLin Cayman, a company incorporated in the
Cayman Islands that develops and operates instant voice chatting applications for mobile devices. BiLin Cayman is the sole
shareholder of BiLin Information Technology Co., Limited, which is in turn the sole shareholder of Beijing Bilin Changxiang
Information Technology Co., Ltd., or Bilin Changxiang. Bilin Changxiang entered into a series of contractual arrangements
with Beijing Bilin Online Information Technology Co., Ltd., or Bilin Online, and its shareholders, through which Bilin
Changxiang exercises effective control over the operations of Bilin Online. In the second quarter of 2016, the percentage of
our shareholdings in BiLin Cayman was diluted to 53.02%.
In January 2016, we established Guangzhou
Huanju Microfinance Co., Ltd., which is 100% directly owned by Guangzhou Huaduo.
In February 2016, we established Guangzhou
Zhiniu Asset Management Co., Ltd., which is 100% directly owned by Guangzhou Huaduo.
In April 2016, we established Guangzhou
Sanrenxing 100-EducationTechnology Co., Ltd., which is 70% directly owned by Guangzhou Huaduo.
In August 2016, we established Guangzhou
Huya Information Technology Co., Ltd., which is 100% directly owned by Guangzhou Huaduo.
In December 2016, we established Guangzhou
WanheTechnology Co., Ltd., which is 100% directly owned by Guangzhou Huaduo.
We currently own the domain names of YY.com,
Huya.com, Zhiniu8.com, Duowan.com and 100.com.
YY Inc. completed an initial public offering
of 7,800,000 ADSs, representing 156,000,000 Class A common shares, in November 2012. On November 21, 2012, our ADSs were listed
on The NASDAQ Stock Market under the symbol “YY.” In December 2012, in connection with the initial public offering,
we also completed the over-allotment offering of an additional 1,170,000 ADSs, representing 23,400,000 Class A common shares.
In March 2014, we issued an aggregate of
US$400 million 2.25% convertible senior notes due in 2019. Proceeds from the sale of the notes are expected to be used for general
corporate purposes, including working capital needs and potential acquisitions of complementary businesses. The notes were offered
to qualified institutional buyers pursuant to Rule 144A under the Securities Act and certain non-U.S. persons in compliance with
Regulation S under the Securities Act. The notes will be convertible into our ADSs based on an initial conversion rate of 9.0334
of our ADSs per $1,000 principal amount of notes (which is equivalent to an initial conversion price of approximately US$110.7
per ADS and represents an approximately 35% conversion premium over the closing trading price of our ADSs on March 18, 2014, which
was US$82.00 per ADS). The conversion rate is subject to adjustment upon the occurrence of certain events. The notes bear interest
at a rate of 2.25% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014.
The notes will mature on April 1, 2019, unless earlier converted, redeemed for certain tax-related events or repurchased in accordance
with their terms. On April 1, 2017, the Company repurchased for cash the notes of an aggregate principal amount of US399.0 million.
Following the settlement of the repurchase, US$1.0 million aggregate principal amount of the notes remain outstanding and will
be due in 2019.
On March 5, 2015, our board
of directors approved the 2015 Share Repurchase Plan, pursuant to which we may repurchase up to US$100 million in total of
the our outstanding ADSs for a period not exceeding twelve (12) months from the date of approval by board of directors. The
2015 Share Repurchase Plan expired on March 5, 2016. On June 15, 2016, our board of directors approved another share
repurchase plan, or the 2016 Share Repurchase Plan. Under the terms of the 2016 Share Repurchase Plan, we may repurchase up
to US$200 million worth of our outstanding shares (including shares represented by ADSs) and our convertible senior notes due
in 2019 from time to time for a period not to exceed twelve (12) months. Our 2016 Share Repurchase Plan will expire on June
15, 2017. For the year ended December 31, 2016, no share was repurchased under the 2015 Share Repurchase Plan and the 2016
Share Repurchase Plan.
On July 9, 2015, our board of
directors received a non-binding proposal letter from Mr. Jun Lei, and Mr. David Xueling Li, our chairman and director
(together, the “Buyer Group”), proposing a “going-private” transaction to acquire all of our
outstanding common shares not already beneficially owned by the Buyer Group for US$68.50 in cash per ADS. The proposed
purchase price represents a premium of approximately 17.4% to the closing trading price of our ADS on July 8, 2015, the last
trading day prior to the date of the going-private proposal. Our board of directors formed a special committee consisting of
three independent and disinterested directors, Mr. Peter Andrew Schloss, Mr. David Tang and Mr. Peng Tsing Ong, to consider
the “going-private” proposal. On June 15, 2016, our board of directors received a letter from the Buyer Group
stating that the Buyer Group had determined not to proceed with the going-private proposal with immediate effect.
Our
principal executive offices locate at 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. Our telephone
number at this address is +(86 20) 8212 0000. Our registered office in the Cayman Islands is located at Conyers Trust Company
(Cayman) Limited of Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KYI-1111, Cayman Islands. Our agent for
service of process in the United States is Law Debenture Corporate Services Inc., 801 2nd Avenue, Suite 403, New York,
NY 10017.
See “Item 5. Operating and Financial
Review and Prospects—B. Liquidity and Capital Resources—Capital Expenditures” for a discussion of our capital
expenditures and divestitures.
B. Business Overview
Overview
YY is a live streaming platform that enables
users to interact in live online group activities through voice, text and video. YY also empowers users to create and organize
groups of varying sizes to discover and participate in a wide range of online activities, including music shows, online games,
dating shows, live game broadcasting and e-learning. With a capacity to support over one million participants concurrently, YY
offers users a more immersive, enriching and engaging entertainment experience through its large live streaming platforms, primarily
include YY Live and Huya broadcasting.
YY attracted approximately 96.1 million and 56.0 million average monthly active
users with its PC clients and mobile clients, respectively, in the three months ended December 2016.
Founded as an online game web portal in
2005, our company has transformed into a multifaceted live streaming platform in the past decade. In July 2008, YY launched its
core product YY Client, a PC-based free software that allows users to create individual channels for any online live group activities
that covers a broad range of interests and topics. To increase the accessibility and usage of YY Client, we introduced a mobile
application, Mobile YY, in September 2010 and a browser-based version of our services in October 2012. To accelerate the monetization
of our mobile platform, we introduced virtual item purchase functions on Mobile YY in October 2013. In February 2014, we expanded
our original education business by launching a dedicated education platform, 100 Education. In the fourth quarter of 2014, we acquired
two education businesses, respectively focusing on online professional training and English language test preparation, to further
expand our educational services offerings. Since the beginning of 2015, we have been operating our live game broadcasting business
under a stand-alone brand, Huya, which includes Huya.com and its corresponding mobile application Huya Live. In August 2015, we
launched a new brand, Zhiniu, with its own domain name Zhiniu8.com and mobile application Zhiniu Finance, for the finance related
contents on our platforms. In February 2016, we released our mobile broadcasting application, ME Live, which allows users to perform
and make broadcasts with a single mobile device. In the third quarter of 2016, we integrated our live streaming services under
our two well-established live streaming platforms, YY Live and Huya broadcasting. We offer live streaming services through a variety
of websites, PC clients and mobile applications. We also operate Duowan.com, a game media website that provides access to and interactive
resources for online games.
Our operations rely on proprietary technology
and industry know-how. YY is supported by our highly scalable infrastructure throughout China and our proprietary algorithms enabling
low latency, low jitter and low loss rates in delivering voice and video data.
While the basic use of our platforms is
currently free, we mainly monetize our user base through sales of virtual items for live streaming and game token for online games.
We also generate revenues through our membership program whereby users pay a fixed fee to enjoy certain privileges and regular
bonus packages. We primarily generate online advertising and promotion revenues from sales of various forms of advertising and
provision of promotion campaigns on our live streaming platforms by way of advertisement display or integrated promotion activities
in shows and programs on our live stream platforms. We believe that we will be able to capitalize on the large and highly engaged
user base of our platforms by exploring additional monetization opportunities and diversifying our revenue sources.
Our total net revenues were RMB3,678.4 million,
RMB5,897.2 million and RMB8,204.1 million (US$1,181.6 million) in 2014, 2015 and 2016 respectively. We had a net income of RMB1,064.5
million, RMB998.3 million and RMB1,511.6 million (US$217.7 million) in 2014, 2015 and 2016 respectively.
Our Platforms
We currently
offer live streaming services primarily through our YY Live platform and Huya broadcasting platform.
YY Live
In June
2016, we revamped our online music and entertainment live streaming services to YY Live. With the increasing popularity of and growing
contents in YY Live, it has been transformed into an interactive and comprehensive live streaming platform. Users of YY Live may
enjoy the live streaming services on YY Live website, YY Client or YY Live APP and stream the content in various channels, including,
among others, music and dance show, talk show, outdoor activities, sports, anime and games.
Huya Broadcasting
In November
2014, we launched Huya broadcasting, with a focus on livestream of game playthroughs. After years of coverage expansion and user
accumulation, Huya broadcasting has become a comprehensive live streaming platform covering online games, console games, mobile
games, entertainments, sports and etc. Users of Huya broadcasting may access content on Huya through Huya website, YY Client or
Huya APP, Huya’s dedicated mobile application.
Our Products
We offer our services primarily through
our YY Live platform and Huya broadcasting platform. Users of our services could stream the contents on those two platforms through
(i) our PC client, YY Client, (ii) our websites, yy.com and Huya.com, and (iii) our mobile applications, including, among others,
YY Live APP and Huya APP.
YY Client
Our core product, YY Client, enables users
to engage in live streaming online, and we continue to develop and upgrade it to address evolving user needs. YY Client provides
access to user-created online social activities groups, which we refer to as channels. YY Client is compatible with most internet-enabled
systems, including PCs and mobile interfaces. YY Client is available to download for free from YY.com, Duowan.com and other internet
software download centers.
The first version of YY Client, launched
in July 2008, had voice-enabled features that allowed online game players to communicate with large groups of fellow gamers on
a real-time basis. Game players typically organize various guilds for players to discuss gaming strategies and communicate with
each other in a team setting. Such online guilds, which can consist of up to thousands of players, built their own channels on
YY Client to communicate with fellow guild members in real time when playing games online. Gradually, we further developed and
tailored YY Client in response to the market need for a platform enabling large groups to gather, meet and socialize in real time
online, and turned it into the rich communication social platform that it is today. We introduced live video-enabled channels beginning
in late 2011 and have since applied video features to all our channels.
All of the basic social interface features
enabled by our YY Client, such as the ability to engage in multi-party voice- and video-enabled communications, are currently available
to our users free of charge. In addition, some services are free to users up to a certain threshold. We currently earn revenues
from YY Client through sales of services paid through online third party payment systems.
Game Center on YY Client
The game center on YY Client currently primarily
consists of a game lobby and VIP game access. The game lobby enables users to access various online games without downloading any
additional client software. The VIP game access provide our users with access to new games being developed or tested by third party
game developers, and afford game developers an opportunity to promote their games among our users as well as solicit user feedback
on new games.
We conduct market research regarding trends
and demand for online games and various types of in-game virtual items, and often work with third party game developers to develop
and offer a wide range of in-game virtual items. We intend to continue to source popular online games to users on YY Client.
Web-based YY
We extended our platforms to web browsers
in October 2012. Web-based YY enables users to conduct real-time interactions and watch live streaming content through web browsers
without requiring any downloads or installations. Web-based YY optimizes YY technology for the web, transcending the limitations
of operational systems and enabling real-time communications and live streaming on the web by simply clicking on a link. To date,
users can visit YY.com, Huya.com and Zhiniu8.com to browse and watch various categories of live broadcasts and other contents on
our platforms.
Mobile Applications
We develop mobile applications to provide
a variety of live streaming contents to our users through mobile operating systems and make live streaming services available at
finger tips. While we continue to develop and upgrade our platforms, we rebranded Mobile YY, our first and main mobile application,
into YY Live APP, which primarily provides users access to our live streaming content offered on our YY Live platform. To better
accommodate the increasing demands of our users to access more content on our YY Live platform, we developed a number of additional
mobile applications, each of which dedicates to a specific type of content — Xunhuan application for online dating in January
2015, Zhiniu Finance application for financial news and analysis in November 2015. Users can access contents on our YY Live platform
through all these mobile applications, and retrieve contents most suitable to individual preferences and interests.
With the growth of users on our Huya broadcasting
platform, we launched Huya APP, for live game broadcasting in 2014, which is now a mobile application for streaming comprehensive
contents offered on our Huya broadcasting platform.
In addition, we have introduced MCBox. MCBox
is a mobile application offering a number of game supporting features for Minecraft, a popular mobile game, such as game editing,
mode creating and skin designing, to give players of Minecraft a better gaming experience.
We will continue to focus on developing
enhanced features for our mobile applications going forward.
Contents on Our Platforms
We offer various contents on our live streaming
platforms, which cover a broad range of interests and topics. Beginning in March 2011, we started offering various virtual items
for sale on our platforms. Through our PC clients, websites and mobile applications, users can stream the below contents on our
live streaming platforms, YY Live and Huya broadcasting:
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Music, Dancing and Talk Shows.
Users can watch music, dancing and talk shows on our live streaming platforms.
Currently, music, dancing and talk shows related content is the largest contributor to our total revenues.
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Game Broadcasting.
Users livestream play-throughs of online games in a casual environment or during competitions.
Professional game teams and commentators often attract more viewers, who may show support and appreciation by purchasing and giving
virtual items to the commentators.
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Dating Shows.
Users host, participate or live stream dating shows through live video and audio communication,
during which the participants and the audience can purchase and give virtual gifts to the host or other participants. The format
of our online dating is based on a popular dating TV show in China.
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Finance.
Users interested in finance and investment can stream finance shows hosted by financial experts, which
cover investment-related topics, including stock market trends and investment basics.
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Outdoor Activities and Sports.
Users can livestream outdoor activity shows, such as camping, hiking, travel and tourism,
as well as professional sports shows such as basketballs, footballs and snookers.
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Branding and Marketing
Branding Strategy
We consider the branding of our products
and services a crucial task. We use YY as the general brand for our company and for our core product. At the same time, we also
set up stand-alone brands for those products and services which have good potential in their vertical area. Each of our stand-alone
brands, such as YY Live, Huya, and Zhiniu, has its dedicated branding team to promote the brand in a way most suitable to the related
business.
Marketing Activities
Historically, we have incurred minimal marketing
expenses for our platforms and have built a large community of users primarily through viral marketing, with word of mouth referrals
and repeat user visits ultimately driven by user experience. Nowadays, we employ a variety of marketing activities to further promote
our platforms, including advertising on news and social network media, search engines and web portals, cooperating with application
distributors and hardware manufacturers, as well as participating and sponsoring offline exhibitions and industry summits.
Seasonality
Our results of operations of various products
and services are subject to seasonal fluctuations. However, seasonal fluctuations have not posed material operational and financial
challenges to us, as such periods tend to be brief and predictable.
Competition
We face competition in several major aspects
of our business, particularly from companies that provide online live streaming and online games. We also compete for online advertising
and promotion revenues with other internet companies that sell online advertising services in China.
Live streaming.
In relation
to our live streaming business and our online advertising and promotion business, our competitors primarily include Momo,Yingke
(Ingkee), DouyuTV.com, Huajiao, Youku’s Laifeng, Yizhibo, NetEase’s Bobo and Kuaishou.
Online games.
For online games,
our competitors include other major internet companies that host games, such as 37.com, 4399.com, Tencent, Qihoo 360 and other
private companies. We also have various competitors in the online game media market in China. Duowan.com’s primary competitor
among game media websites is 17173.com.
Technology
We believe we are an industry leader in
providing large-scale quality multi-user voice- and video-enabled online services in China, and we intend to continue to update
our technology to maintain this leadership position.
Features and Advantages
QoS for online multi-media communications
Quality of Service, or QoS, assurance is
a key element of any high quality delivery of voice and video data over the internet. For live voice- or video-enabled communications,
any data packet loss and jitter, or delay in transmission, is often immediately noticeable to users. We devote significant resources
to maintain and develop a creative combination of multiple voice- and voice-over internet protocol, or VOIP, quality assurance
mechanisms to minimize data loss and jitter. The mechanisms we employ include but not limited to cloud-based intelligence routing,
low-bitrate redundant solution, upstream-forward error correction and adaptive jitter. A special intelligent routing algorithm
we designed automatically seeks optimal ways of delivering voice and video data across our cloud-based network, enabling us to
provide better QoS even when the QoS levels are lower on certain routes.
We employ computer programs and design and
implement a standardized set of measurements to help monitor our service quality. Our system periodically collects, and our team
of experts analyzes, data from each of our data centers to evaluate the voice- and video-quality for each user using a systematic
standard. We have set up formal procedures to handle different levels of server breakdowns and network-related emergencies, and
our team can remotely discover issues and access any server to promptly resolve issues.
Large, dedicated cloud-based network
infrastructure
Our team of experts developed a cloud-based
network infrastructure specifically designed to handle multi-party voice- and video-enabled real-time online interactions. We own
over 27,000 servers which are hosted in the data centers we lease from third parties throughout the country as of December 31,
2016. Our cloud-based network infrastructure provides quality data delivery and allows multiple users to interact online from anywhere
in China with ease and speed.
Our system is designed for scalability and
reliability to support growth in our user base. The number of our servers contributes significantly to our fast streaming speed
and reliable services, and can be expanded with comparative ease, given the low cost of renting data centers to host additional
servers in any high traffic regions in our network. We believe that our current network facilities and broadband capacity provide
us with sufficient capacity to carry out our current operations, and can be expanded to meet additional capacity relatively quickly.
The amount of bandwidth we lease is continually expanded to reflect increased peak concurrent user numbers.
Content management and monitoring
Our live streaming platforms and Duowan.com
all contain user-generated content, which we are required to monitor for compliance with PRC laws and regulations. A team within
our data security department helps in enforcing our internal procedures to ensure that the content in our system are in compliance
with applicable laws and regulations. They are aided by a program designed to periodically sweep our platforms and the data being
conveyed in our system for sensitive key words or questionable materials. Content that contains certain keywords are automatically
filtered by our program and cannot be successfully posted on our platforms. Thus we are able to minimize offending materials on
our platforms and to remove such materials promptly after they are discovered. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Business—We may be held liable for information or content displayed on, retrieved from
or linked to our platforms, or distributed to our users, and PRC authorities may impose legal sanctions on us, including, in serious
cases, suspending or revoking the licenses necessary to operate our platforms.”
Accumulated experience and data
for a proprietary technology platform
Significant time and efforts are required
to build and operate an infrastructure such as ours. The technological difficulties which a platform that hosts 10,000 concurrent
users faces differ greatly from the difficulties a platform with 100,000 and 1,000,000 concurrent users faces, including many issues
to be considered when programming for the platform and planning the infrastructure. Over the years, we have gradually developed
an effective system to identify, study and resolve issues that we encounter every day. In addition, our team members have been
trained over the years to anticipate and resolve any issues, having gained significant knowledge from building and maintaining
our platforms over time.
Research and Development Team
We believe that our ability to develop internet
and mobile online applications and services tailored to respond to the needs of our user base has been a key factor for the success
of our business. As of December 31, 2016, our research and development team consisted of 1,700 members. All of our service programs
are designed and developed internally, including various interactive technologies. We expect to continue to develop all of our
core technologies in-house.
Our research and development team currently
works on both back-end and front-end development of our products and services, including (a) the continuous improvement of our
core audio and video data processing and streaming technologies, (b) the enhancement of network and server structures, data distribution
and transfer technologies to achieve lower latency and reduce interruptions, and (c) the creation of new features and functions
to meet the demand of our users in various business lines, including but not limited to PC-desktop, web and mobile applications,
channel templates and virtual items.
Operation and Maintenance Team
As of December 31, 2016, approximately 153
technicians are dedicated to monitoring and maintaining our network infrastructure 24 hours a day, seven days a week. Our operation
and maintenance team checks the voice and video data quality received by various users, the quality of user experience on our platforms
and the proper functioning of our server equipment in our network, as well as contacting internet data center hosts to fix any
issues located through such checks. Having launched more diversified and complex products and services for an increasing number
of users, we raised new challenges to our operation and maintenance team, and rely on them to continue to provide live streaming
services and online real-time interactions to our users.
Intellectual Property
We regard our patents,
trademarks, domain names, copyrights, trade secrets, proprietary technologies and similar intellectual property as critical
to our success. We seek to protect our intellectual property rights through a combination of patent, trademark, copyright and
trade secret protection laws in the PRC and other jurisdictions, as well as through confidentiality agreements and procedures
with our employees, partners and others. As of December 31, 2016, we had registered 208 domain names, including YY.com,
Huya.com, Zhiniu8.com, Duowan.com, 100.com and Chinaduo.com, 286 software copyrights and other copyrights, 75 patents and
610 trademarks and service marks in China and overseas. In addition, as of December 31, 2016, we had filed 816
patent applications covering certain of our proprietary technologies and 451 trademark applications in China and
overseas.
PRC Regulation
Certain areas related to the internet, such
as telecommunications, internet information services, connections to the international information networks, internet information
security and censorship and online game operations, are covered extensively by a number of existing laws and regulations issued
by various PRC governmental authorities, including:
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the Ministry of Industry and Information Technology, or the MIIT;
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the Ministry of Culture, or the MOC;
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the General Administration of Press and Publication, or the GAPP;
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the State Administration for Radio, Film and Television, or the SARFT;
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State Administration of Press, Publication, Radio, Film and Television of the People's Republic of China, or the SAPPRFT;
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the National Copyright Administration, or the NCA;
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the State Administration for Industry and Commerce, or the SAIC;
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the State Council Information Office, or the SCIO;
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the Ministry of Commerce, or the MOFCOM;
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the Bureau of Protection of State Secrets;
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the Ministry of Public Security; and
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the State Administration of Foreign Exchange, or the SAFE.
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As the online social platform and online
game industries are still at an early stage of development in China, new laws and regulations may be adopted from time to time
to require new licenses and permits in addition to those we currently have. There are substantial uncertainties on the interpretation
and implementation of any current and future Chinese laws and regulations, including those applicable to the online social platform
and online game industries. See “D. Risk Factors—Risks Related to Doing Business in China—Uncertainties in the
interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”
This section sets forth the most important laws and regulations that govern our current business activities in China and that affect
the dividends payment to our shareholders.
Regulation on Telecommunications
Services and Foreign Ownership Restrictions
The Telecommunications Regulations, which
became effective on September 25, 2000 and have been subsequently amended respectively on July 29, 2014 and February 6, 2016, are
the core regulations on telecommunications services in China. The Telecommunications Regulations set out basic guidelines on different
types of telecommunications business activities, including the distinction between “basic telecommunications services”
and “value-added telecommunications services.” According to the Catalog of Telecommunications Business (2015 Amendment),
implemented on March 1, 2016 attached to the Telecommunications Regulations, internet information services are deemed a type of
value-added telecommunications services. The Telecommunications Regulations require the operators of value-added telecommunications
services to obtain value-added telecommunications business operation licenses from MIIT or its provincial delegates prior to the
commencement of such services. Under these regulations, if the value-added telecommunications services offered include mobile network
information services, the operation license for value-added telecommunications business must include the provision of such services
in its covered scope. We currently, through Guangzhou Huaduo, our PRC consolidated affiliated entity, hold an ICP license, a sub-category
of the value-added telecommunications business operation license, covering the provision of internet and mobile network information
services, issued by the Guangdong branch of the MIIT on February 10, 2012.
The Regulations for the Administration of
Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which took effect on January 1, 2002 and were amended
respectively on September 10, 2008 and February 6, 2016, are the key regulations that regulate foreign direct investment in telecommunications
companies in China. The FITE Regulations stipulate that the foreign investor of a telecommunications enterprise is prohibited from
holding more than 50% of the equity interest in a foreign-invested enterprise that provides value-added telecommunications services,
including provision of internet content. Moreover, such foreign investor shall demonstrate a good track record and experience in
operating value-added telecommunications services when applying for the value-added telecommunications business operation license
from the MIIT.
On July 13, 2006, the MIIT issued the Circular
on Strengthening the Administration of Foreign Investment in Value-added Telecommunications Services, or the MIIT Circular 2006,
which requires that (a) foreign investors can only operate a telecommunications business in China through establishing a telecommunications
enterprise with a valid telecommunications business operation license; (b) domestic license holders are prohibited from leasing,
transferring or selling telecommunications business operation licenses to foreign investors in any form, or providing any resource,
sites or facilities to foreign investors to facilitate the unlicensed operation of telecommunications business in China; (c) value-added
telecommunications service providers or their shareholders must directly own the domain names and registered trademarks they use
in their daily operations; (d) each value-added telecommunications service provider must have the necessary facilities for its
approved business operations and maintain such facilities in the geographic regions covered by its license; and (e) all value-added
telecommunications service providers should improve network and information security, enact relevant information safety administration
regulations and set up emergency plans to ensure network and information safety. The provincial communications administration bureaus,
as local authorities in charge of regulating telecommunications services, (a) are required to ensure that existing qualified value-added
telecommunications service providers will conduct a self-assessment of their compliance with the MIIT Circular 2006 and submit
status reports to the MIIT before November 1, 2006; and (b) may revoke the value-added telecommunications business operation licenses
of those that fail to comply with the above requirements or fail to rectify such non-compliance within specified time limits. Due
to the lack of any additional interpretation from the regulatory authorities, it remains unclear what impact MIIT Circular 2006
will have on us or the other PRC internet companies with similar corporate and contractual structures.
To comply with such foreign ownership restrictions,
we operate our online social platform and online game businesses in China through Guangzhou Huaduo, which is owned by several PRC
citizens and Beijing Tuda. Beijing Tuda is owned by Mr. David Xueling Li. Guangzhou Huaduo and Beijing Tuda are both controlled
by Beijing Huanju Shidai through a series of contractual arrangements. Similarly, we operate our Bilin business through contractual
arrangement among Bilin Changxiang, Bilin Online and its shareholder. See “Item 7. Major Shareholders and Related Party Transactions—B.
Related Party Transactions—Contractual Arrangements.” Moreover, Guangzhou Huaduo is the registered holder of a majority
of the domain names, trademarks and facilities necessary for daily operations in compliance with the MIIT Circular 2006. Based
on our PRC legal counsel Fangda Partners’ understanding of the current PRC laws, rules and regulations, our corporate structure
complies with all existing PRC laws and regulations. However, we were further advised by our PRC legal counsel that there are substantial
uncertainties with respect to the interpretation and application of existing or future PRC laws and regulations and thus there
is no assurance that Chinese governmental authorities would take a view consistent with the opinions of our PRC legal counsel.
Internet Information Services
The Administrative Measures on Internet
Information Services, or the ICP Measures, issued by the State Council on September 25, 2000 and amended on January 8, 2011, regulate
the provision of internet information services. According to the ICP Measures, “internet information services” refer
to services that provide internet information to online users, and are categorized as either commercial services or non-commercial
services. Pursuant to the ICP Measures, internet information commercial service providers shall obtain an ICP license, from the
relevant local authorities before engaging in the providing of any commercial internet information services in China. In addition,
if the internet information services involve provision of news, publication, education, medicine, health, pharmaceuticals, medical
equipment and other services that statutorily require approvals from other additional governmental authorities, such approvals
must be obtained before applying for the ICP license. Guangzhou Huaduo presently holds the ICP license on internet and mobile network
information services issued by the Guangdong branch of the MIIT on February 10, 2012.
Besides, the ICP Measures and other relevant
measures also ban the internet activities that constitute publication of any content that propagates obscenity, pornography, gambling
and violence, incite the commission of crimes or infringe upon the lawful rights and interests of third parties, among others.
If an internet information service provider detects information transmitted on their system that falls within the specifically
prohibited scope, such provider must terminate such transmission, delete such information immediately, keep records and report
to the governmental authorities in charge. Any provider’s violation of these prescriptions will lead to the revocation of
its ICP license and, in serious cases, the shutting down of its internet systems.
Internet Publication and Cultural
Products
The Tentative Measures for Internet Publication
Administration, or Internet Publication Measures, were jointly promulgated by the GAPP and the MIIT on June 27, 2002 and became
effective on August 1, 2002. The Internet Publication Measures imposed a license requirement for any company that engages in internet
publishing, which means any act by an internet information service provider to select, edit and process content or programs and
to make such content or programs publicly available on the internet. The provision of online games is deemed an internet publication
activity; therefore, an online game operator must (i) obtain an Internet Publishing License so that it can directly offer its online
games to the public in the PRC, or (ii) publish its online games through a qualified press entity by entering into an entrustment
agreement.
Since the Internet Publication Measures
has been in place for more than thirteen years, on February 4, 2016, the SAPPRFT and the MIIT decided to further regulate order
in network publication services management, and issued the Measures for Network Publication Service Administration, or Network
Publication Measures, which took effect on March 10, 2016 and replaced the Internet Publication Measures. According to the Network
Publication Measures, engagement in network publication services must be approved by the competent administrative department for
publications and a Network Publication Services Permit must be obtained. Pursuant to the Network Publication Measures, network
publication services refer to the use of information networks to provide the public with network publications, and network publications
refer to digital works provided to the public through the use of information networks that have characteristics of publication
such as editing, creation, or processing. In addition, before online games are published to the public, an application must be
put forward with the competent administrative departments for publication, and upon verification and consent, such online games
are to be reported to the State Administration of Press, Publication, Radio, Film and Television.
The Rules for the Administration of Electronic
Publication, or the Electronic Publication Rules, was issued by the GAPP on February 21, 2008 and became effective on April 15,
2008. Under the Electronic Publication Rules and other regulations issued by the GAPP, online games are classified as a kind of
electronic publication, and publishing of online games is required to be conducted by licensed electronic publishing entities that
have been issued standard publication codes. Pursuant to the Electronic Publication Rules, if a PRC company is contractually authorized
to publish foreign electronic publications, it must obtain the approval of, and register the copyright license contract with, the
GAPP.
We, through Guangzhou Huaduo, obtained an
Internet Publishing License for the publication of online games and mobile phone games on November 7, 2011. For more information
on the pre-approval by the GAPP, see “—Regulation on Online Games and Foreign Ownership Restrictions.”
Regulation on Online Games and
Foreign Ownership Restrictions
On June 3, 2010, the MOC promulgated the
Provisional Administration Measures of Online Games, or the Online Game Measures, which came into effect on August 1, 2010. The
Online Game Measures governs the research, development and operation of online games and the issuance and trading services of virtual
currency. It specifies that the MOC is responsible for the censorship of imported online games and the filing of records of domestic
online games. The procedures for the filing of records of domestic online games must be conducted with the MOC within 30 days after
the commencement date of the online operation of such online games or the occurrence date of any material alteration of such online
games.
All operators of online games, issuers of
virtual currencies and providers of virtual currency trading services, or Online Game Business Operators, are required to obtain
Internet Culture Operation Licenses. An Internet Culture Operation License is valid for three years and in case of renewal, the
renewal application should be submitted 30 days prior to the expiry date of such license. An Online Game Business Operator should
request the valid identity certificate of game users for registration, and notify the public 60 days ahead of the termination of
any online game operations or the transfer of online game operational rights. Online Game Business Operators are also prohibited
from (a) setting compulsory matters in the online games without game users’ consent; (b) advertising or promoting the online
games that contain prohibited content, such as anything that compromise state security or divulges state secrets; and (c) inducing
game users to input legal currencies or virtual currencies to gain online game products or services, by way of random draw or other
incidental means. It also states that the state cultural administration authorities will formulate the compulsory clauses of a
standard online game service agreement, which have been promulgated on July 29, 2010 and are required to be incorporated into the
service agreement entered into between the Online Game Business Operators, with no conflicts with the rest of clauses in such service
agreements. Guangzhou Huaduo holds a valid Internet Culture Operation License that was last updated in August 2016.
On July 11, 2008, the General Office of
the State Council promulgated the Regulation on Main Functions, Internal Organization and Staffing of the GAPP, or the Regulation
on Three Provisions. On September 7, 2009, the Central Organization Establishment Commission issued the corresponding interpretations,
or the Interpretations on Three Provisions. The Regulation on Three Provisions and the Interpretation on Three Provisions granted
the MOC overall jurisdiction to regulate the online gaming industry, and granted the GAPP the authority to issue approvals for
the internet publication of online games. Specifically, (a) the MOC is empowered to administrate online games (other than the pre-examination
and approval before internet publication of online games); (b) subject to the MOC’s overall administration, GAPP is responsible
for the pre-examination and approval of the internet publication of online games; and (c) once an online game is launched, the
online game will be only administrated and regulated by the MOC. On July 11, 2013, the General Office of the State Council promulgated
the Provisions on the Main Responsibilities, Internal Institutions and Staffing of SAPPRFT, or the Three-Decision Provisions, which
reiterates the restrictions stipulated in the Regulation on Three Provisions. On November 7, 2011, Guangzhou Huaduo obtained an
Internet Publishing License for the publication of online games and mobile phone games. The online games we currently offer are
domestically produced games, and are published by third parties qualified to publish online games. As of March 31, 2017, approximately
46.5% of the online games available on YY Client were filed with the GAPP as electronic publications, and the others were still
undergoing the filing process.
On September 28, 2009, the GAPP, the NCA
and the National Working Group to Eliminate Pornography and Illegal Publications jointly issued the Circular on Consistent Implementation
of the Stipulation on the Three Determinations of the State Council and the Relevant Interpretations of the State Commission for
Public Sector Reform and the Further Strengthening of the Pre-approval of Online Games and the Approval and Examination of Imported
Online Games, or Circular 13. Circular 13 explicitly prohibits foreign investors from directly or indirectly engaging in online
gaming business in China, including through variable interest entity structures, or VIE Structures. Foreign investors are not allowed
to indirectly control or participate in PRC operating companies’ online game operations, whether (a) by establishing other
joint ventures, entering into contractual arrangements or providing technical support for such operating companies; or (b) in a
disguised form such as by incorporating or directing user registration, user account management or game card consumption into online
gaming platforms that are ultimately controlled or owned by foreign companies. Circular 13 reiterates that the GAPP is responsible
for the examination and approval of the import and publication of online games and states that downloading from the internet is
considered a publication activity, which is subject to approval from the GAPP. Violations of Circular 13 will result in severe
penalties.
For detailed analysis, see “D. Risk
Factors—Risks Related to Our Corporate Structure and Our Industry—We may be adversely affected by the complexity, uncertainties
and changes in PRC regulation of internet business and companies.”
Anti-fatigue Compliance System
and Real-name Registration System
On April 15, 2007, in order to curb addictive
online game-playing by minors, eight PRC government authorities, including the GAPP, the Ministry of Education, the Ministry of
Public Security and the MIIT, jointly issued a circular requiring the implementation of an anti-fatigue compliance system and a
real-name registration system by all PRC online game operators. Under the anti-fatigue compliance system, three hours or less of
continuous playing by minors, defined as game players under 18 years of age, is considered to be “healthy”, three to
five hours is deemed “fatiguing”, and five hours or more is deemed “unhealthy.” Game operators are required
to reduce the value of in-game benefits to a game player by half if it discovers that the amount of a time a game player spends
online has reached the “fatiguing” level, and to zero in the case of the “unhealthy” level.
To identify whether a game player is a minor
and thus subject to the anti-fatigue compliance system, a real-name registration system should be adopted to require online game
players to register their real identity information before playing online games. Pursuant to a notice issued by the relevant eight
government authorities on July 1, 2011, online game operators must submit the identity information of game players to the National
Citizen Identity Information Center, a subordinate public institution of the Ministry of Public Security, for verification as of
October 1, 2011.
We have developed and implemented an anti-fatigue
and compulsory real-name registration system in all our online games, and will cooperate with the National Citizen Identity Information
Center to launch the identity verification system upon the issuance of relevant implementing rules. For game players who do not
provide verified identity information, we assume that they are minors under 18 years of age. In order to comply with the anti-fatigue
rules, we set up our system so that after three hours of playing our online games, minors only receive half of the virtual items
or other in-game benefits they would otherwise earn, and after playing for more than five hours, minors would receive no in-game
benefits. These restrictions could limit our ability to increase our online games business among minors. Furthermore, if these
restrictions were expanded to apply to adult game players in the future, our online games business could be materially and adversely
affected. See “D. Risk Factors—Risks Related to Our Corporate Structure and Our Industry—Intensified” government
regulation of the internet industry in China could restrict our ability to maintain or increase our user level or the level of
user traffic to our platforms.
Virtual Currency
On January 25, 2007, the Ministry of Public
Security, the MOC, the MIIT and the GAPP jointly issued a circular regarding online gambling which has implications for the issuance
and use of virtual currency. To curtail online games that involve online gambling while addressing concerns that virtual currency
might be used for money laundering or illicit trade, the circular (a) prohibits online game operators from charging commissions
in the form of virtual currency in connection with winning or losing of games; (b) requires online game operators to impose limits
on use of virtual currency in guessing and betting games; (c) bans the conversion of virtual currency into real currency or property;
and (d) prohibits services that enable game players to transfer virtual currency to other players. To comply with the relevant
section of the circular that bans the conversion of virtual currency into real currency or property, in relation to online music
and entertainment, our virtual currency currently can only be used by users to exchange into virtual items to be used to show support
for performers or gain access to privileges and special features in the channels which are services in nature instead of “real
currency or property.” Once the virtual currency is exchanged by users for virtual items or the relevant privileged services,
the conversion transaction is completed and we immediately cancel the virtual item in our internal system. In the case of virtual
items used as gifts to performers, we cancel the virtual items and record corresponding points for the benefit of the performers
and the channel owners, which are then used as basis for the revenue-sharing calculation pursuant to arrangements among us, certain
popular performers and channel owners.
In February 2007, 14 PRC regulatory authorities
jointly issued a circular to further strengthen the oversight of internet cafes and online games. In accordance with the circular,
the People’s Bank of China, or PBOC, has the authority to regulate virtual currency, including: (a) setting limits on the
aggregate amount of virtual currency that can be issued by online game operators and the amount of virtual currency that can be
purchased by an individual; (b) stipulating that virtual currency issued by online game operators can only be used for purchasing
virtual products and services within the online games and not for purchasing tangible or physical products; (c) requiring that
the price for redemption of virtual currency shall not exceed the respective original purchase price; and (d) banning the trading
of virtual currency.
On June 4, 2009, the MOC and the MOFCOM
jointly issued a notice to strengthen the administration of online game virtual currency. The Virtual Currency Notice requires
businesses that (a) issue online game virtual currency (in the form of prepaid cards and/or pre-payment or prepaid card points),
or (b) offer online game virtual currency transaction services to apply for approval from the MOC through its provincial branches
within three months after the issuance of the notice. The Virtual Currency Notice prohibits businesses that issue online game virtual
currency from providing services that would enable the trading of such virtual currency. Any business that fails to submit the
requisite application will be subject to sanctions, including, without limitation, mandatory corrective measures and fines.
Under the Virtual Currency Notice, an online
game virtual currency transaction service provider means a business providing platform services relating to trading of online game
virtual currency among game users. The Virtual Currency Notice further requires an online game virtual currency transaction service
provider to comply with relevant e-commerce regulations issued by the MOFCOM. According to the Guiding Opinions on Online Trading
(Interim) issued by the MOFCOM on March 6, 2007, online platform services are trading services provided to online buyers and sellers
through a computer information system operated by the service provider.
The Virtual Currency Notice regulates, among
others, the amount of virtual currency a business can issue, the retention period of user records, the function of virtual currency
and the return of unused virtual currency upon the termination of online services. It prohibits online game operators from distributing
virtual items or virtual currency to players based on random selection through lucky draw, wager or lottery which involves cash
or virtual currency directly paid by the players. The Virtual Currency Notice bans the issuance of virtual currency by game operators
to game players through means other than purchases with legal currency. Any business that does not provide online game virtual
currency transaction services is required to adopt technical measures to restrict the transfer of online game virtual currency
among accounts of different game players.
In addition, the Online Game Measures promulgated
in June 2010 further provide that (i) virtual currency may only be used to purchase services and products provided by the online
service provider that issues the currency; (ii) the purpose of issuing virtual currency shall not be malicious appropriation of
the user’s advance payment; (iii) the storage period of online gamers’ purchase record shall not be shorter than 180
days; (iv) the types, price and total amount of virtual currency shall be filed with the cultural administration department at
the provincial level. The Online Game Measures stipulate that virtual currency service providers may not provide virtual currency
transaction services to minors or for online games that fail to obtain the necessary approval or filings, and that such providers
should keep transaction records, accounting records and other relevant information for its users for at least 180 days. On December
1, 2016, MOC released the Notice on Regulating Online Game Operation and Strengthening Concurrent and Ex-Post Supervision, to be
implemented from May 1, 2017, restate and introduce a series of regulatory requirements governing the online game operation, including
clarifications on online game operation and operators, virtual items rules, random-event rules, user protection measures, and reiteration
of MOC’s approval and filing requirements.
Online Music and Entertainment
On November 20, 2006, the MOC issued Several
Suggestions of the MOC on the Development and Administration of Internet Music, or the Suggestions, which became effective on the
same date. The Suggestions, among other things, reiterate the requirement for an internet service provider to obtain an Internet
Culture Operation License to carry out any business relating to internet music products. In addition, foreign investors are prohibited
from operating internet culture businesses. However, the laws and regulations on internet music products are still evolving, and
there have not been any provisions clarifying whether music products will be regulated by the Suggestions or how such regulation
would be carried out.
On October 23, 2015, the MOC promulgated
the Notice on Further Strengthening and Improving the Content Management of Online Music, which stipulated that operating entities
shall carry out self-examination in respect of the content management of online music, which shall be regulated by the cultural
administration departments in process or afterwards.
Guangzhou Huaduo holds a valid Internet
Culture Operation License covering our provision of online music. More than 99% of the music offered on our websites is sung by
grassroots performers along with recorded music. If any music provided through our platforms is found to lack necessary filings
and/or approvals, we could be requested to cease providing such music or be subject to claims from third parties or penalties from
the MOC or its local branches. See “D. Risk Factors—Risks Related to Our Corporate Structure and Our Industry—If
our PRC consolidated affiliated entities fail to obtain and maintain the requisite licenses and approvals required under the complex
regulatory environment for internet-based businesses in China, our business, financial condition and results of operations may
be materially and adversely affected.” Moreover, the unauthorized posting of online music on our platforms by third parties
may expose us to the risk of administrative penalties and intellectual property infringement lawsuits. See “D. Risk Factors—Risks
Related to Our Business—We may be held liable for information or content displayed on, retrieved from or linked to our platforms,
or distributed to our users, and PRC authorities may impose legal sanctions on us, including, in serious cases, suspending or revoking
the licenses necessary to operate our platforms” and “PRC Regulation—Intellectual Property Rights—Copyright
Law.”
In 2011, the MOC greatly intensified its
regulation of the provision of online music products. According to the series of Notices on Clearing Online Music Products that
are in Violation of Relevant Regulations promulgated by the MOC since January 7, 2011, entities that provide any the following
will be subject to relevant penalties or sanctions imposed by the MOC: (a) online music products or relevant services without obtaining
corresponding qualifications, (b) imported online music products that have not passed the content review of the MOC or (c) domestically
developed online music products that have not been filed with the MOC. Thus far, we believe that we have eliminated from our platforms
any online music products that may fall into the scope of those prohibited online music products thereunder.
Online Transmission of Audio-Visual
Programs
The Administrative Provisions on Private
Network and Targeted Publication of Audio-Visual Programs Services, or the Audio-Visual Provisions was promulgated by the SAPPRFT
on April 25, 2016 and put into effect on June 1, 2016. The Audio-Visual Provisions applies to the radio and TV program and other
audio-visual program services with targeted audience through the targeted transmission channels, such as local area network, virtual
private network, Internet and other information networks, and using TV and handheld electronic equipment as terminal recipients.
Under the Audio-Visual Provisions, to engage in the transmission and distribution of audio-visual programs, a License for the Online
Transmission of Audio-Visual Programs is required. Foreign invested enterprises are not allowed to carry out such business.
In addition, the State Internet Information
Office promulgated the Administrative Provisions on Internet Live-Streaming Services, or Internet Live-Streaming Services Provisions,
on November 4, 2016, which came into effect on December 1, 2016. According to the Internet Live-Streaming Services Provisions,
an Internet live-streaming service provider shall (a) establish a live-streaming content review platform; (b) conduct authentication
registration of Internet live-streaming issuers based on their identity certificates, business licenses and organization code certificates,
etc.; and (c) enter into a service agreement with Internet live-streaming services user to specify both parties’ rights and
obligations.
On April 13, 2005, the State Council promulgated
the Certain Decisions on the Entry of the Non-state-owned Capital into the Cultural Industry. On July 6, 2005, five PRC governmental
authorities, including the MOC, the SARFT, the GAPP, the CSRC and the MOFCOM, jointly adopted the Several Opinions on Canvassing
Foreign Investment into the Cultural Sector. According to these regulations, non-state-owned capital and foreign investors are
not allowed to engage in the business of transmitting audio-visual programs through information networks.
To further regulate the provision of audio-visual
program services to the public via the internet, including through mobile networks, within the territory of the PRC, the SARFT
and the MIIT jointly promulgated the Administrative Provisions on Internet Audio-Visual Program Service, or the Audio-Visual Program
Provisions, on December 20, 2007, which came into effect on January 31, 2008 and subsequently amended on August 28, 2015. Providers
of internet audio-visual program services are required to obtain a License for Online Transmission of Audio-Visual Programs issued
by SARFT, or complete certain registration procedures with SARFT. In general, providers of internet audio-visual program services
must be either state-owned or state-controlled entities, and the business to be carried out by such providers must satisfy the
overall planning and guidance catalog for internet audio-visual program service determined by SARFT. In a press conference jointly
held by SARFT and MIIT to answer questions relating to the Audio-Visual Program Provisions in February 2008, SARFT and MIIT clarified
that providers of internet audio-visual program services who engaged in such services prior to the promulgation of the Audio-Visual
Program Provisions are eligible to register their business and continue their operation of internet audio-visual program services
so long as those providers did not violate the relevant laws and regulations in the past. On May 21, 2008, SARFT issued a Notice
on Relevant Issues Concerning Application and Approval of License for the Online Transmission of Audio-Visual Programs, which further
sets out detailed provisions concerning the application and approval process regarding the License for Online Transmission of Audio-Visual
Programs. The notice also states that providers of internet audio-visual program services that engaged in such services prior to
the promulgation of the Audio-Visual Program Provisions are eligible to apply for the license so long as their violation of the
laws and regulations is minor in scope and can be rectified in a timely manner and they have no records of violation during the
last three months prior to the promulgation of the Audio-Visual Program Provisions. Further, on March 31, 2009, SARFT promulgated
the Notice on Strengthening the Administration of the Content of Internet Audio-Visual Programs, which reiterates the pre-approval
requirements for the audio-visual programs transmitted via the internet, including through mobile networks, where applicable, and
prohibits certain types of internet audio-visual programs containing violence, pornography, gambling, terrorism, superstition or
other similarly prohibited elements.
On March 17, 2010, the SARFT issued the
Internet Audio-visual Program Services Categories (Provisional), or the Provisional Categories, which classified internet audio-visual
program services into four categories. In addition, the Notice concerning Strengthening the Administration of the Broadcasting
Service on Online Audio-Visual Programs promulgated by the SAPPRFT on September 2, 2016 emphasizes that, unless a specific license
is granted, audio-visual programs service provider is forbidden from engaging in online live broadcasting on major political, military,
economic, social, cultural and sports events.
Guangzhou Huaduo holds a valid License for
Online Transmission of Audio-Visual Programs with the business classification of converging and play-on-demand service for certain
kinds of audio-visual programs—literary, artistic and entertaining—as prescribed in the Provisional Categories.
Production of Radio and Television
Programs
On July 19, 2004, the SARFT issued the Regulations
on the Administration of Production of Radio and Television Programs, or the Radio and TV Programs Regulations, which become effective
on August 20, 2004. The Radio and TV Programs Regulations require any entities engaging in the production of radio and television
programs to obtain a license for such businesses from the SARFT or its provincial branches. Entities with the License for Production
and Operation of Radio and TV Programs must conduct their business operations strictly in compliance with the approved scope of
production and operations and these entities (except radio and TV stations) must not produce radio and TV programs regarding current
political news or similar subjects.
Guangzhou Huaduo holds an effective License
for Production and Operation of Radio and TV Programs, covering the production, reproduction and publication of broadcasting plays,
TV dramas, cartoons (excluding production), special subjects, special columns (excluding current political news category) and entertainment
programs.
Regulation on Internet Bulletin
Board Services
On November 6, 2000, the MIIT promulgated
the Administrative Measures on Internet Bulletin Board Services, or BBS Measures, which required commercial internet information
service providers which provide bulletin boards, discussion forums, chat rooms or similar services, or BBS services, to obtain
specific approval from the competent telecommunications authorities. Commercial internet information service providers are also
required to conspicuously display their ICP license numbers and the rules of the BBS and inform users of the possible legal liabilities
and consequences for posting improper comments. Although the BBS Measures were abandoned in July 2010 by the State Council, certain
telecommunication authorities still require online bulletin board services be itemized in ICP license if an ICP license holder
intends to provide such services.
Regulation on Advertising Business
and Conditions on Foreign Investment
The SAIC is the primary governmental authority
regulating advertising activities in China. Regulations that apply to advertising business primarily include:
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Advertisement Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s
Congress on October 27, 1994 and amended on April 24, 2015 and effective since September 1, 2015;
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Administrative Regulations for Advertising, promulgated by the State Council on October 26, 1987 and effective since December
1, 1987; and
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Implementation Rules for the Administrative Regulations for Advertising, promulgated by the State Council on January 9, 1988
and amended on December 3, 1998, December 1, 2000, November 30, 2004 and December 12, 2011, respectively.
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According to the above regulations, companies
that engage in advertising activities must each obtain, from the SAIC or its local branches, a business license which specifically
includes operating an advertising business in its business scope. An enterprise engaging in advertising business within the specifications
in its business scope does not need to apply for an advertising operation license, provided that such enterprise is not a radio
station, television station, newspaper or magazine publisher or any other entity otherwise specified in the relevant laws or administrative
regulations. Enterprises conducting advertising activities without such a license may be subject to penalties, including fines,
confiscation of advertising income and orders to cease advertising operations. The business license of an advertising company is
valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant laws or
regulations.
PRC advertising laws and regulations set
certain content requirements for advertisements in China, including, among other things, prohibitions on false or misleading content,
superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or
infringement of the public interest. Advertisers, advertising agencies, and advertising distributors are required to ensure that
the content of the advertisements they prepare or distribute is true and in complete compliance with applicable laws. In providing
advertising services, advertising operators and advertising distributors must review the supporting documents provided by advertisers
for advertisements and verify that the content of the advertisements complies with applicable PRC laws and regulations. Prior to
distributing advertisements that are subject to government censorship and approval, advertising distributors are obligated to verify
that such censorship has been performed and approval has been obtained. Violation of these regulations may result in penalties,
including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish
an advertisement correcting the misleading information. Where serious violations occur, the SAIC or its local branches may revoke
such offenders’ licenses or permits for their advertising business operations.
On July 4, 2016, the SAIC issued the Interim
Measures for the Administration of Internet Advertising, or the Internet Advertising Measures, which become effective on September
1, 2016. According to the Internet Advertising Measures, Internet Advertising refers to the commercial advertising for direct or
indirect marketing goods or services in the form of text, image, audio, video, or others means through websites, webpages, Internet
applications, or other Internet media. The Internet Advertising Measures specifically sets out the following requirements: (a) advertisements
must be identifiable and marked with the word “advertisement” enabling consumers to distinguish them from non-advertisement
information; (b)sponsored search results must be clearly distinguished from organic search results; (c) it is forbidden to sent
advertisements or advertisement links by email without the recipient’s permission or induce Internet users to click on an
advertisement in a deceptive manner; and (d) Internet information service providers who do not participate in the business activities
of Internet advertising are required to stop publishing illegal advertisement only if they know or should have known the advertising
is illegal.
Intellectual Property Rights
Software Registration
The State Council and the NCA have promulgated
various rules and regulations relating to protection of software in China. According to these rules and regulations, software owners,
licensees and transferees may register their rights in software with the SCB or its local branches and obtain software copyright
registration certificates. Although such registration is not mandatory under PRC law, software owners, licensees and transferees
are encouraged to go through the registration process and registered software rights may be entitled to better protections. For
the number of software programs for which we had registered rights as of December 31, 2016, see “Item 4. Information on the
Company—B. Business Overview—Intellectual Property.”
Patents
The National People’s Congress adopted
the Patent Law of the People’s Republic of China in 1984 and amended it in 1992, 2000 and 2008, respectively. A patentable
invention, utility model or design must meet three conditions: novelty, inventiveness and practical applicability. Patents cannot
be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or treat diseases,
animal and plant breeds or substances obtained by means of nuclear transformation. The Patent Office under the State Intellectual
Property Office is responsible for receiving, examining and approving patent applications. A patent is valid for a twenty-year
term for an invention and a ten-year term for a utility model or design, starting from the application date. Except under certain
specific circumstances provided by law, any third party user must obtain consent or a proper license from the patent owner to use
the patent, or else the use will constitute an infringement of the rights of the patent holder. For the number of patents we had
and the number of patent applications we made as of December 31, 2016, see “Item 4. Information on the Company—B. Business
Overview—Intellectual Property.”
Copyright Law
The Copyright Law of the People’s
Republic of China, promulgated in 1990 and amended in 2001 and 2010, or the Copyright Law, and its related implementing regulations,
promulgated in 2002 and amended in 2013, are the principal laws and regulations governing the copyright related matters. The amended
Copyright law covers internet activities, products disseminated over the internet and software products, among the subjects entitled
to copyright protections. Registration of copyright is voluntary, and is administrated by the China Copyright Protection Center.
To further clarify some key internet copyright
issues, on December 27, 2012, the PRC Supreme People’s Court promulgated the Regulation on Several Issues Concerning Applicable
Laws on Trial of Civil Disputes over the Infringement of Information Network Transmission Right, or the 2013 Regulation. The 2013
Regulation took effect on January 1, 2013, and replaced the Interpretations on Some Issues Concerning Applicable Laws for Trial
of Disputes over Internet Copyright that was initially adopted in 2000 and subsequently amended in 2004 and 2006. Under the 2013
Regulation, where an internet information service provider work in cooperation with others to jointly provide works, performances,
audio and video products of which the right holders have information network transmission right, such behavior will constitute
joint infringement of third parties’ information network transmission right, and the PRC court shall order such internet
information service provider to assume join liability for such infringement. If an internet information service provider can prove
that it has only provided network services through automatic access, automatic transmission, data storage space, search functions,
links, document sharing technology, etc., and thereby argues that it has not been involved in any alleged joint infringement, the
PRC court shall find in favor of such internet information service provider. If an internet information service provider fails
to delete, block, disconnect or take other necessary measures, or if it provides technological support or other aid when it knows
or should have known of the network user’s infringement on the information network transmission right, the PRC court shall
find that such aid constitutes contributory infringement. The PRC court shall determine whether an internet information service
provider is liable for abetting or contributory infringement according to its findings on the degree of fault of the internet information
service provider. The fault of the internet information service provider is determined according to various criteria, including
situations where such provider knew or should have known of the network user’s infringement against third party’s information
network transmission right. If an internet information service provider can prove it has adopted fairly reasonable and effective
technological measures, and yet still finds it difficult to discover infringement against information network transmission conducted
by the network user, the PRC court shall find such provider to be not at fault. Where an internet information service provider
promotes popular video and films through setting up a list, directory, index, descriptive paragraph, briefing or other means of
recommendation, and the public can download, browse or acquire them through other methods directly from the internet information
service provider’s webpage, the PRC court may find that such provider knew of the network user’s infringement on the
information network transmission right of others.
Under the Copyright Law and its implementation
rules, anyone infringing upon the copyrights of others is subject to various civil liabilities, which include stopping the infringement,
eliminating the damages, apologizing to the copyright owners and compensating the copyright owners for such owners’ actual
and other losses resulting from such infringement. If the actual loss of the copyright owner is difficult to calculate, the income
received by the offender as a result of the copyright infringement shall be deemed to be the actual loss; or if such income is
in itself difficult to calculate, the relevant PRC court may decide the amount of the actual loss up to RMB500,000 for each infringement.
To address the problem of copyright infringement
related to content posted or transmitted on the internet, the PRC National Copyright Administration and MIIT jointly promulgated
the Measures for Administrative Protection of Copyright Related to Internet on April 29, 2005. These measures, which became effective
on May 30, 2005, apply to acts of automatically providing services such as uploading, storing, linking or searching works, audio
or video products, or other contents through the internet based on the instructions of internet users who publish contents on the
internet, or the Internet Content Providers, without editing, amending or selecting any stored or transmitted content. When imposing
administrative penalties upon the act which infringes upon any users’ right of communication through information networks,
the Measures for Imposing Copyright Administrative Penalties, promulgated in 2009, shall be applied.
Where a copyright holder finds that certain
internet content infringes upon its copyright and sends a notice to the relevant internet information service operator, the relevant
internet information service operator is required to (i) immediately take measures to remove the relevant contents, and (ii) retain
all infringement notices for six months and to record the content, display time and IP addresses or the domain names related to
the infringement for 60 days. After any content is removed by an internet information service operator according to the notice
of a copyright holder, the content provider may deliver a counter-notice to both the internet information service operator and
the copyright holder, stating that the removed content does not infringe upon the copyright of other parties. After the delivery
of such counter-notice, the internet information service operator may immediately reinstate the removed contents and shall not
bear administrative legal liability for such reinstatement.
An internet information service operator
may be subject to cease-and-desist orders and other administrative penalties such as confiscation of illegal income and fines,
if it is clearly aware of a copyright infringement through the internet or, although not aware of such infringement, it fails to
take measures to remove relevant content upon receipt of the copyright owner’s notice of infringement and, as a result, damages
public interests. Where there is no evidence to indicate that an internet information service operator is clearly aware of the
existence of copyright infringement, or the internet information service operator has taken measures to remove relevant contents
upon receipt of the copyright owner’s notice, the internet information service provider shall not bear the relevant administrative
legal liabilities.
On May 18, 2006, the State Council issued
the Protection of the Right of Communication through Information Network, which took effect on July 1, 2006 and amended on January
30, 2013. Under this regulation, an internet information service provider may be exempt from indemnification liabilities under
the following circumstances:
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any internet information service provider that provides automatic internet access service upon instructions from its users
or provides automatic transmission service for works, performances and audio-visual products provided by its users are not required
to assume indemnification liabilities if (a) it has not chosen or altered the transmitted works, performance and audio-visual products
and (b) it provides such works, performances and audio-visual products to the designated users and prevents any person other than
such designated users from obtaining access.
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any internet information service provider that, for the sake of improving network transmission efficiency, automatically stores
and provides to its own users the relevant works, performances and audio-visual products obtained from any other internet information
service providers, are not required to assume the indemnification liabilities if (a) it has not altered any of the works, performance
or audio-visual products that are automatically stored; (b) it has not affected such original internet information service provider
in holding the information about where the users obtain the relevant works, performance and audio-visual products; and (c) when
the original internet information service provider revises, deletes or shields the works, performances and audio-visual products,
it will automatically revise, delete or shield the same.
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any internet information service provider that provides its users with information memory space for such users to provide the
works, performances and audio-visual products to the general public via an informational network are not required to assume the
indemnification liabilities if (a) it clearly indicates that the information memory space is provided to the users and publicizes
its own name, contact person and web address; (b) it has not altered the works, performance and audio-visual products that are
provided by the users; (c) it is not aware of or has no reason to know that the works, performances and audio-visual products provided
by the users infringe upon the copyrights of others; (d) it has not directly derived any economic benefit from the providing of
the works, performances and audio-visual products by its users; and (e) after receiving a notice from the copyright holder, it
promptly deletes the allegedly infringing works, performances and audio-visual products pursuant to the relevant regulation.
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Since 2005, the NCA, together with certain
other PRC governmental authorities, have jointly launched annual campaigns specifically aimed to crack down on internet copyright
infringement and piracy in China; these campaigns normally last for three to four months every year. According to the Notice of
2010 Campaign to Crack Down on Internet Infringement and Piracy promulgated by the NCA, the Ministry of Public Security and the
MIIT on July 19, 2010, the 2010 campaign mainly targeted internet audio and video programs, literature websites, online games,
animation, software and art works related to Shanghai World Expo and Guangzhou Asian Games. During the 2010 campaign, starting
from late July to the end of October 2010, the local branches of NCA focused on popular movies and TV series, newly published books,
online games and animation, music and software and various illegal activities, including, for example, illegal uploading or transmission
of a thirty party’s works without proper license or permission, sales of pirated audio-video and software through e-commerce
platforms, providing search links, information storage, web hosting or internet access services for third parties engaging in copyright
infringement or piracy of copyrighted works and the infringement by use of mobile media. In serious cases, the operating permits
of the websites engaging illegal activities were revoked, and such websites were ordered to shut down.
We have adopted measures to mitigate copyright
infringement risks. For instance, we have established a routine reporting and registration system that is updated on a monthly
basis, and we require performers, channel owners and users to acknowledge and agree that (a) they would not perform or upload copyrighted
content without proper authorization and (b) that they will indemnify us for any relevant copyright infringement claims in relation
to their activities on our platforms.
If, despite these precautions, such procedures
fail to effectively prevent unauthorized posting or use of copyrighted content or the infringement of other third party rights
on our platforms, and the PRC courts find that certain safe harbor exemptions under PRC laws are not applicable to us because,
for instance, a court finds that we knew or should have known about such infringement or that we have directly derived economic
benefits from allowing such infringement activities on our platforms, we may be held jointly and severally liable with the performers,
channel owners or other infringement parties in lawsuits initiated by the relevant third party copyright holders or authorized
users. Moreover, we may be held directly liable for the infringement activities of such performers or channel owners on our platforms,
if the PRC courts view them as our employees or agents, deem us to have control over their activities on our platforms and the
content they upload or otherwise make available on our platforms, and determine that we have knowingly uploaded such infringing
contents on our platforms. See “D. Risk Factors—Risks Related to Our Business—We may be subject to intellectual
property infringement claims or other allegations, which could result in our payment of substantial damages, penalties and fines,
removal of relevant content from our website or seeking license arrangements which may not be available on commercially reasonable
terms.”
Domain Name
In September 2002, the CNNIC issued the
Implementing Rules for Domain Name Registration setting forth detailed rules for registration of domain names, which was amended
on May 29, 2012. On November 5, 2004, the MIIT promulgated the Measures for Administration of Domain Names for the Chinese Internet,
or the Domain Name Measures. The Domain Name Measures regulate the registration of domain names, such as the first tier domain
name “.cn.” On May 28, 2012, the CNNIC issued the Measures on Domain Name Dispute Resolution and relevant implementing
rules, pursuant to which the CNNIC can authorize a domain name dispute resolution institution to decide disputes. For the number
of domain names we registered as of December 31, 2016, see “Item 4. Information on the Company—B. Business Overview—Intellectual
Property.”
Trademark
The PRC Trademark Law, adopted in 1982 and
amended in 1993, 2001 and 2013, with its implementation rules adopted in 2014, protects registered trademarks. The Trademark Office
of the SAIC handles trademark registrations and grants a protection term of ten years to registered trademarks. Trademark license
agreements must be filed with the Trademark Office for record. For the number of trademarks we had and trademark applications we
had made as of December 31, 2016, see “Item 4. Information on the Company—B. Business Overview—Intellectual Property.”
Internet Infringement
On December 26, 2009, the Standing Committee
of National People’s Congress promulgated the Tort Law of the People’s Republic of China, or the Tort Law, which became
effective on July 1, 2010. Under the Tort Law, an internet user or an internet service provider that infringes upon the civil rights
or interests of others through using the internet assumes tort liability. If an internet user infringes upon the civil rights or
interests of another through using the internet, the person being infringed upon has the right to notify and request the internet
service provider whose internet services are facilitating the infringement to take necessary measures including the deletion, blocking
or disconnection of an internet link. If, after being notified, the internet service provider fails to take necessary measures
in a timely manner to end the infringement, it will be jointly and severally liable for any additional harm caused by its failure
to act. According to the Tort Law, civil rights and interests include the personal rights and rights of property, such as the right
to life, right to health, right to name, right to reputation, right to honor, right of portraiture, right of privacy, right of
marital autonomy, right of guardianship, right to ownership, right to usufruct, right to security interests, copyright, patent
right, exclusive right to use trademarks, right to discovery, right to equity interests and right of heritage, among others.
Regulation of Internet Content
The PRC government has promulgated measures
relating to internet content through a number of governmental agencies, including the MIIT, the MOC and the GAPP. These measures
specifically prohibit internet activities, such as the operation of online games, that result in the publication of any content
which is found to contain, among others, propagate obscenity, gambling or violence, instigate crimes, undermine public morality
or the cultural traditions of the PRC, or compromise state security or secrets. If an ICP license holder violates these measures,
its ICP license may be revoked and its websites may be shut down by the relevant government agencies.
Moreover, pursuant to the Notice on Enhancing
the Content Review Work of Online Game Products promulgated by the MOC in 2004, imported online games are subject to content review
by the MOC prior to being offered to Chinese internet users.
Information Security and Censorship
Internet content in China is regulated and
restricted from a state security standpoint. Internet companies in China are required to complete security filing procedures and
regularly update information security and censorship systems for their websites with local public security bureau. The PRC Law
on Preservation of State Secrets, which became effective on October 1, 2010 requires an internet information services providers
to discontinue disseminating any information that may be deemed to be leaked state secrets and to report such incidents in a timely
manner to the state security and public security authorities. Failure to do so in a timely and adequate manner may subject the
internet information services providers to liability and certain penalties given by the Ministry of State Security, the Ministry
of Public Security and/or the MIIT or their respective local branches.
On December 13, 2005, the Ministry of Public
Security promulgated Provisions on Technological Measures for Internet Security Protection, or the Internet Protection Measures,
which took effect on March 1, 2006. The Internet Protection Measures requires all internet information services operators to take
proper measures including anti-virus, data back-up and other related measures, and keep records of certain information about their
users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at
least 60 days and submit the above information as required by laws and regulations.
The National People’s Congress, China’s
national legislative body, enacted the Decisions on the Maintenance of Internet Security on December 28, 2000 and subsequently
amended on August 27, 2009, that may subject persons to criminal liabilities in China for any attempt to: (i) gain improper entry
to a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets;
(iv) spread false commercial information or (v) infringe upon intellectual property rights. The Internet Security Law of the People’s
Republic of China, issued by the Standing Committee of the National People’s Congress on November 7, 2016 and will take effective
on June 1, 2017, further emphasizes the implementation of classified protection with respect to Internet security. According to
the Internet Security Law, Internet operators shall fulfill relevant mandatory security protection obligations.
In 1997, the Ministry of Public Security
issued the Administration Measures on the Security Protection of Computer Information Network with Internationally Connections
(2011 amendment), which prohibit using the internet in ways which, among others, result in a leakage of state secrets or a spread
of socially destabilizing content. The Ministry of Public Security has supervision and inspection powers in this regard, and relevant
local security bureaus may also have jurisdiction. If an ICP license holder violates these measures, the PRC government may revoke
its ICP license and shut down its websites.
On December 28, 2012, the Standing Committee
of the National People’s Congress reiterated relevant rules on the protection of internet information by issuing the Decision
on Strengthening the Protection of Network Information, or the 2012 Decision. The 2012 Decision distinctly clarified certain relevant
obligations of the internet information service provider. For example, the 2012 Decision specifies that the internet information
service provider should take relevant technical measures and other necessary actions to prevent the leakage, damage or loss of
each user’s personal information collected in the internet information service provider’s operation activities, and
shall take remedial measures when the leakage, damage or loss of the citizen’s personal information occurs or may possibly
occur. Once it discovers any transmission or disclosure of information prohibited by the relevant laws and regulations, the internet
information service provider shall stop transmission of such information, take measures such as elimination, keeping relevant record,
and reporting to relevant authorities.
To comply with the above laws and regulations,
we have established an internet information security department to implement measures on information filtering. For example, we
have adopted a voice monitor system, and installed on our platforms various alerts on sensitive words or abnormal activities of
users, channels or groups. We also have a dedicated team that maintains 24-hour surveillance on the information posted on our platforms,
with different categories for monitoring purposes, according to subject and content. We have also established and follow a strict
review process and storage system of relevant records which, in combination with various information security measures, have effectively
prevented the public dissemination of statutory prohibited information through our websites in the past. We intend to continue
to further update our measurements and system and work closely with relevant authorities to avoid any violation of relevant laws
and regulations in the future.
Privacy Protection
PRC laws and regulations do not prohibit
internet content providers from collecting and analyzing their users’ personal information if appropriate authorizations
are obtained. We require our users to accept a user agreement whereby they agree to provide certain personal information to us.
PRC laws and regulations prohibit internet content providers from disclosing any information transmitted by users through their
networks to any third parties without their authorization unless otherwise permitted by law. If an internet content provider violates
these regulations, the MIIT or its local bureaus may impose penalties and the internet content provider may be liable for damages
caused to its users.
Regulation of Foreign Currency
Exchange and Dividend Distribution
Foreign Currency Exchange.
The core regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, as amended
in August 2008, or the FEA Regulations. Under the FEA Regulations, the Renminbi is freely convertible for current account items,
including the distribution of dividends, interest payments, trade- and service-related foreign exchange transactions, but not for
capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of
China, unless the prior approval of the SAFE is obtained and prior registration with the SAFE is made. On August 29, 2008, SAFE
promulgated Circular 142 to regulate the conversion of foreign currency into Renminbi by a foreign-invested enterprise by restricting
the ways in which the converted Renminbi may be used. Circular 142 stipulates that the registered capital of a foreign-invested
enterprise that has been settled in Renminbi converted from foreign currencies may only be used for purposes within the business
scope approved by the applicable governmental authority and cannot be used for equity investments within the PRC. Meanwhile, the
SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested enterprise settled in Renminbi
converted from foreign currencies. The use of such Renminbi capital may not be changed without the SAFE’s approval, and may
not in any case be repayment of Renminbi loans if the proceeds of such loans have not been used.
Since SAFE Circular 142 has been in place
for more than five years, in 2014, SAFE decided to further reform the foreign exchange administration system in order to satisfy
and facilitate the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues
Concerning the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested
Enterprises in Certain Areas on July 4, 2014, or SAFE Circular 36. SAFE Circular 36 suspends the application of SAFE Circular 142
in certain areas and allows a foreign-invested enterprise registered in such areas to use the RMB capital converted from foreign
currency registered capital for equity investments within the scope of business, which will be regarded as the reinvestment of
foreign-invested enterprise. On March 30, 2015, SAFE issued the Circular on the Reforming of the Management Method of the Settlement
of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect on June 1, 2015, and replaced
SAFE Circular 142 and SAFE Circular 36. Under SAFE Circular 19, a foreign-invested enterprise, within the scope of business, may
also choose to convert its registered capital from foreign currency to RMB on a discretionary basis, and the RMB capital so converted
can be used for equity investments within PRC, which will be regarded as the reinvestment of foreign-invested enterprise.
Dividend Distribution.
The
Foreign Investment Enterprise Law, promulgated in 1986 and amended in 2000 and 2016, and the Administrative Rules under the Foreign
Investment Enterprise Law, promulgated in 2001 and 2014, are the key regulations governing distribution of dividends of foreign-invested
enterprises.
Under these regulations, a wholly foreign-invested
enterprise in China, or a WFOE, may pay dividends only out of its accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. In addition, a WFOE is required to allocate at least 10% of its accumulated profits each
year, if any, to statutory reserve funds unless its reserves have reached 50% of the registered capital of the enterprises. These
reserves are not distributable as cash dividends. The proportional ratio for withdrawal of rewards and welfare funds for employees
shall be determined at the discretion of the WFOE. Profits of a WFOE shall not be distributed before the losses thereof before
the previous accounting years have been made up. Any undistributed profit for the previous accounting years may be distributed
together with the distributable profit for the current accounting year.
Circular 37.
Pursuant to SAFE’s
Notice on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Round-Trip Investment through Special
Purpose Vehicles, or SAFE Circular 37, issued and effective on July 4, 2014, and its appendixes, PRC residents, including PRC institutions
and individuals, must register with local branches of SAFE in connection with their direct establishment or indirect control of
an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or
equity interest in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose
vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect
to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange,
merger, division or other material event.
In the event that a PRC shareholder holding
interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose
vehicle may be prohibited from making distributions of profit to the offshore parent and from carrying out subsequent cross-border
foreign exchange activities and the special purpose vehicle may be restricted in their ability to contribute additional capital
into its PRC subsidiary. Further, failure to comply with the various SAFE registration requirements described above could result
in liability under PRC law for foreign exchange evasion. These regulations apply to our direct and indirect shareholders who are
PRC residents and may apply to any offshore acquisitions and share transfer that we make in the future if our shares are issued
to PRC residents. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC
regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability to increase
their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.”
We have completed the foreign exchange registration
of PRC resident shareholders of Guangzhou Huaduo, as required by SAFE Circular 37, for our financings that were completed before
the end of 2010. The SAFE Circular 37 registration in relation to the issuance of common shares to Tiger Global Six YY Holdings
was completed on February 6, 2012. Our PRC resident shareholders further updated their SAFE Circular 37 registrations in March
2015 to reflect shareholding changes in our company resulting from our initial public offering.
Stock Option Rules.
The Administration
Measures on Individual Foreign Exchange Control were promulgated by the PBOC on December 25, 2006, and their Implementation Rules,
issued by the SAFE on January 5, 2007, became effective on February 1, 2007. Under these regulations, all foreign exchange matters
involved in employee stock ownership plans and stock option plans participated in by onshore individuals, among others, require
approval from the SAFE or its authorized branch. Furthermore, the Notices on Issues concerning the Foreign Exchange Administration
for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules,
were promulgated by SAFE on February 15, 2012, that replaced the Application Procedures of Foreign Exchange Administration for
Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies
issued by SAFE on March 28, 2007. Pursuant to the Stock Option Rules, PRC residents who are granted shares or stock options by
companies listed on overseas stock exchanges based on the stock incentive plans are required to register with SAFE or its local
branches, and PRC residents participating in the stock incentive plans of overseas listed companies shall retain a qualified PRC
agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such
PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plans on behalf of these
participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise
of stock options, purchase and sale of corresponding stocks or interests, and fund transfer. In addition, the PRC agents are required
to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive
plan, the PRC agents or the overseas entrusted institution or other material changes. The PRC agents shall, on behalf of the PRC
residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for
the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign
exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed
by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution
to such PRC residents. In addition, the PRC agents shall file each quarter the form for record-filing of information of the Domestic
Individuals Participating in the Stock Incentive Plans of Overseas Listed Companies with SAFE or its local branches.
We and our PRC citizen employees who have
been granted share options, restricted shares or restricted share units, or PRC optionees, are subject to the Stock Option Rules.
If we or our PRC optionees fail to comply with the Individual Foreign Exchange Rule and the Stock Option Rules, we and/or our PRC
optionees may be subject to fines and other legal sanctions. See “D. Risk Factors—Risks Related to Doing Business in
China—PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiaries’ ability
to increase their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.”
In addition, the State Administration for
Taxation has issued circulars concerning employee share options, under which our employees working in the PRC who exercise share
options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee
share options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share
options. If our employees fail to pay or if we fail to withhold their income taxes as required by relevant laws and regulations,
we may face sanctions imposed by the PRC tax authorities or other PRC government authorities.
Regulation on Tax
PRC Enterprise Income Tax
The PRC enterprise income tax is calculated
based on the taxable income determined under the applicable EIT Law and its implementation rules. On March 16, 2007, the National
People’s Congress of China enacted the New EIT Law, which became effective on January 1, 2008 and subsequently amended on
February 24, 2017. On December 6, 2007, the State Council promulgated the implementation rules to the New EIT Law, which also became
effective on January 1, 2008. The New EIT Law imposes a uniform enterprise income tax rate of 25% on all resident enterprises in
China, including foreign-invested enterprises and domestic enterprises, unless they qualify for certain exceptions, and terminates
most of the tax exemptions, reductions and preferential treatment available under the previous tax laws and regulations. According
to the New EIT Law and relevant regulations, subject to the approval of competent tax authorities, the income tax of an enterprise
that has been determined to be a high and new technology enterprise shall be reduced to a preferential rate of 15%.
Moreover, under the New EIT Law, enterprises
organized under the laws of jurisdictions outside China with their “de facto management bodies” located within China
may be considered PRC resident enterprises and are therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide
income. Though the implementation rules of the EIT Law define “de facto management bodies” as “establishments
that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting,
properties, etc. of an enterprise,” the main guidance currently available for the definition of “de facto management
body” as well as the determination of offshore incorporated PRC tax resident status and its administration are set forth
in the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise
on the Basis of De Facto Management Bodies, or Circular 82, and the Administrative Measures for Enterprise Income Tax of Chinese-Controlled
Offshore Incorporated Resident Enterprises (Trial) or SAT Bulletin No. 45, both issued by the SAT, which provide main guidance
on the administration as well as determination of the tax residency status of a Chinese-controlled offshore-incorporated enterprise,
defined as an enterprise that is incorporated under the law of a foreign country or territory and that has a PRC company or PRC
corporate group as its primary controlling shareholder.
According to Circular 82, a Chinese-controlled
offshore-incorporated enterprise will be regarded as a PRC tax resident by virtue of having its “de facto management body”
in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions set forth
in Circular 82 are met:
|
·
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the primary location of the day-to-day operational management is in the PRC;
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|
·
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decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations
or personnel in the PRC;
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|
·
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the enterprise’s primary assets, accounting books and records, company seals and board and shareholder resolutions are
located or maintained in the PRC; and
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|
·
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50% or more of voting board members or senior executives habitually reside in the PRC.
|
In addition, Bulletin No. 45 provides clarification
on the resident status determination, post-determination administration, and competent tax authorities. It also specifies that
when provided with a copy of PRC resident determination certificate from a resident Chinese-controlled offshore-incorporated enterprise,
the payer should not withhold 10% income tax when paying certain PRC-sourced income such as dividends, interest and royalties to
the Chinese-controlled offshore-incorporated enterprise.
Although we do not believe that our company
should be treated as a PRC resident enterprise for PRC tax purposes, substantial uncertainty exists as to whether we will be deemed
to be such by the relevant authorities. In the event that we are considered a PRC resident enterprise, we would be subject to the
PRC enterprise income tax at the rate of 25% on our worldwide income. See “D. Risk Factors—Risks Related to Doing Business
in China—Under the PRC enterprise income tax law, we may be classified as a PRC “resident enterprise,” which
could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations
and the value of your investment.”
In addition, although the New EIT Law provides
that dividend income between “qualified resident enterprises” is exempted income, and the Implementation Rules refer
to “qualified resident enterprises” as enterprises with “direct equity interest”, it is unclear whether
dividends we receive from our PRC subsidiaries are eligible for exemption.
According to the Notice on Strengthening
Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises issued by the PRC State Administration
of Taxation on December 10, 2009, with retroactive effect from January 1, 2008, or SAT Circular 698, and the Notice on Several
Issues Concerning Enterprise Income Tax for Indirect Share Transfer by Non-PRC Resident Enterprises, issued by the PRC State Administration
of Taxation on February 3, 2015, or SAT Circular 7, an “indirect transfer” of assets of a PRC resident enterprise,
including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as
a direct transfer of PRC taxable properties, if such transaction arrangement lacks of reasonable commercial purpose and was established
for the purpose of reducing, avoiding or deferring PRC enterprise income tax. As a result, gains derived from such indirect transfer
may be subject to PRC enterprise income tax, and tax filing or withholding obligations may be triggered, depending on the nature
of the PRC taxable properties being transferred. According to SAT Circular 7, “PRC taxable properties” include assets
of a PRC establishment or place of business, real properties in the PRC, and equity investments in PRC resident enterprises, in
respect of which gains from their transfer by a direct holder, being a non-PRC resident enterprise, would be subject to PRC enterprise
income taxes. When determining if there is a “reasonable commercial purpose” of the transaction arrangement, features
to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives
from PRC taxable properties; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment
in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly
holding PRC taxable properties have real commercial nature which is evidenced by their actual function and risk exposure; the duration
of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC
taxable properties; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In respect
of an indirect offshore transfer of assets of a PRC establishment or place of business of a foreign enterprise, the resulting gain
is to be included with the annual enterprise filing of the PRC establishment or place of business being transferred, and would
consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to PRC real properties
or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident
enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax
treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation.
Where the payor fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the competent tax authority
by itself within the statutory time limit. Late payment of applicable tax will subject the transferor to default interest. Currently,
neither SAT Circular 698 nor SAT Circular 7 applies to transactions of sale of shares by investors through a public stock exchange
where such shares were acquired from a transaction through a public stock exchange.
We cannot assure you that the PRC tax authorities
will not, at their discretion, adjust any capital gains and impose tax return filing and withholding or tax payment obligations
on the transferors and transferees, while our PRC subsidiaries may be requested to assist in the filing. Any PRC tax imposed on
a transfer of our shares or any adjustment of such gains would cause us to incur additional costs and may have a negative impact
on the value of your investment in us.
Value Added Tax
On January 1, 2012, the State Administration
of Taxation officially launched a pilot VAT reform program (“Pilot Program”), applicable to businesses in selected
industries. Taxable income derived from the businesses in the Pilot Program is subject to VAT in lieu of business tax. The Pilot
Program initially applied only to transportation industry and “modern service industries” (“Pilot Industries”)
in Shanghai in 2011 and expanded to eight trial regions (including Beijing and Guangdong province) and nationwide progressively
from August to December 2012. The Pilot Industries in Shanghai included industries involving the leasing of tangible movable property,
transportation services, research and development and technical services, information technology services, cultural and creative
services, logistics and ancillary services, certification and consulting services. Revenues generated by advertising services,
a type of “cultural and creative services”, are subject to the VAT tax rate of 6%. According to official announcements
made by competent authorities in Beijing and Guangdong province, Beijing launched the same Pilot Program on September 1, 2012,
and Guangdong province launched it on November 1, 2012. In addition, the Supplementary Notice on Several Tax Policies in Relation
to the Scope of VAT-able and Other Matters in the Transportation and Selected Modern Service Sectors under the VAT Reform Pilot
Program, Caishui [2012] No. 86, or Circular 86, which was issued in December 2012, further defines the application scope of relevant
industries and specifies that, starting from December 1, 2012, website operation services provided by website owners for non-self-owned
online games are taxed as “Information System Services,” and therefore would also be subject to the VAT tax rate as
6%. Going forward, in Guangdong province, we will pay the pilot VAT instead of business taxes for our advertising activities, operating
services for online games not owned by us and for any other parts of our business that are deemed by the competent state tax authorities
to be in the scope of the Pilot Industries.
On December 12, 2013, the Ministry of Finance
and the SAT issued the Circular on Including the Railway Transportation and Postal Industries in the Pilot Program of Replacing
Business Tax with Value-Added Tax, or the Pilot Collection Circular. The scope of certain modern services industries under the
Pilot Collection Circular is expanded to cover research and development and technical services, cultural and creative services,
and radio, film and television services. In addition, according to the Notice on Including the Telecommunications Industry in the
Pilot Program of Levying Value-added Tax in Lieu of Business Tax, which became effective on June 1, 2014, the scope of certain
modern services industries under the Pilot Collection Circular is further expanded to cover the telecommunications industry. On
March 23, 2016, the Ministry of Finance and the SAT issued the Notice of Taxation on Implementing the Pilot Program of Replacing
Business Tax with Value-Added Tax in an All-round Manner, pursuant to which the pilot plan for the replacement of business tax
with VAT was expanded to all regions and industries as of May 1, 2016. Live streaming revenues and membership revenues became subject
to VAT from June 1, 2014, at a rate of 6%, while they were subject to business taxes at a rate of 3% prior to June 1, 2014. Online
games revenues and other revenues, are subject to VAT for the years ended December 31, 2014, 2015 and 2016.
Cultural Development Fee
According to applicable PRC tax regulations
or rules, advertising service providers are generally required to pay a cultural development fee at the rate of 3% on the revenues
(a) which are generated from providing advertising services and (b) which are also subject to VAT after the VAT reform program.
Dividends Withholding Tax
Under the Old EIT Law that was effective
prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises, such as dividends paid to us by
Beijing Huanju Shidai or Guangzhou Huanju Shidai, our PRC subsidiaries, were exempt from PRC withholding tax. We are a Cayman Islands
holding company and substantially all of our income may come from dividends we receive from our subsidiaries located in the PRC.
Pursuant to the New EIT Law and its implementation rules, dividends generated after January 1, 2008 and distributed to us by our
PRC subsidiaries are subject to withholding tax at a rate of 10%, unless otherwise exempted or reduced according to treaties or
arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident holding
enterprises are incorporated.
As uncertainties remain regarding the interpretation
and implementation of the New EIT Law and its implementation rules, we cannot assure you that, if we are deemed a PRC resident
enterprise, any dividends to be distributed by us to our non-PRC shareholders and ADS holders would not be subject to any PRC withholding
tax. See “D. Risk Factors—Risks Related to Doing Business in China—Under the PRC enterprise income tax law, we
may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our
shareholders and have a material adverse effect on our results of operations and the value of your investment.”
Labor Laws and Social Insurance
The principle laws that govern employment
include:
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·
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Labor Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s Congress
on July 5, 1994, effective since January 1, 1995 and amended on August 27, 2009; and
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·
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Labor Contract Law of the People’s Republic of China, promulgated by the Standing Committee of the National People’s
Congress on June 29, 2007 and amended on December 28, 2012.
|
According to the Labor Law and Labor Contract
Law, employers must execute written labor contracts with full-time employees. All employers must compensate their employees with
wages equal to at least the local minimum wage standards. All employers are required to establish a system for labor safety and
sanitation, strictly comply with state rules and standards and provide employees with workplace safety training. Violations of
the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative penalties. For
serious violations, criminal liability may arise.
In addition, employers in China are required
to provide employees with welfare schemes covering pension insurance, unemployment insurance, maternity insurance, work-related
injury insurance, medical insurance and housing funds.
We have caused all of our full-time employees
to enter into written labor contracts with us and have provided and currently provide our employees with the proper welfare and
employment benefits.
New M&A Regulations and Overseas
Listings
On August 8, 2006, six PRC governmental
agencies jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New
M&A Rule, which became effective on September 8, 2006, and amended on June 22, 2009. The New M&A Rule requires offshore
special purpose vehicles formed to pursue overseas listing of equity interests in PRC companies and controlled directly or indirectly
by PRC companies or individuals to obtain the approval of the Chinese Securities Regulatory Commission, or the CSRC, prior to the
listing and trading of such special purpose vehicle’s securities on any stock exchange overseas.
The application of the M&A Rules remains
unclear. Based on the understanding on the current PRC laws, rules and regulations and the M&A Rules of our PRC Legal Counsel,
Fangda Partners, prior approval from the CSRC is not required under the M&A Rules for the listing and trading of our ADSs on
the Nasdaq Global Market because (a) our PRC subsidiaries, Beijing Huanju Shidai and Guangzhou Huanju Shidai, are foreign-invested
enterprises established by foreign enterprises, (b) we did not acquire any equity interest or assets of a PRC domestic company
owned by PRC companies or individuals as defined under the M&A Rules, and (c) there is no provision that clearly classifies
the contractual arrangements among our PRC subsidiary, Beijing Huanju Shidai, our PRC consolidated affiliated entities and their
shareholders as a transaction regulated by the M&A Rules. However, as there has been no official interpretation or clarification
of the M&A Rules, we are also advised by our PRC legal counsel that there is uncertainty as to how this regulation will be
interpreted or implemented.
Considering the uncertainties that exist
with respect to the issuance of new laws, regulations or interpretation and implementing rules, the opinion of Fangda Partners,
summarized above, is subject to change. If the CSRC or another PRC regulatory agency subsequently determines that prior CSRC approval
was required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies.
C. Organizational Structure
The following diagram illustrates our corporate
structure as of the date of this annual report, including our principal subsidiaries and our variable interest entities and their
principal subsidiaries:
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(1)
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Beijing Tuda is our PRC consolidated affiliated entity. Mr. David Xueling Li, our co-founder, chief executive officer and director,
owns 97.7% of Beijing Tuda’s equity interests, as of the date of this annual report. For a detailed description of the contractual
arrangements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual
Arrangements with Beijing Tuda.”
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(2)
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Guangzhou Huaduo is our PRC consolidated affiliated entity. Mr. David Xueling Li and Beijing Tuda own approximately 0.5% and
99.0% of Guangzhou Huaduo’s equity interests, respectively, as of the date of this annual report. For a detailed description
of the contractual arrangements, see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual
Arrangements with Guangzhou Huaduo.”
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(3)
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Bilin Online is our PRC consolidated affiliated entity. Mr. David Xueling Li owns 99.0% of Bilin Online’s equity interests,
as of the date of this annual report. For a detailed description of the contractual arrangements, see “Item 7. Major Shareholders
and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements with Bilin Online.”
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(4)
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Duowan BVI and Guangzhou Huaduo is the limited partner of Engage L.P. and Shanghai Yilian, respectively.
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D. Property and Equipment
In November 2015, our principal executive
offices were relocated to our previously purchased commercial premises in Panyu District, Guangzhou, China, which comprise approximately
30,574 square meters. This facility currently accommodates our management headquarters, principal development, engineering, sales
and marketing, human resources and administrative activities. We also have a branch office in Beijing focusing on research and
development, a branch office in Zhuhai focusing on games related businesses, and a representative office in Shanghai that handles
advertising-related matters. We lease these relatively small premises under lease agreements from unrelated third parties, and
we plan to renew these leases from time to time as needed.
In August 2015, we acquired the use right
of a parcel of land located at Pazhou, Haizhu District, Guangzhou, China. This land and its adjacent areas are designated by the
Guangzhou municipal government to be a new center for e-commerce companies. We expect to use this land to support future development
of our company.
Our servers are hosted in leased internet
data centers in different geographic regions in China. The data centers in our network are owned and maintained for us by major
domestic internet data center providers. We typically enter into leasing and hosting service agreements that are renewable annually.
We believe that our existing facilities
are sufficient for our current needs and we will obtain adequate facilities, principally through leasing, to accommodate our future
expansion plans.
See Notes 11 and 12 to our financial statements
for further information about our property and equipment and intangible assets.
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ITEM 4A.
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UNRESOLVED STAFF COMMENTS
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None.
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ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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You should read the following discussion
and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and
the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D.
Risk Factors” and elsewhere in this annual report.
A. Operating Results
Overview
We began our operations in 2005 by launching
Duowan.com, a popular online web portal hosting game media content. We have grown significantly in recent years, developing and
introducing YY Client in 2008 and extending our services into mobile devices in September 2010 and onto web browsers in October
2012. Our business has also expanded from focusing on providing voice communication services to becoming a a live streaming platform.
We offer a variety of live streaming content on our platforms, such as online music shows, live game playthrough streaming, online
dating shows and online financial news and shows, which give our users a more diverse, immersive, engaging and enriching experience.
We derive our revenues primarily from
live streaming services, online games and membership subscriptions. We derived 95.0%, 95.0% and 96.9% of our total net
revenues from such services in 2014, 2015 and 2016, respectively, with online education revenue and online advertising and
promotion revenue accounting for the remainder of our revenues. Revenues from live streaming are primarily generated through
YY Live platform and Huya broadcasting platform. Online game revenues are primarily generated from offering virtual items in
online games by us. Membership revenues are primarily generated from our membership subscriptions. As we continue to expand
our service offerings and our user engagement and spending levels increase, our revenue sharing fees and content costs have
increased significantly in recent years, resulting in lower gross margin. We have been exploring additional monetization
opportunities and diversifying our revenue sources in order to capitalize on the large and highly engaged user base of our
platforms.
An increasing number of users are
accessing our platforms through mobile devices, and we consider the rise of mobile-based business to be a general trend.
We
have been taking measures to expand our success from PC-based products and services to the mobile platform. In 2010, we
introduced Mobile YY, our music and entertainment mobile application. In the second half of 2016, along with our transition
into a live streaming platform, we rebrand Mobile YY into YY Live APP, a mobile application for our YY Live platform. We also
have introduced Huya APP, a mobile application for our Huya broadcasting platform. We have also developed numerous mobile
applications for other parts of our business, including, among others, Xunhuan for online dating shows and Zhiniu for
financial news and analysis. Our mobile applications in aggregate, have contributed 49.6% of the total revenue generated
from our live streaming services in the fourth quarter of 2016, compared to 33.4% in the same period of 2015.
The
ARPU of our live streaming mobile applications has reached RMB292.7 (US$42.2) in the fourth quarter of 2016, compared to
RMB428.6 (US$61.7), the average ARPU of our whole live streaming business. An important element of our strategy is to
continue to develop and enhance mobile applications to capture a greater share of the growing number of mobile users.
Our total net revenues increased from RMB3,678.4
million in 2014 to RMB5,897.2 million in 2015 and to RMB8,204.1 million (US$1,181.6 million) in 2016. We had a net income of RMB1,064.5
million, RMB998.3 million and RMB1,511.6 million (US$217.7 million) in 2014, 2015 and 2016, respectively.
Discussion of Selected Statements of
Operations Items
Revenues
In the years ended December 31, 2014, 2015
and 2016, we had derived our revenues from live streaming, online games and membership, and other revenues. Our live streaming
revenues are primarily comprised of revenues from YY Live platform and Huya broadcasting platform. Our online games revenues are
primarily comprised of revenues from the online games developed by us or by third parties under revenue-sharing arrangements on
our platforms. Our membership revenues are primarily comprised of revenues from our membership subscriptions. Other revenues, mainly
include revenues from our online education platform, and online advertising and promotion revenues. We expect that in the future,
as is the case in 2016, an increasing portion of our revenues will be derived from live streaming revenues, including revenues
from in-channel virtual items sold on our platforms, such as virtual flowers and gifts for use in various channels, as well as
other online products and services.
The following table sets forth the principal
components of our total net revenues by amount and as a percentage of our total net revenues for the periods presented.
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For the Year Ended December 31,
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2014
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2015
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2016
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RMB
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% of total
net
revenues
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|
|
RMB
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% of total
net
revenues
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|
|
RMB
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US$
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% of total
net
revenues
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(in thousands, except for percentages)
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Total net revenues :
(1)(2)
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|
|
|
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|
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|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Live streaming
|
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2,475,379
|
|
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67.3
|
|
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4,539,857
|
|
|
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77.0
|
|
|
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7,027,227
|
|
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1,012,131
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|
|
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85.7
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Online games
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811,699
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22.1
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|
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771,882
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13.1
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|
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634,325
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|
|
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91,362
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7.7
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Membership
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205,199
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5.6
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|
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291,310
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|
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4.9
|
|
|
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284,860
|
|
|
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41,028
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|
|
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3.5
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Others
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186,091
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|
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5.0
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|
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294,200
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|
|
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5.0
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|
|
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257,638
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|
|
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37,108
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3.1
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Total
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3,678,368
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100.0
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|
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5,897,249
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|
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100.0
|
|
|
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8,204,050
|
|
|
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1,181,629
|
|
|
|
100.0
|
|
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(1)
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Revenues are presented net of rebates and discounts.
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(2)
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For the year ended December 31, 2016, we presented our revenue in four segments categories — live streaming, online
games, membership and others . We also have retrospectively changed the revenue presentation for the year ended December 31,
2014 and 2015.
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Live streaming revenues.
We
generate live streaming revenues from the sales of in-channel virtual items used on our live streaming platforms, including
YY Live platform and Huya broadcasting platform. Users access content on our platforms free of charge, but are charged for
purchases of virtual items.
The most significant factors that directly
affect our live streaming revenues include the increase in the number of our paying users and ARPU:
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·
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The number of paying users.
We had approximately 3.4 million, 5.8 million and 11.0 million paying users in 2014, 2015
and 2016, respectively for our live streaming services. We calculate the number of paying users during a given period as the cumulative
number of registered user accounts that have purchased virtual items or other products and services on our live streaming platform
at least once during the relevant period. We were able to achieve an increase in the number of paying users primarily due to a
larger active user base and a higher conversion ratio of active users to paying users, and we expect that the number of our paying
users will continue to grow in the future as we expand our services and products offerings and further monetize our existing platform.
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·
|
ARPU.
Our ARPU for live streaming was approximately RMB726.7, RMB780.5 and RMB637.8 (US$91.9) in 2014, 2015 and 2016,
respectively. ARPU is calculated by dividing our total revenues from live streaming during a given period by the number of paying
users for our live streaming services for that period. As we begin to generate revenues from an increasing variety of live streaming
services, our ARPU may fluctuate from period to period due to the mix of live streaming services purchased by our paying users.
|
Other significant factors that directly
or indirectly affect our live streaming revenues include:
|
·
|
our ability to increase our popularity by offering new and attractive contents, products and services that allow us to monetize
our live streaming platform;
|
|
·
|
our ability to attract and retain a large and engaged user base; and
|
|
·
|
our ability to attract and retain certain popular performers, channel owners, professional game playing team and commentators.
|
We expect that the portion of our revenues
from live streaming derived from the sales of virtual items and services will continue to increase as we capitalize on monetization
opportunities. We create and offer to users virtual items that can be used on various channels. Users can purchase consumable virtual
items from us to show support for their favorite performers or time-based virtual items that provide users with recognized status,
such as priority speaking rights or special symbols on the music and entertainment channels.
Online games revenues.
We generate
online games revenues from the sales of in-game virtual items used for games developed by us or by third parties under revenue-sharing
arrangements on our platforms. Users play online games free of charge, but are charged for purchases of virtual items.
The most significant factors that directly
affect our online games revenues include the increase in the number of our paying users and ARPU:
|
·
|
The number of paying users.
We had approximately 1.6 million, 1.2 million and 1.2 million paying users in 2014, 2015
and 2016, respectively, for our online games. We calculate the number of paying users during a given period as the cumulative number
of registered user accounts that have purchased virtual items or other products and services in our online games at least once
during the relevant period. We were able to achieve an increase in the number of paying users primarily due to a larger active
user base and a higher conversion ratio of active users to paying users, and we expect that the number of our paying users will
continue to grow in the future as we expand our online game offerings and further monetize our existing online games.
|
|
·
|
ARPU.
Our ARPU for online games was approximately RMB520.8, RMB635.8 and RMB533.6 (US$76.9) in 2014, 2015 and 2016,
respectively. ARPU is calculated by dividing our total revenues from online games during a given period by the number of paying
users for online games for that period. As we begin to generate revenues from an increasing variety of online games, our ARPU may
fluctuate from period to period due to the mix of online games offered by us.
|
Other significant factors that directly
or indirectly affect our revenues include:
|
·
|
our ability to increase our popularity by offering new and attractive online games that allow us to monetize our platforms;
|
|
·
|
our ability to attract and retain a large and engaged player base; and
|
|
·
|
our ability to attract and retain third party game developers, third party licensee operators and service providers.
|
The online games we currently offer are
primarily web games that can be run from an internet browser and require an internet connection to play. We have historically derived
a significant portion of our revenues from a number of popular online games, primarily through selling in-game virtual items for
these games. A majority of our popular online games are developed by third party game developers under revenue-sharing arrangements
that typically last one to two years. We derive an increasingly lower percentage of our revenues from online games as a whole,
as we expect to monetize other non-game aspects of the YY Live platform and Huya broadcasting platform.
Membership revenues.
We generated
membership revenues from the membership subscription fees paid by our users. In our membership program, users pay a flat monthly
subscription fee in order to become members, and in exchange, we give them access to various privileges and enhanced features on
our channels, including additional video usage, priority entrance to certain live performances, and exclusive rights to access
VIP avatars, VIP ring-tones, VIP fonts and VIP emoticons.
Other revenues.
We generated other
revenues from our online education platform and online advertising and promotion revenues. Online education services consisted
of vocational training courses, language training courses and K-12 afterschool education courses. Revenue is recognized over the
period the online course is available to the students, which generally is from the enrolment date to the completion of the relevant
professional examination date. We enter into advertising contracts with both advertisers and advertising agencies. In 2014, 2015
and 2016, a vast majority of our online advertising and promotion revenues were derived from pay-for-time arrangements under which
we charge advertisers depending on the duration of display for an advertisement or a series of advertisements as well as promotion
campaigns conducted by relevant channel owners.
Cost of Revenues
Cost of revenues consists primarily of (i)
revenue sharing fees and content costs including payments to various channel owners and performers, and content providers, (ii)
bandwidth costs, (iii) salary and welfare, (iv) depreciation and amortization expense for servers, other equipment and intangibles
directly related to operating the platform, (v) payment handling costs, (vi) business tax and surcharges, (vii) share-based compensation,
and (viii) other costs. We anticipate that revenue sharing fees and content costs paid to performers, channel owners and content
providers will increasingly contribute to our cost of revenues. We expect that our cost of revenues will increase in absolute amount
as we further grow our user base and expand our revenue-generating services.
Revenue sharing fees and content costs.
Our revenue sharing fees and content costs paid to performers, channel owners and content providers increased from RMB1,134.0 million
in 2014 to RMB2,343.2 million in 2015 and further increased to RMB3,790.6 million (US$546.0 million) in 2016. We expect our revenue
sharing fees and content costs to continue to increase as we continue to expand our live streaming offerings, our user engagement
and spending levels increase, as well as our investments in expanding the amount of new and innovative content provided to users.
Bandwidth costs.
Our bandwidth costs
increased from RMB345.9 million in 2014, to RMB570.2 million in 2015 and further increased to RMB651.7 million (US$93.9 million)
in 2016. We expect bandwidth costs to continue to increase as of the continued user base expansion and video quality improvements,
but be partially offset by our improved efficiency and pricing terms.
Salary and welfare.
Our salary and
welfare costs increased from RMB131.8 million in 2014 to RMB198.2 million in 2015, and further increased to RMB232.5 million (US$33.5
million) in 2016. We expect our salary and welfare costs to increase as we continue to hire additional employees in line with the
expansion of our business.
Depreciation and amortization.
Our
depreciation and amortization increased from RMB59.8 million in 2014 to RMB145.1 million in 2015, and further increased to RMB173.0
million (US$24.9 million) in 2016. We expect depreciation and amortization to increase as we continue to expand our operations
and purchase servers and other equipment or intangibles directly related to the operating of our platforms and business.
Payment handling costs.
Our payment
handling costs increased from RMB55.1 million in 2014 to RMB104.8 million in 2015, but decreased to RMB67.5 million (US$9.7 million)
in 2016. We expect payment handling costs to increase as we continue to grow our paying users base and expand our paid service
offerings.
Business tax and surcharges.
Our
business tax and surcharges decreased from RMB49.2 million in 2014 to RMB27.8 million in 2015, and increased to RMB44.7 million
(US$6.4 million) in 2016. We expect the payment of surcharges to increase due to the expansion of our business.
Share-based compensation.
Our share-based
compensation allocated to the cost of revenues increased from RMB18.0 million in 2014 to RMB24.0 million in 2015 and decreased
to RMB15.9 million (US$2.3 million) in 2016.
Operating Expenses
Our operating expenses consist of (i) research
and development expenses, (ii) sales and marketing expenses, (iii) general and administrative expenses, (iv) goodwill impairment,
and (v) fair value change of contingent consideration. The following table sets forth the components of our operating expenses
for the years indicated, both in absolute amounts and as percentages of our total net revenues. We expect our operating expenses
to generally increase in absolute amount and decrease as percentage of total net revenues in the near future.
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
% of total
net
revenues
|
|
|
RMB
|
|
|
% of total
net
revenues
|
|
|
RMB
|
|
|
US$
|
|
|
% of total
net
revenues
|
|
|
|
(in thousands, except for percentages)
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
431,188
|
|
|
|
11.7
|
|
|
|
548,799
|
|
|
|
9.3
|
|
|
|
675,230
|
|
|
|
97,253
|
|
|
|
8.2
|
|
Sales and marketing expenses
|
|
|
102,527
|
|
|
|
2.8
|
|
|
|
312,870
|
|
|
|
5.3
|
|
|
|
387,268
|
|
|
|
55,778
|
|
|
|
4.7
|
|
General and administrative expenses
|
|
|
223,019
|
|
|
|
6.1
|
|
|
|
358,474
|
|
|
|
6.1
|
|
|
|
482,437
|
|
|
|
69,485
|
|
|
|
5.9
|
|
Goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
310,124
|
|
|
|
5.3
|
|
|
|
17,665
|
|
|
|
2,544
|
|
|
|
0.2
|
|
Fair value change of contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
(292,471
|
)
|
|
|
(5.0
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total operating expenses
|
|
|
756,734
|
|
|
|
20.6
|
|
|
|
1,237,796
|
|
|
|
21.0
|
|
|
|
1,562,600
|
|
|
|
225,060
|
|
|
|
19.0
|
|
Research and Development
Expenses
Research and development expenses consist
primarily of salaries and benefits and share-based compensation expenses for research and development personnel and rental expenses
and depreciation of office premises and servers utilized by the research and development personnel. Research and development expenses
generally increased in the past three years ended December 31, 2016, due to the need for additional research and development personnel
to accommodate the growth of our business. We expect our research and development expenses in absolute amount to increase as we
intend to retain existing research and development personnel and also hire new ones to, among other things, develop new series
of applications for our platforms, improve technology infrastructure to further enhance user experience, and further develop enhanced
features for mobile devices to reach more users. However, we also expect to be able to leverage on the expertise of our established
research and development team and achieve better efficiency.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily
of (i) advertising and promotion expenses, (ii) salary and welfare for sales and marketing personnel, and (iii) rental expenses.
Our sales and marketing expenses generally increased over the past three years ended December 31, 2016, primarily reflecting increased
marketing and promotional activities and increased numbers of sales and marketing staff. We expect that our sales and marketing
expenses will increase in absolute amount in the near term as we expect to increase our spending on promotional activities, particularly
relating to mobile applications and new business initiatives.
General and Administrative
Expenses
General and administrative expenses consist
primarily of (i) salary and welfare general and administrative personnel, (ii) share based compensation for management and administrative
personnel, and (iii) impairment charges of intangibles and other non-current assets. Our general and administrative expenses generally
increased over the past three years ended December 31, 2016 as our business expanded, primarily due to the general growth of our
business and an increase in the investments impairment charge. We expect our general and administrative expenses generally increase
in absolute amount and decrease as percentage of total net revenues in the near future as our business grows.
Goodwill impairment and
Fair value change of contingent consideration
We have noted further impairment indicator
for 100 Online as well as impairment indicator for Bilin Online in 2016. Based on the result of the impairment assessment, impairment
charges of RMB17.7 million (US$2.5 million) were recognised.
Share-based Compensation
Expenses
Our operating expenses include share-based
compensation expenses as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for percentages)
|
|
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
|
|
Total
|
|
|
116,595
|
|
|
|
161,409
|
|
|
|
141,392
|
|
|
|
20,365
|
|
We grant stock-based award such as, but
not limited to, share options, restricted shares, restricted share units and warrants to eligible employees, officers, directors,
and non-employee consultants. Awards granted to employees, officers, and directors are initially accounted for as equity-classified
awards, which are measured at the grant date fair value of the award and are recognized using the graded vesting method, net of
estimated forfeitures, over the requisite service period, which is generally the vesting period. Awards granted to non-employees
are initially measured at fair value on the grant date and periodically re-measured thereafter until the earlier of the performance
commitment date or the date the service is completed and recognized over the period in which the service is provided.
Operating Income
Gain on deconsolidation and disposal
of subsidiaries
In June 2016, we disposed 60% equity interest
of Shanghai Beifu for a total consideration of RMB3.5 million. After the disposal, we retained 10% equity interest in Shanghai
Beifu. A total loss of RMB23.5 million was recognized. In December 2016, we disposed 33.86% equity interest of Beijing Xingxue
for a total consideration of RMB118.5 million. After the disposal, we retained 31.14% equity interest in Beijing Xingxue. A total
income of RMB127.4 million was recognized.
Other income
Other income primarily consists of government
grants in connection with our contributions to technology development, tax refund and investments in local business districts.
These grants may not be recurring in nature.
Taxation
Cayman Islands
According to our Cayman Islands counsel,
Conyers Dill & Pearman, Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income,
gains or appreciations and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely
to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments
executed in, or after execution brought within the jurisdiction of, the Cayman Islands. There are no exchange control regulations
or currency restrictions in the Cayman Islands.
The Cayman Islands are a party to a double
tax treaty entered into with the United Kingdom in 2010 but otherwise is not party to any double tax treaties.
Pursuant to Section 6 of the Tax Concessions
Law (1999 Revision) of the Cayman Islands, we have obtained an undertaking from the Governor-in-Cabinet:
|
(1)
|
that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciations
shall apply to us or our operations; and
|
|
(2)
|
that the aforesaid tax or any tax in the nature of estate duty or inheritance tax shall not be payable (i) on or in respect
of our shares, debentures or other obligations, or (ii) by way of withholding in whole or in part of any relevant payment as defined
in section 6(3) of the Tax Concessions Law (1999 Revision).
|
The undertaking is for a period of twenty
years from August 2, 2011.
British Virgin Islands
Duowan BVI is our wholly owned subsidiary.
As Duowan BVI is a BVI business company
subject to the provisions of the BVI Business Companies Act 2004 (as amended), it is exempt from all provisions of the Income Tax
Act of the BVI (including with respect to all dividends, interests, rents, royalties, compensation and other amounts payable by
Duowan BVI to persons who are not persons resident in the BVI).
Capital gains realized with respect to any
shares, debt obligations or other securities of Duowan BVI by persons who are not persons resident in the BVI are also exempt from
all provisions of the Income Tax Act of the BVI.
No estate, inheritance, succession or gift
tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI with respect to any shares,
debt obligations or other securities of Duowan BVI, save for interest payable to or for the benefit of an individual resident in
the European Union.
Hong Kong
Our subsidiary registered in Hong Kong is
subject to Hong Kong Profits Tax on the taxable income as reported in its respective statutory financial statements adjusted in
accordance with relevant Hong Kong tax laws. The applicable tax rate is 16.5% in Hong Kong.
PRC
Current taxation primarily represented the
provision for a state and local corporate income tax, or EIT, for subsidiaries and consolidated affiliated entities operating in
the PRC. Prior to January 1, 2008, companies established in the PRC were generally subject to EIT at statutory rates of 30% and
3% respectively. On March 16, 2007, the PRC National People’s Congress promulgated the New EIT Law, which became effective
on January 1, 2008. These subsidiaries and VIEs are subject to new EIT on their taxable income as reported in their respective
statutory financial statements adjusted in accordance with the relevant tax laws and regulations in the PRC. All our PRC entities
are subject to EIT at a rate of 25%, with the exception of any preferential treatments they may receive, such as the 15% preferential
tax rate that Guangzhou Huaduo can enjoy for the periods reported as a result of its qualification as a high and new technology
enterprise. Furthermore, Guangzhou Huanju Shidai has been qualified as a software enterprise since 2013, and is entitled to a two-year
exemption from EIT followed by three years at 50% tax reduction starting from 2014, the first profit-making year.
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, or Super Deduction. Certain subsidiaries and VIEs have claimed such Super Deduction for the period
reported.
In addition, according to the New 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 is subject to PRC withholding tax, or 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 our PRC subsidiaries and consolidated affiliated entities to us and our subsidiaries
outside the PRC. We do not have any present plan to pay out the retained earnings in the PRC subsidiaries and PRC consolidated
affiliated entities in the foreseeable future. We currently intend to retain our available funds and any future earnings to operate
and expand our business. Accordingly, no such WHT has been accrued.
Our PRC subsidiaries and PRC consolidated
affiliated entities are subject to value added tax and related surcharges. Our live streaming revenues became subject to VAT from
June 1, 2014, at a rate of 6%, while they were subject to business taxes at a rate of 3% prior to June 1, 2014. Online games revenues
and other revenues are subject to VAT for the year ended December 31, 2014, 2015 and 2016. Surcharges are calculated based on 12%
of the monthly business taxes and VAT payable for 2014, 2015 and 2016. Business taxes and related surcharges during 2014, 2015
and 2016 were RMB49.2 million, RMB27.8 million and RMB44.7 million (US$6.4 million), respectively.
For more information on PRC tax regulations,
see “PRC Regulation—Regulation on Tax.”
Critical Accounting Policies
We prepare our financial statements in conformity
with U.S. GAAP, which requires us to make estimates and assumptions that affect our reporting of, among other things, assets and
liabilities, revenues and expenses. We regularly evaluate these estimates and assumptions based on the most recently available
information, our own historical experiences and other factors that we believe to be relevant under the circumstances. Since our
financial reporting process inherently relies on the use of estimates and assumptions, our actual results could differ from these
estimates. This is especially true with some accounting policies that require higher degrees of judgment than others in their application.
We consider the policies discussed below to be critical to an understanding of our audited consolidated financial statements because
they involve the greatest reliance on our management’s judgment.
Revenue Recognition and Deferred Revenue
For the year ended December 31, 2016, we
presented our revenue in four categories — live streaming, online games, membership and others to better reflect the way
we generate revenues. The revenue for all previous financial years before 2016 presented in this annual report was also retrospectively
changed to be consistent with the revenue for the year ended December 31, 2016.
For previous financial years before 2016
presented in this annual report, before the changes mentioned above were made, revenues had been originally presented as internet
value-added service, or IVAS, and other revenues. Under the category of IVAS, there were four sub-categories: online music and
entertainment, online games, online dating and other IVAS. After the changes to our revenue presentation were made, revenues from
online music and entertainment, online dating and other IVAS (excluding revenues from membership and certain minor revenue streams
that do not meet the criteria of live streaming), which are generated from our YY Live platform and Huya broadcasting platform,
are categorized as live streaming revenues. Revenues from online games and membership are presented separately. Other revenues
and those revenues streams previously categorized in other IVAS that do not meet the criteria of live streaming are categorized
as “others”. The changes to our revenue presentation have no impact on the amount of our total net revenues.
We generate revenues from live streaming,
online games, membership and others. Revenues from live streaming are generated from YY Live platform and Huya broadcasting platform.
Revenues from online games are generated from our online game platform and the online games that we host. Revenue from membership
are generated from our membership subscription program which enhances user experience and provide certain privileges to users when
they use YY Client. Other revenues mainly include online education revenue and advertising revenue. Online education services consist
of vocational training and language training courses. Online advertising revenues are primarily generated from sales of different
forms of advertising on our platforms. Revenue is recognized when persuasive evidence of an arrangement exists, service has been
rendered, the price is fixed or determinable and collection is reasonably assured.
We operate a virtual currency system under
which the users can directly purchase virtual currency on live streaming channels or pay membership subscription fees via online
payment systems provided by third parties including payments using mobile phone, internet debit/credit card and other third party
payment systems. The virtual currency can be converted into game tokens that can be used to purchase virtual items in online games
(both developed by third parties and self-developed), or used to pay membership subscription fees. Virtual currency sold but not
yet consumed by the purchaser is recorded as “advances from customers” and, upon conversion or being used, is recognized
as revenue according to the respective prescribed revenue recognition policies addressed below unless otherwise stated.
Live Streaming
We create and offer virtual items to be
used by users on our live streaming channels that we operate and maintain. The virtual items are offered free of charge or sold
to users at different specified prices as pre-determined by us. Live streaming revenue consists of sales of virtual items. Users
purchase consumable virtual items from us and present them to performers to show support for their favorite performers or time-based
virtual items which provide users with recognized status, such as priority speaking rights or special symbols on the music channels
for a specific period of time. In order to attract user traffic, we share a portion of the revenues we derive from such in-channel
virtual item sales on live streaming channels with certain popular performers and channel owners, who have entered into revenue
sharing arrangements with us. We account for such shared revenues as cost of revenues. Performers and channel owners who do not
have such revenue sharing arrangements with us are not entitled to share any revenue derived from the virtual items sold. We do
not recognize any revenue from offering free virtual items and do not share any revenue with performers or channel owners when
free virtual items are presented to performers by our users. Accordingly, live streaming revenue is recognized for the sale of
virtual items sold in live streaming channels immediately if the virtual item is a consumable or, in the case of time-based virtual
items, recognized ratably over the period each virtual item is made available to the user, which does not exceed one year. We do
not have further obligations to the user after the virtual items are consumed. Virtual items may be sold individually or bundled
into one arrangement. When our users purchase multiple virtual items bundled within the same arrangement, we evaluate such arrangements
under ASC 605-25
Multiple-Element Arrangements
. We identify individual elements under the arrangement and determine if such
elements meet the criteria to be accounted for as separate units of accounting. We allocate the arrangement consideration to separate
units of accounting based on their relative selling price. The following hierarchy has been followed when determining the relative
selling price for each element: (1) vendor specific objective evidence, or VSOE, (2) third party evidence, or TPE, and (3) best
estimate of selling price, or BESP. Given that the VSOE of the selling price cannot be determined, we have adopted a policy to
allocate the consideration of the whole arrangement to different virtual item elements based on the TPE of selling price or the
BESP for each virtual item element. We determine the fair values of virtual items sold in a bundle based on similar products sold
separately on our platforms based on the TPE of selling price and determine the fair values of virtual items without similar products
sold separately on our platform based on the BESP. The BESP is generally based on the selling prices of the various elements of
a similar nature when they are sold to users on a stand-alone basis. The BESP may also be based on the estimated stand-alone pricing
when the element has not previously been sold on a stand-alone basis. These estimates are generally determined based on pricing
strategies, market factors and strategic objectives. We recognize revenue for each virtual item element in accordance with the
applicable revenue recognition method.
Online game revenue
We generate revenues from offering virtual
items in online games developed by third parties or our self-developed online games to game players. Historically, the majority
of online games revenues for the three years ended December 31, 2014, 2015 and 2016 were derived from third party-developed games.
Users play games through our platforms free
of charge and are charged for purchases of virtual items including consumable and perpetual items, which can be utilized in the
online games to enhance their game-playing experience. Consumable items represent virtual items that can be consumed by a specific
user within a specified period of time. Perpetual items represent virtual items that are accessible to the users’ accounts
over the life of the online games.
We recognize revenue when recognition criteria
defined under US GAAP are satisfied. For purposes of determining when the service has been provided to the paying player, we have
determined that an implied obligation exists to the paying player to continue providing access to the games such that the users
can utilize the virtual items purchased. Game players need to log on and access the games through our platforms because their game
tokens, virtual items, and game history are specific to our game accounts and non-transferable to other platforms. To purchase
in-game virtual items, players can either charge their game accounts by purchasing game tokens or virtual currency from our platforms,
which are convertible into game tokens based on a predetermined exchange rate agreed among the relevant game developers and us.
The proceeds from the sales of our virtual
currency is recorded as “advances from customers”, representing prepayments received from users in the form of our
virtual currency not yet converted into game specific tokens. Upon the conversion into a game token from our virtual currency or
upon the direct purchase of a game token, whichever is applicable, the proceeds will be shared between the relevant game developer
and us based on a predetermined contractual ratio. Game tokens are non-refundable and non-exchangeable among different games. Our
portion, net of the game developer’s entitled consideration, is recorded as deferred revenue and amortized according to the
prescribed revenue recognition policies described below. Users typically do not convert the virtual currency into game tokens or
purchase the game tokens unless they plan to purchase in-game virtual items soon.
There are two types of third party-developed
online games:
|
·
|
Non-exclusive third party-developed games; and
|
|
·
|
Exclusive third party-developed games
|
Under the non-exclusive arrangement, game
developers license the games to various platforms and we are only one of the platforms. Game developers will receive only revenue
shared from us pursuant to the mutually agreed sharing percentage.
Under the exclusive arrangement, game developers
only license the game to us as the exclusive licensee. We can sub-license the games to other platforms and receive a portion of
revenue shared from sub-licensees. In addition to the revenue shared to the game developers, we also pay an exclusive license fee
to the game developers.
Non-exclusive third party-developed
games
Pursuant to contracts signed between the
game developers and us, revenues from the sale or conversion of game tokens for the purchase of in-game virtual items from online
games developed by third parties are shared between the game developers and us based on a pre-agreed ratio for each game. These
revenue-sharing contracts typically last one to two years.
The third party-developed games under non-exclusive
licensing contracts are maintained and updated by the game developers. We view the game developers to be our customers and consider
our responsibilities under our agreements with the game developers to offer certain standard promotions that include providing
access to the platform, announcing the new games to users on the platform, and occasional advertising on our platforms. The determination
of whether to record these revenues using gross or net method is based on an assessment of various factors. The primary factors
are whether we are acting as the principal in offering services to the game players or as the agent in the transaction, and the
specific requirement of each contract. We determined that for third party-developed games, the third party game developers are
the principal given the game developers design and develop the online game services offered, have reasonable latitude to establish
prices of game tokens, and are responsible for maintaining and upgrading the game contents and virtual items. Accordingly, We record
online games revenue, net of the pre-agreed portion of sharing of the revenues with the game developers.
Given that third party-developed games under
non-exclusive licensing contracts are managed and administered by the third party game developers, we do not have access to the
data on the consumption details such as when the game token is spent on the virtual items or the types of virtual items (consumable
or perpetual items) purchased by each individual game player. However, we maintain historical data on timing of the conversion
of its virtual currency into game specific tokens and the amount of purchases of game tokens. We believe that our performance for,
and obligation to, the game developers correspond to the game developers’ services to the users. We have adopted a policy
to recognize revenues relating to game tokens for third party developed games over the estimated user relationship period with
us on a game-by-game basis, which is approximately one to six months for the periods presented. Future usage patterns may differ
from historical usage patterns and therefore the estimated user relationship period with us may change in the future.
When we launch a new game, we estimate the
user relationship period based on other similar types of games in the market until the new game establishes its own history. We
consider the game’s profile, attributes, target audience, and its appeal to players of different demographics groups in estimating
the user relationship period.
The estimated user relationship period is
based on data collected from those users who have acquired game tokens. To estimate the user relationship period, we maintain a
system that captures the following information for each user: (a) the frequency that users log into each game via our platforms,
and (b) the amount and the timing of when the users convert or charge his or her game tokens. We estimate the user relationship
period for a particular game to be the date a player purchases or converts from virtual currency to a game token through the date
we estimate the user plays the game for the last time. This computation is performed on a user by user basis. Then, the results
for all analyzed users are averaged to determine an estimated end user relationship period for each game. Revenues from in-game
payments of each month are recognized over the user relationship period estimated for that game.
The consideration of user relationship period
with each online game is based on our best estimate that takes into account all known and relevant information at the time of assessment.
We assess the estimated user relationships period for each game on a quarterly basis. Any adjustments arising from changes in the
user relationship period as a result of new information will be accounted as a change in accounting estimate in accordance with
ASC 250 Accounting Changes and Error Corrections.
Exclusive third party developed
games
Under certain exclusive arrangements, we
pay additional license fees to the game developers as we are entitled to an exclusive right to operate third party developed games
in specified geographic areas. Based on ASC 350, we have adopted an accounting policy to recognize the exclusive license fee as
an intangible asset upon the commercial launch of the related online games. This intangible asset is amortized on a straight-line
basis over the shorter of the economic life or license period of the relevant online game.
Pursuant to the exclusive licensing contracts
signed between the third party game developers and us, our responsibilities in operating the licensed games vary for each game.
The determination of whether to record these revenues using gross or net method is based on an assessment of various factors, including
but not limited to whether we (i) are the primary obligor in the arrangement; (ii) have latitude in establishing the selling price;
(iii) change the product or performs part of the service, (iv) have involvement in the determination of product and service specifications.
For the game license arrangements under
which we take primary responsibilities of game operation, including determining distribution and payment channels, providing customer
services, hosting game servers, if needed, and controlling game and services specifications and pricing, we consider ourselves
to be the principal in these arrangements. Accordingly, we record online games revenues from these third party licensed games on
a gross basis. Commission fees paid to distribution channels and payment channels and content fees paid to third party game developers
are recorded as cost of revenues.
For the game license arrangements under
which our responsibilities are limited to publishing, providing payment solutions and game operating advice, we view the game developers
to be our customers and consider ourselves to be the agent in the arrangements. Accordingly, we record online games revenues from
these third party licensed games, net of fees paid to third parties upon the provision of service.
Pursuant to the terms and conditions of
certain online game exclusive license agreements entered into between game developers and us, we, as the exclusive licensee, could
sublicense a non-exclusive, non-transferable and limited license to any third party without the prior formal consent of game developers.
Under the non-exclusive and non-transferable limited license, the sub-licensee cannot further license the game to other platforms.
We received monthly revenue-based royalty payments from all sub-licensees. We view the third-party sub-licensees operators as our
customers and recognize revenues on a net basis, as we do not have the primary responsibility for fulfillment and acceptability
of the game services.
Similar to other online games, the exclusive
third party developed games are free to play and players can pay for virtual items for better in-game experience. For exclusive
third party games, the consumption details can be provided by third party developers or we have access to such data. Therefore,
we recognize revenues based on item-based model: (1) for consumable items, the revenue is recognized immediately upon consumption;
(2) for perpetual items, the revenue is recognized ratably over the user relationship period of a specific game as described. The
determination of user relationship period is the same as what is described in “Non-exclusive third party developed games”
above.
Self-developed games
Revenues derived from self-developed games
are recorded on a gross basis as we act as a principal to fulfill all obligations. Considering that revenues derived from self-developed
games were immaterial to us for the years presented, we do not maintain information on consumption details of in-game virtual items,
and only maintains limited information related to the frequency of log-ons for our self-developed games. Given that certain historical
data is not available, we use the user relationship period of third party games with similar popularity, gaming experience and
sales to determine the estimated period of user relationship for our self-developed games.
Membership
We operate a membership subscription program
where subscription members can have enhanced user privileges when using YY Client and live streaming channels. The membership fee
is collected up-front from subscribers. The receipt of the revenue is initially recorded as deferred revenue and revenue is recognized
ratably over the period of the subscription when services are rendered. Unrecognized portion beyond 12 months from balance sheet
date is classified as long-term deferred revenue.
Others
Other revenues mainly include online education
revenues and advertising revenues.
Online education revenues
Educational programs and services consist
of vocational training and language training courses. The course fee is generally paid in advance and is initially recorded as
deferred revenue. Revenue for regular courses is recognized proportionately as the classes are attended, and is reported net of
scholarships and course fee refunds. Students are entitled to one trial class of the purchased course and course fee is fully refundable
if a student decides not to take the remaining course after the trial class. No refund will be provided to a student who withdraws
from a course after the trial period, and revenue is recognized for the amount collected. Course fee refunds were insignificant
over the period presented.
In addition to regular courses, we also
provide a package of several regular courses to students, which have individual fair value in the market. Pursuant to the applicable
accounting guidance, we have accounted for these course packages as a multiple-element arrangement because each individual course
qualifies as a single unit of accounting, and allocated the course fee from the course package to each individual course in the
package based on its relative fair value. We recognize revenue equal to the fair value allocated to individual courses proportionately
as the classes are attended.
Students are granted a right to retake the
courses at a substantial discount in the circumstances where the students fail to achieve certain score targets for some specific
courses. The discount arrangement has a stand-alone value and qualifies as a separate unit of accounting under U.S. GAAP. Therefore,
we have accounted for those courses as a multiple-element arrangement and allocated a portion of the initial course fee to the
substantial discount based on a breakage rate. The breakage rate is determined based on our historical data. The amount allocated
to the substantial discount is deferred and recognized as revenue upon the expiration of the retaking right, which is generally
six months after the end of the initial course term.
We also sell pre-paid cards primarily to
distributors. Pre-paid card sales represent prepaid service fees received from students for online courses. The prepaid service
fee is recorded as deferred revenue upon receiving the upfront cash payment. Revenue is recognised on a gross basis based on the
selling price of the distributors to the students and is recognized over the period the online course is available to the students,
which generally is from the enrolment date to the completion of the relevant professional examination date.
Advertising
revenues
Advertising revenues are derived principally
from sales of various forms of advertising and provision of promotion campaigns on our live streaming platforms by way of advertisement
display or integrated promotion activities in shows and programs on our live streaming platforms. Such formats generally include
but are not limited to banners, text-links, videos, logos, and buttons. Advertisements on our platforms are generally charged on
the basis of duration, and advertising contracts are signed to establish the fixed price and the advertising services to be provided.
Where collectability is reasonably assured, advertising revenues from advertising contracts are recognized ratably over the contract
period of display.
We enter into advertising contracts directly
with advertisers or third party advertising agencies that represent advertisers. Contract terms generally range from 1 to 3 months.
Both third party advertising agencies and direct advertisers are generally billed at the end of the display period and payments
are due usually within 6 months.
Where our customers purchase multiple advertising
spaces with different display periods in the same contract, we allocate the total consideration to the various advertising elements
based on the relative selling price method and recognize revenue for the different elements over their respective display periods.
The following hierarchy should be followed when determining the appropriate selling price for each element: (1) vendor specific
objective evidence (“VSOE”), (2) third party evidence (“TPE”), and (3) best estimate of selling price (“BESP”).
Given that the VSOE or TPE of the selling price cannot be determined, we have adopted a policy to allocate the fair values of different
advertising elements based on the best estimate selling prices of each advertisement within the contract taking into consideration
the standard price list and historical discounts granted. We recognize revenue on the elements delivered and defers the recognition
of revenue for the fair value of the undelivered elements until the remaining obligations have been satisfied. Where all of the
elements within an arrangement are delivered uniformly over the agreement period, the revenues are recognized on a straight line
basis over the contract period.
Transactions
with third party advertising agencies
For contracts entered into with third party
advertising agencies, the third party advertising agencies will in turn sell the advertising services to advertisers. Revenue is
recognized ratably over the contract period of display based on the following criteria:
|
·
|
there is persuasive evidence that an arrangement exists—we enter into framework and execution agreements with the advertising
agencies, specifying price, advertising content, format and timing;
|
|
·
|
price is fixed or determinable—the price charged to the advertising agencies are specified in the agreements, including
relevant discount and rebate rates;
|
|
·
|
services are rendered—we recognize revenue ratably as the elements are delivered over the contract period of display;
and
|
|
·
|
collectability is reasonably assured—we assess the credit history of each advertising agency before entering into any
framework and execution agreements. If the collectability from the agencies is assessed as not reasonably assured, we recognize
revenue only when the cash is received and all the other revenue criteria are met.
|
We provide sales incentives in the forms
of discounts and rebates to third party advertising agencies based on purchase volume. As the advertising agencies are viewed as
the customers in these transactions, revenue is recognized based on the price charged to the agencies, net of sales incentives
provided to the agencies. Sales incentives are estimated and recorded at the time of revenue recognition based on the contracted
rebate rates and estimated sales volume based on historical experience.
Transactions
with advertisers
We also enter into advertisement contracts
directly with advertisers. Similar to transactions with third party advertising agencies, we recognize revenue ratably as the elements
are delivered over the contract periods of display. The terms and conditions, including price, are fixed according to the contract
between the advertisers and us. We also perform a credit assessment of all advertisers prior to entering into contracts. Revenue
is recognized based on the amount charged to the advertisers, net of discounts.
Advances from customers and deferred
revenue
Advances from customers primarily consist
of prepayments from users in the form of our virtual currency that are not yet consumed or converted into game tokens, and upon
the consumption or conversion, are recognized as revenue according to the prescribed revenue recognition policies described above.
Deferred revenue primarily consists of the unamortized game tokens, prepaid subscriptions under the membership program and unamortized
revenue from virtual items in our various channels on our platforms, where there is still an implied obligation to be provided
by us which will be recognized as revenue when all of the revenue recognition criteria are met.
Accounts receivable, net
Accounts receivable are presented net of
allowance for doubtful accounts. We use specific identification in providing for bad debts when facts and circumstances indicate
that collection is doubtful and a loss is probable and estimable. If the financial condition of its customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional allowance would be required.
We maintain an allowance for doubtful accounts
which reflects our best estimate of amounts that potentially will not be collected. We determine the allowance for doubtful accounts
on an individual basis taking into consideration various factors, including, but not limited to, historical collection experience,
credit-worthiness of the debtors and the age of the individual receivables balance. Additionally, we make specific bad debt provisions
based on any specific knowledge we have acquired that might indicate that an account is uncollectible. The facts and circumstances
of each account may require us to use substantial judgment in assessing its collectability.
Consolidation
Our consolidated financial statements include
the financial statements of our company, our subsidiaries, variable interest entities (“VIEs”) for which we or our
subsidiaries are the primary beneficiaries. All transactions and balances among our company, subsidiaries and VIEs have been eliminated
upon consolidation.
A subsidiary is an entity in which our company,
directly or indirectly, controls more than one half of the voting power, has the power to appoint or remove the majority of the
members of the board of directors or to cast a majority vote at each meeting of directors, or has the power to govern the financial
and operating policies of the investee under a statute or agreement among the entity’s shareholders or equity holders.
A VIE is an entity in which our company,
or our subsidiary, through contractual agreements, bears the risks of, and enjoys the rewards normally associated with ownership
of the entity, and therefore our company or our subsidiary is the primary beneficiary of the entity. In determining whether our
company or our subsidiaries are the primary beneficiary, we considered whether we have the power to direct activities that are
significant to the VIE’s economic performance, and also our obligation to absorb losses of the VIE 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, Bilin Changxiang and ultimately we hold all the variable interests of the VIEs and have been determined to be the
primary beneficiary of the VIEs.
Foreign ownership of internet-based businesses
is subject to significant restrictions under current PRC laws and regulations. We conduct our operations in China primarily through
a series of contractual arrangements entered into among Beijing Huanju Shidai, our PRC subsidiary, Guangzhou Huaduo and Beijing
Tuda, as well as Guangzhou Huaduo and Beijing Tuda’s shareholders. Based on our evaluations of the relationships between
us and Beijing Tuda and Guangzhou Huaduo, the economic benefit flow of contractual arrangements made with them, as well as the
controls conferred to us through these contractual arrangements enacted, we consider, through Beijing Huanju Shidai, we exercise
effective control over Guangzhou Huaduo and Beijing Tuda, receive substantially all of their economic benefits and residual returns,
and absorb substantially all the risks and expected losses from these two companies as if we were their sole shareholder. We also
have an exclusive option to purchase all of the equity interests in each of Beijing Tuda and Guangzhou Huaduo when and if PRC law
permits so and also the exclusive right to require any nominee shareholder of Beijing Tuda or Guangzhou Huaduo to transfer its
interest in them to any person designated by us. A similar mechanism exists among Bilin Changxiang, Bilin Online and its shareholder.
For a detailed description of these contractual arrangements, see “Item 7. Major Shareholders and Related Party Transactions—B.
Related Party—Contractual Arrangements with Beijing Tuda.” Based on our evaluation, we consider each of Beijing Tuda,
Guangzhou Huaduo and Bilin Online to be our VIE. Beijing Huanju Shidai, our wholly owned subsidiary in China, is the primary beneficiary
of our VIEs, Beijing Tuda and Guangzhou Huaduo, while Bilin Changxiang is the primary beneficiary of Bilin Online; therefore, we
consolidate the results of Beijing Tuda and Guangzhou Huaduo in our consolidated financial statements under U.S. GAAP.
As advised by our PRC counsel, Fangda Partners,
the contractual arrangements among Beijing Huanju Shidai and Beijing Tuda and its shareholders, the contractual arrangements among
Beijing Huanju Shidai and Guangzhou Huaduo and its shareholders and the contractual arrangements among Bilin Changxiang and Bilin
Online and its shareholder, governed by PRC law, are valid, binding and enforceable, and do not violate PRC laws currently in effect.
However, as advised by our PRC legal counsel, because of the substantial uncertainties involved, if such contracts are held to
be unenforceable, or if there are changes in PRC laws and regulations that affect our ability to control Beijing Tuda, Guangzhou
Huaduo and Bilin Online, we may be precluded from consolidating these companies in the future. See “Item 3. Key Information—D.
Risk Factors—Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of
draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and
business operations.”
We established two funds entities, namely
Engage L.P. and Shanghai Yilian, (collectively, the “Funds”), in March and June 2015, respectively. We hold 93.5% of
interests in the Funds. We assesse that we exercise controls and are entitled to the various returns of the Funds and therefore
the Funds have been accounted for as subsidiaries of and have been consolidated by us in accordance with ASC 810.
We deconsolidates our subsidiaries in accordance
with ASC 810 as of the date we cease to have a controlling financial interest in our subsidiaries.
We account for the deconsolidation of our
subsidiaries by recognizing a gain or loss in net income/loss attributable to us in accordance with ASC 810. This gain or loss
is measured at the date our 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 our subsidiaries being deconsolidated, and the
carrying amount of any non-controlling interest in our 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 our subsidiaries
being deconsolidated.
Share-based compensation
We awarded a number of share-based compensation
to our employees and non-employees (such as consultants), which include share options, restricted shares and restricted share units
granted to employees and non-employees, share-based awards granted to our chief executive officer and chairman and share-based
awards granted in relation to our acquisition of NeoTasks Inc. The details of these share-based awards and the respective terms
and conditions are described in “Share-based compensation” in Note 23 to our audited consolidated financial statements
for the years ended December 31, 2014, 2015 and 2016, which are included elsewhere in this annual report on Form 20-F.
Share options
Options were initially accounted for as
equity-classified awards because there are no explicit repurchase rights specified in the award documents and the number of shares
of our common shares issued under these awards are fixed and determined at the time of grants. All options to employees and non-employees
are measured based on the grant date fair value of the award and recognized as compensation expense based on the graded-vesting
method, net of estimated forfeitures, over the requisite service period, with a corresponding impact reflected in additional paid-in
capital. The options to non-employees are re-measured at each reporting date using the fair value as at each period end. The compensation
expense is recognized using the graded-vesting method. Upon the completion of the initial public offering, the share options granted
to a non-employee were remeasured at the stock price of our common share. All share options granted to the non-employee were exercised
in 2013.
Restricted shares
Restricted shares issued to our employees
are measured based on the grant date fair value of the award and recognized as compensation expense based on the graded-vesting
method, net of estimated forfeitures, over the requisite service period, with a corresponding impact reflected in additional paid-in
capital. The fair value of restricted shares was based on the fair value of our underlying common shares on the grant date.
We account for restricted shares issued
to non-employees are measured at fair value at the date the services are completed. These awards are re-measured at each reporting
date using the fair value as at each period end until the measurement date. The compensation expenses is recognized using the graded
vesting method.
We are required to estimate forfeiture at
the time of grant and revise those estimated in subsequent periods if actual forfeitures differ from those estimates. Historical
data was used to estimate pre-vesting forfeitures and record share-based compensation expenses only for those awards that we expect
to vest.
The following table sets forth certain information
regarding the restricted shares granted to our employees and non-employees at different dates.
Grant Date
|
|
Restricted Shares
Granted
|
|
|
Fair Value Per Common
Share as of the Grant Date
|
|
|
Type/Methodology
of Valuation
|
|
|
(US$)
|
|
|
|
|
|
|
January 1, 2010
|
|
|
23,686,542
|
|
|
|
0.1590
|
|
|
Retrospective/ GTM
(1)
|
February 1, 2010
|
|
|
4,257,335
|
|
|
|
0.1875
|
|
|
Retrospective/ GTM
(1)
|
April 1, 2010
|
|
|
2,000,000
|
|
|
|
0.2721
|
|
|
Retrospective/ GTM
(1)
|
July 1, 2010
|
|
|
20,060,000
|
|
|
|
0.4666
|
|
|
Retrospective/ GTM
(1)
|
October 1, 2010
|
|
|
500,000
|
|
|
|
0.6988
|
|
|
Retrospective/ GTM
(1)
|
January 1, 2011
|
|
|
10,846,800
|
|
|
|
0.9362
|
|
|
Retrospective/ Backsolve
(2)
|
|
(1)
|
GTM denotes the guideline transaction method under the market approach based on the enterprise value to revenue multiples of
our own equity transactions close to the valuation date.
|
|
(2)
|
Backsolve denotes the back solve method under the market approach based on our own equity transactions as of the valuation
date.
|
Restricted share units
Restricted share units issued to our employees
are measured based on the grant date fair value of the award and recognized as compensation expense based on the graded-vesting
method, net of estimated forfeitures, over the requisite service period, with a corresponding impact reflected in additional paid-in
capital. The fair value of restricted shares was based on the fair value of our underlying common shares on the grant date.
We are required to estimate forfeiture at
the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ with those estimates. Historical
data was used to estimate pre-vesting forfeitures and record share-based compensation expenses only for those awards that we expect
to vest.
The following table sets forth certain information
regarding the restricted share units granted to our employees in 2014, 2015 and 2016 with share and per share information.
Grant Date
|
|
Restricted
Shares Granted
|
|
|
Fair Value Per
Common Share as of
the Grant Date
|
|
|
Type/Methodology
of Valuation
|
|
|
|
(US$)
|
|
|
|
|
|
|
|
February 1, 2014
|
|
|
330,000
|
|
|
|
3.1230
|
|
|
Contemporaneous/Stock price
(1)
|
April 1, 2014
|
|
|
660,000
|
|
|
|
4.0920
|
|
|
Contemporaneous/Stock price
(1)
|
April 30, 2014
|
|
|
220,000
|
|
|
|
2.8680
|
|
|
Contemporaneous/Stock price
(1)
|
May 1, 2014
|
|
|
800,000
|
|
|
|
3.0110
|
|
|
Contemporaneous/Stock price
(1)
|
June 16, 2014
|
|
|
292,500
|
|
|
|
3.5035
|
|
|
Contemporaneous/Stock price
(1)
|
June 20, 2014
|
|
|
6,009,695
|
|
|
|
3.5560
|
|
|
Contemporaneous/Stock price
(1)
|
October 30, 2014
|
|
|
1,600,400
|
|
|
|
3.9525
|
|
|
Contemporaneous/Stock price
(1)
|
April 30,2015
|
|
|
455,400
|
|
|
|
3.1780
|
|
|
Contemporaneous/Stock price
(1)
|
May 1, 2015
|
|
|
400,000
|
|
|
|
3.3665
|
|
|
Contemporaneous/Stock price
(1)
|
June 30, 2015
|
|
|
829,200
|
|
|
|
3.4760
|
|
|
Contemporaneous/Stock price
(1)
|
July 1, 2015
|
|
|
13,621,544
|
|
|
|
3.3515
|
|
|
Contemporaneous/Stock price
(1)
|
August 6, 2015
|
|
|
90,000
|
|
|
|
3.0620
|
|
|
Contemporaneous/Stock price
(1)
|
October 30, 2015
|
|
|
180,000
|
|
|
|
2.8470
|
|
|
Contemporaneous/Stock price
(1)
|
November 7, 2015
|
|
|
292,500
|
|
|
|
2.9180
|
|
|
Contemporaneous/Stock price
(1)
|
December 30, 2015
|
|
|
140,000
|
|
|
|
3.1465
|
|
|
Contemporaneous/Stock price
(1)
|
January 1, 2016
|
|
|
192,000
|
|
|
|
3.0350
|
|
|
Contemporaneous/Stock price
(1)
|
June 30, 2016
|
|
|
1,338,008
|
|
|
|
1.6935
|
|
|
Contemporaneous/Stock price
(1)
|
Upon the completion of the initial public
offering, the fair values of restricted share units are based on stock price of our company.
Acquisition
We apply the purchase method of accounting
to account for our acquisitions. We determine the acquisition date based on the date at which all required licenses are transferred
to us and we obtained control of the acquiree.
Purchase consideration generally consists
of cash, contingent consideration and equity securities. In estimating the fair value of equity compensation, we consider both
income and market approach and selected the methodology that is most indicative of our fair value in an orderly transaction between
market participants as of the measurement date. Under the market approach, we utilize publicly-traded comparable company information
to determine the revenue and earnings multiples that are used to value our equity securities. Under the income approach, we determine
the fair value of our equity securities based on the estimated future cash flow discounted by an estimated weighted-average cost
of capital, which reflects the overall level of inherent risk and the rate of return an outside investor would expect to earn.
We base the cash flow projections on forecasted cash flows derived from the most recent annual financial forecast using a terminal
value based on the perpetuity growth model.
In estimating the fair value of the contingent
consideration recognized on the acquisition date, we consider the trinomial tree model. Under this model, we perform a scenario
analysis and calculate the fair value of the contingent consideration based on the net present value of the total contingent payments
under each scenario and the expected probability of each scenario.
The identifiable assets acquired and liabilities
and contingent liabilities assumed in a business acquisition are measured initially at the fair value at the acquisition date.
The excess of the cost of acquisition over the fair value of the identifiable net assets acquired is recorded as goodwill.
We are responsible for determining the fair
value of the equity issued, assets acquired, liabilities assumed and intangibles identified as of the relevant acquisition date.
Post-acquisition expenses are charged to general and administrative expenses directly.
Goodwill
Goodwill represents the amount by which
the cost of acquired net assets in a business acquisition exceeds the fair value of the net identifiable assets on the date of
purchase. Goodwill is carried at cost less accumulated impairment losses. Goodwill is allocated to the reporting units that are
expected to benefit from the business combination in which the goodwill arises for the purpose of impairment testing. If the carrying
value of the reporting unit exceeds its fair value, an impairment loss is recorded to the extent that the carrying value of goodwill
exceeds its fair value. We have determined that the reporting units for testing goodwill impairment are the operating segments
that constitute a business for which discrete financial information is available and for which management regularly reviews the
operating results.
Estimating fair value is performed by utilizing
various valuation techniques, with the primary technique being the discounted cash flow method. There are inherent limitations
in any estimation technique and a minor change in the assumption could result in a significant change in its estimate of fair value,
thereby increasing or decreasing the amounts of our consolidated assets, shareholders’ equity and net income or loss.
We perform an impairment test on October
1 of each year or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
RMB310.1 million and RMB17.7 million (US$2.5 million) of impairment of goodwill were recognized for the year ended December 31,
2015 and 2016, respectively.
Intangible assets
Intangible assets that are acquired in business
acquisitions are recognized apart from goodwill if the intangible assets arise from contractual or other legal rights, or are separately
identifiable if the intangible assets do not arise from contractual or other legal rights.
The costs of determinable-lived intangible
assets are amortized to expense over their estimated life and stated at cost (fair value at acquisition) less accumulated amortization.
The value of indefinite-lived intangible assets is not amortized, but tested for impairment annually on October 1 of each year,
or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We reassess
indefinite-lived intangible assets at each reporting period to determine whether events or circumstances continue to support an
indefinite useful life.
Impairment of investment, long-lived
assets and intangible assets
The carrying amounts of investment, long-lived
assets and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying
amount of assets to future undiscounted net cash flows expected to be generated by the assets. Such assets are considered to be
impaired if the sum of the expected undiscounted cash flow is less than carrying amount of the assets. The impairment to be recognized
is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. RMB4.0 million of impairment
of an investment and RMB5.7 million of impairment of intangible assets were recognized for the year ended December 31, 2014. RMB6.0
million of impairment of an investment and RMB57.2 million of impairment of intangible assets were recognized for the year ended
December 31, 2015. RMB80.1 million (US$11.5 million) of impairment of investments, RMB43.0 million (US$6.2 million) of impairment
of prepayment to a game developer and RMB3.8 million (US$0.6 million) of impairment of intangible assets were recognized for the
year ended December 31, 2016.
Taxation and uncertain tax positions
Current income tax is provided on the basis
of income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for income
tax purposes. In accordance with the regulations of the relevant tax jurisdictions, deferred income taxes are accounted for using
an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset
or liability for tax purpose. The effect on deferred taxes of a change in tax rates is recognized in statement of operations and
comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if
it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
We currently have deferred tax assets resulting
from net operating loss carryforwards and deductible temporary differences, all of which are available to reduce future tax payable
in our significant tax jurisdictions. The largest component of our deferred assets are the temporary differences generated by our
PRC subsidiary and VIE due to recognition of the deferred revenue. In assessing whether such deferred tax assets can be realized
in the future, we need to make judgments and estimates on the ability of each of our PRC subsidiary and VIE to generate taxable
income in the future years. To the extent that we believe it is more likely than not that some portion or the entire amount of
deferred tax assets will not be realized, we established a total valuation allowance to offset the deferred tax assets. As of December
31, 2014, 2015 and 2016, a total valuation allowance of RMB24.4 million, RMB53.3 million and RMB80.7 million (US$11.6 million),
respectively, was recognized against deferred tax assets. If we subsequently determine that all or a portion of the temporary differences
are more like than not to be realized, the valuation allowance will be released, which will result in a tax benefit in our consolidated
statements of operations.
We adopted the guidance on accounting for
uncertainty in income taxes on January 1, 2008. The guidance prescribes a more likely than not threshold for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition
of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for
interest and penalties associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures.
Significant judgment is required in evaluating our uncertain tax positions and determining the relevant provision for income taxes.
The adjustment to the opening balance of retained earnings as of January 1, 2008 as a result of the implementation of the guidance
was zero. The interest and penalties associated with tax positions for the years ended December 31, 2014, 2015 and 2016 was zero.
As of December 31, 2014, 2015 and 2016, we had no significant unrecognized uncertain tax positions.
Foreign currency
We use Renminbi as our reporting currency.
The functional currency of our company and our subsidiaries, incorporated in the Cayman Islands, British Virgin Islands and Hong
Kong is U.S. dollars, while the functional currency of the other entities is Renminbi, which is their respective local currency.
In the consolidated financial statements, the financial information of our company and our subsidiaries which use U.S. dollars
as their functional currency have been translated into Renminbi. Assets and liabilities are translated at the exchange rates on
the balance sheet date, equity amounts are translated at historical exchange rates, and revenues, expenses, gains and losses are
translated using the average rate for the period. Translation adjustments arising from these are reported as foreign currency translation
adjustments and are shown as a component of other comprehensive income or loss in the statement of operations and comprehensive
income.
Foreign currency transactions denominated
in currencies other than functional currency are translated into the functional currency using the exchange rates prevailing at
the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are
re-measured at the applicable rates of exchange in effect at that date. Foreign exchange gains and losses resulting from the settlement
of such transactions and from re-measurement at year-end are recognized in foreign currency exchange gains (losses), net in the
consolidated statements of operations and comprehensive income.
Convertible Bonds
In accordance with ASC subtopic 470-20,
the convertible debts are initially carried at the principal amount of the convertible debts. Related debts issuance cost, are
subsequently amortized using effective interest method as adjustments to interest expense from the debt issuance date to its first
put date. Convertible debts are classified as a current liability if they are or will be callable by us or puttable by the debt
holders within one year from the balance sheet date, even though liquidation may not be expected within that period.
Results of Operations
The following table sets forth a summary
of our consolidated results of operations for the years indicated. Our business has grown rapidly since our inception, and our
limited operating history makes it difficult to predict future operating results. We believe that period-to-period comparisons
of results of operations should not be relied upon as indicative of future performance.
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
% of total
net
revenues
|
|
|
RMB
|
|
|
% of total
net
revenues
|
|
|
RMB
|
|
|
US$
|
|
|
% of total
net
revenues
|
|
Total net revenues
(1)(2)
|
|
|
3,678,368
|
|
|
|
100.0
|
|
|
|
5,897,249
|
|
|
|
100.0
|
|
|
|
8,204,050
|
|
|
|
1,181,629
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Live streaming
|
|
|
2,475,379
|
|
|
|
67.3
|
|
|
|
4,539,857
|
|
|
|
77.0
|
|
|
|
7,027,227
|
|
|
|
1,012,131
|
|
|
|
85.7
|
|
Online games
|
|
|
811,699
|
|
|
|
22.1
|
|
|
|
771,882
|
|
|
|
13.1
|
|
|
|
634,325
|
|
|
|
91,362
|
|
|
|
7.7
|
|
Membership
|
|
|
205,199
|
|
|
|
5.6
|
|
|
|
291,310
|
|
|
|
4.9
|
|
|
|
284,860
|
|
|
|
41,028
|
|
|
|
3.5
|
|
Others
|
|
|
186,091
|
|
|
|
5.0
|
|
|
|
294,200
|
|
|
|
5.0
|
|
|
|
257,638
|
|
|
|
37,108
|
|
|
|
3.1
|
|
Cost of revenues
|
|
|
(1,849,149
|
)
|
|
|
(50.3
|
)
|
|
|
(3,579,744
|
)
|
|
|
(60.7
|
)
|
|
|
(5,103,430
|
)
|
|
|
(735,047
|
)
|
|
|
(62.2
|
)
|
Gross profit
|
|
|
1,829,219
|
|
|
|
49.7
|
|
|
|
2,317,505
|
|
|
|
39.3
|
|
|
|
3,100,620
|
|
|
|
446,582
|
|
|
|
37.8
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(431,188
|
)
|
|
|
(11.7
|
)
|
|
|
(548,799
|
)
|
|
|
(9.3
|
)
|
|
|
(675,230
|
)
|
|
|
(97,253
|
)
|
|
|
(8.2
|
)
|
Sales and marketing expenses
|
|
|
(102,527
|
)
|
|
|
(2.8
|
)
|
|
|
(312,870
|
)
|
|
|
(5.3
|
)
|
|
|
(387,268
|
)
|
|
|
(55,778
|
)
|
|
|
(4.7
|
)
|
General and administrative expenses
|
|
|
(223,019
|
)
|
|
|
(6.1
|
)
|
|
|
(358,474
|
)
|
|
|
(6.1
|
)
|
|
|
(482,437
|
)
|
|
|
(69,485
|
)
|
|
|
(5.9
|
)
|
Goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
(310,124
|
)
|
|
|
(5.3
|
)
|
|
|
(17,665
|
)
|
|
|
(2,544
|
)
|
|
|
(0.2
|
)
|
Fair value change of contingent consideration
|
|
|
—
|
|
|
|
—
|
|
|
|
292,471
|
|
|
|
5.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total operating expenses
|
|
|
(756,734
|
)
|
|
|
(20.6
|
)
|
|
|
(1,237,796
|
)
|
|
|
(21.0
|
)
|
|
|
(1,562,600
|
)
|
|
|
(225,060
|
)
|
|
|
(19.0
|
)
|
Gain on deconsolidation and disposal of subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
103,960
|
|
|
|
14,973
|
|
|
|
1.3
|
|
Other income
|
|
|
6,319
|
|
|
|
0.2
|
|
|
|
82,300
|
|
|
|
1.4
|
|
|
|
129,504
|
|
|
|
18,652
|
|
|
|
1.6
|
|
Operating income
|
|
|
1,078,804
|
|
|
|
29.3
|
|
|
|
1,162,009
|
|
|
|
19.7
|
|
|
|
1,771,484
|
|
|
|
255,147
|
|
|
|
21.6
|
|
Other non-operating income/(expense)
|
|
|
36,714
|
|
|
|
1.0
|
|
|
|
(2,165
|
)
|
|
|
0.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gain on partial disposal of associates
|
|
|
999
|
|
|
|
0.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,061
|
|
|
|
3,610
|
|
|
|
0.3
|
|
Foreign currency exchange (losses)/gains, net
|
|
|
(10,399
|
)
|
|
|
(0.3
|
)
|
|
|
(38,099
|
)
|
|
|
(0.6
|
)
|
|
|
1,158
|
|
|
|
167
|
|
|
|
0.0
|
|
Interest expense
|
|
|
(56,607
|
)
|
|
|
(1.5
|
)
|
|
|
(97,125
|
)
|
|
|
(1.6
|
)
|
|
|
(81,085
|
)
|
|
|
(11,679
|
)
|
|
|
(1.0
|
)
|
Interest income
|
|
|
164,969
|
|
|
|
4.5
|
|
|
|
137,892
|
|
|
|
2.3
|
|
|
|
67,193
|
|
|
|
9,678
|
|
|
|
0.8
|
|
Income before income tax expenses
|
|
|
1,214,480
|
|
|
|
33.0
|
|
|
|
1,162,512
|
|
|
|
19.7
|
|
|
|
1,783,811
|
|
|
|
256,923
|
|
|
|
21.7
|
|
Income tax expenses
|
|
|
(154,283
|
)
|
|
|
(4.2
|
)
|
|
|
(178,327
|
)
|
|
|
(3.0
|
)
|
|
|
(280,514
|
)
|
|
|
(40,402
|
)
|
|
|
(3.4
|
)
|
Income before share of income in equity method investments, net of income taxes
|
|
|
1,060,197
|
|
|
|
28.8
|
|
|
|
984,185
|
|
|
|
16.7
|
|
|
|
1,503,297
|
|
|
|
216,521
|
|
|
|
18.3
|
|
Share of income in equity method investments, net of income taxes
|
|
|
4,275
|
|
|
|
0.1
|
|
|
|
14,120
|
|
|
|
0.2
|
|
|
|
8,279
|
|
|
|
1,192
|
|
|
|
0.1
|
|
Net income
|
|
|
1,064,472
|
|
|
|
28.9
|
|
|
|
998,305
|
|
|
|
16.9
|
|
|
|
1,511,576
|
|
|
|
217,713
|
|
|
|
18.4
|
|
Less: Net loss attributable to the non-controlling interest shareholders and the mezzanine classified non-controlling interest shareholders
|
|
|
—
|
|
|
|
—
|
|
|
|
(34,938
|
)
|
|
|
(0.6
|
)
|
|
|
(12,342
|
)
|
|
|
(1,778
|
)
|
|
|
(0.2
|
)
|
Net income attributable to YY Inc.
|
|
|
1,064,472
|
|
|
|
28.9
|
|
|
|
1,033,243
|
|
|
|
17.5
|
|
|
|
1,523,918
|
|
|
|
219,491
|
|
|
|
18.6
|
|
|
(1)
|
Net of rebates and discounts.
|
|
(2)
|
For the year ended December 31, 2016, we presented our revenue in four categories - live streaming, online games, membership
and others. We also have retrospectively changed the revenue presentation for the year ended December 31, 2015 and 2014.
|
Year Ended December 31, 2016 Compared
to Year Ended December 31, 2015
Net Revenues.
Our net revenues
increased by 39.1% from RMB5,897.2 million in 2015 to RMB8,204.1 million (US$1,181.6 million) in 2016. This increase was primarily
driven by the increase in live streaming revenues.
Live streaming revenues.
Our live streaming revenues, which consisted of revenues from YY Live platform and Huya broadcasting platform, increased by
54.8% from RMB4,539.9 million in 2015 to RMB7,027.2 million (US$1,012.1 million) in 2016. The overall increase was primarily
caused by an increase in the number of paying users from approximately 5.8 million in 2015 to 11.0 million in 2016, but was
partially offset by ARPU decreased from RMB780.5 in 2015 to RMB637.8 (US$91.9) in 2016. The increase in paying users were
primarily due to (a) our ability to offer new and attractive products and services that allow us to monetize our platforms;
(b) our ability to attract and retain a large and engaged user base through hosting an increasing number of events and
activities; and (c) our ability to attract certain popular performers and channel owners.
Online game revenues.
Revenues
from online games decreased by 17.8% from RMB771.9 million in 2015 to RMB634.3 million (US$91.4 million) in 2016. This decline
was primarily a result of the decrease in paying users and ARPU, which reflects the continued weakness in China’s web game
market.
Our paying users for online games decreased from approximately 1,214,000 for 2015 to 1,189,000 for 2016.
Membership revenues.
Our membership
revenues, which consisted of membership subscription fees, decreased by 2.2% from RMB291.3 million in 2015 to RMB284.9 million
(US$41.0 million) in 2016.
Other Revenues.
Other revenues,
which mainly include revenues from our online education platform and online advertising revenues, decreased by 12.4% to RMB257.6
million (US$37.1 million) for 2016 from RMB294.2 million for 2015.
Cost of Revenues.
Our cost
of revenues increased by 42.6% from RMB3,579.7 million in 2015 to RMB5,103.4million (US$735.0million) in 2016. The increase in
our cost of revenues was due in large part to an increase in our revenue sharing fees and content costs, which consist of the payments
to performers, channel owners and content providers, which amounted to RMB3,790.6 million (US$546.0 million) in 2016, representing
a 61.8% increase from RMB2,343.2 million in 2015. This increase in revenue sharing fees and content costs was in line with the
increase in revenues and was primarily due to higher levels of user engagement and spending driven by promotional activities, as
well as investments in expanding the amount of new and innovative content we provide to users. Bandwidth costs increased 14.3%
from RMB570.2 million in 2015 to RMB651.7 million (US$93.9 million) in 2016, primarily reflecting the continued user base expansion
and the video quality improvements. In addition, salary and welfare costs increased 17.3% from RMB198.2 million in 2015 to RMB232.5
million (US$33.5 million) in 2016, mainly due to our hiring of additional employees to serve our rapidly expanding user base as
well as the raise of salary level.
Operating Expenses.
Our operating
expenses increased by 26.2% from RMB1,237.8 million in 2015 to RMB1,562.6million (US$225.1million) in 2016, primarily due to an
increase in research and development expenses, which was associated with our commitment to research and development and the advancements
in our technology development, and general and administrative expenses driven by our company’s overall business expansion,
as well as sales and marketing expenses, particularly in relation to mobile product promotion.
Research and development expenses.
Our research and development expenses increased by 23.0% from RMB548.8 million in 2015 to RMB675.2 million (US$97.3 million) in
2016. This increase was primarily due to an increase in salary level and the number of our research and development staff, especially
engineers, which accounts for approximately 50.7% of our total number of employees in 2016.
Sales and marketing expenses.
Our sales and marketing expenses increased by 23.8% from RMB312.9 million in 2015 to RMB387.3 million (US$55.8 million) in 2016.
This increase was primarily due to the promotion of mobile products.
General and administrative expenses.
Our general and administrative expenses increased by 34.6% from RMB358.5 million in 2015 to RMB482.4 million (US$69.5 million)
in 2016. This increase was associated with the general growth of our business and the increase in investments impairment from RMB6.0
million in 2015 to RMB80.1 million in 2016.
Foreign Currency Exchange Gains (Losses).
We had net foreign currency exchange gains of RMB1.2 million (US$0.2 million) in 2016, compared to a net foreign currency exchange
losses of RMB38.1 million in 2015. Such gains were mainly due to the appreciation of U.S. dollars as we converted certain offshore
Renminbi to U.S. dollars in 2016.
Interest Income.
Our interest
income decreased from RMB137.9 million in 2015 to RMB67.2 million (US$9.7 million) in 2016. This decrease was primarily due to
lower levels of interest rate as official reductions of standard interest rates were announced by the PRC government.
Income Tax Expenses.
We recorded
income tax expenses of RMB280.5 million (US$40.4 million) in 2016 compared to RMB178.3 million in 2015. This increase was primarily
due to the higher income before income tax expenses recorded by certain of our PRC subsidiaries and consolidated affiliated entities.
Net Income.
As a result of
the foregoing, we had a net income of RMB1,523.9 million (US$219.5 million) in 2016 as compared to a net income of RMB1,033.2 million
in 2015.
Year Ended December 31, 2015 Compared
to Year Ended December 31, 2014
Net Revenues.
Our net revenues
increased by 60.3% from RMB3,678.4 million in 2014 to RMB5,897.2 million in 2015. This increase was primarily due to the increased
contribution of revenues from online music and entertainment and our online dating revenues as well as other sources including
Huya broadcasting and membership program, partially offset by a decrease in our online game revenues.
Live streaming revenues.
Our
live streaming revenues, which consisted of revenues from YY Live platform and Huya broadcasting platform, increased by 83.4% from
RMB2,475.4 million in 2014 to RMB4,539.9 million in 2015. The overall increase primarily reflected an increase in the number of
paying users and, to a lesser extent, an increase in ARPU. Our number of paying users for our live streaming services increased
from approximately 3.4 million in 2014 to 5.8 million in 2015. Our ARPU for live streaming services increased from RMB726.7 in
2014 to RMB780.5 in 2015. The increase in paying users and ARPU were primarily due to (a) our ability to offer new and attractive
products and services that allow us to monetize our platforms; (b) our ability to attract and retain a large and engaged user base
through hosting an increasing number of events and activities; and (c) our ability to attract certain popular performers and channel
owners.
Online game revenues.
Revenues
from online games decreased by 4.9% from RMB811.7 million in 2014 to RMB771.9 million in 2015. This decline was primarily a result
of the decrease in paying users, which reflects the continued weakness in China’s web game market, partially offset by an
22.1% increase in ARPU of online games. Our paying users for online games decreased from approximately 1,558,000 for 2014 to 1,214,000
for 2015. The number of online games we operated as of December 31, 2014 was 210 as compared to 293 as of December 31, 2016.
Membership revenues.
Our membership
revenues, which consisted of membership subscription fees, increased by 42.0% from RMB205.2 million in 2014 to RMB291.3 million
in 2015.
Other Revenues.
Other revenues,
which mainly include revenues from our online education platform, 100 Education, online advertising revenues and ecommerce, increased
by 58.1% to RMB294.2 million for 2015 from RMB186.1 million for 2014.
Cost of Revenues.
Our cost
of revenues increased by 93.6% from RMB1,849.1 million in 2014 to RMB3,579.7 million in 2015. The increase in our cost of revenues
was due in large part to an increase in our revenue sharing fees and content costs, which consist of the payments to performers,
channel owners and content providers, which amounted to RMB2,343.2 million in 2015, representing a 106.6% increase from RMB1,134.0
million in 2014. This increase in revenue sharing fees and content costs was in line with the increase in revenues and was primarily
due to higher levels of user engagement and spending driven by promotional activities, as well as investments in expanding the
amount of new and innovative content we provide to users. Bandwidth costs increased 64.8% from RMB345.9 million in 2014 to RMB570.2
million in 2015, primarily reflecting the continued user base expansion and the video quality improvements. In addition, salary
and welfare costs increased 50.4% from RMB131.8 million in 2014 to RMB198.2 million in 2015, mainly due to our hiring of additional
employees to serve our rapidly expanding user base.
Operating Expenses.
Our operating
expenses increased by 63.6% from RMB756.7 million in 2014 to RMB1,237.8 million in 2015, primarily due to an increase in sales
and marketing expenses, particularly in relation to mobile product promotion, and general and administrative expenses driven by
our company’s overall business expansion, as well as research and development expenses, which was associated with our commitment
to research and development and the advancements in our technology development.
Research and development expenses.
Our research and development expenses increased by 27.3% from RMB431.2 million in 2014 to RMB548.8 million in 2015. This increase
was primarily due to an increase in the number of our research and development staff, especially engineers, which accounts for
approximately 52.4% of our total number of employees in 2015.
Sales and marketing expenses.
Our sales and marketing expenses increased by 205.2% from RMB102.5 million in 2014 to RMB312.9 million in 2015. This increase was
primarily due to the promotion of mobile products.
General and administrative expenses.
Our general and administrative expenses increased by 60.8% from RMB223.0 million in 2014 to RMB358.5 million in 2015. This increase
was associated with the general growth of our business and the increase in intangible assets impairment charge from RMB5.7 million
in 2014 to RMB 57.2 million in 2015.
Foreign Currency Exchange Gains (Losses).
We had net foreign currency exchange losses of RMB38.1 million in 2015, compared to a net foreign currency exchange losses of RMB10.4
million in 2014. Such losses were mainly due to the depreciation of Renminbi when we converted our off-shore Renminbi to U.S. dollars
in the third quarter of 2015; bank charges incurred in relation to such conversion also contributed to our loss.
Interest Income.
Our interest
income decreased from RMB165.0 million in 2014 to RMB137.9 million in 2015. This decrease was primarily due to lower levels of
short-term deposits, partly as a result of cash used in repurchase of our common shares in the first quarter of 2015.
Income Tax Expenses.
We recorded
income tax expenses of RMB178.3 million in 2015 compared to RMB154.3 million in 2014. This increase was primarily due to the higher
income before income tax expenses recorded by certain of our PRC subsidiaries and consolidated affiliated entities.
Net Income.
As a result of
the foregoing, we had a net income of RMB1,033.2 million in 2015 as compared to a net income of RMB1,064.5 million in 2014.
Inflation
Since our inception, inflation in China
has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year
percent changes in the consumer price index for December 2014, 2015 and 2016 were increases of 1.5%, 1.6% and 2.1%, respectively.
Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of
inflation in the future.
Recently Issued Accounting Pronouncements
The recently issued accounting pronouncements
that are relevant to us are included in note 2(ll) to our audited consolidated financial statements, which are included in this
annual report.
B.Liquidity and Capital Resources
Cash Flows and Working Capital
In recent years, we have financed our operations
primarily through cash flows from operations, the proceeds from our initial public offering in November 2012 and the proceeds from
our convertible senior notes offering in March 2014. We expect to require cash to fund our ongoing operational needs, particularly
our revenue sharing fees and content costs, salaries and benefits, bandwidth costs and potential acquisitions or strategic investments.
We believe that our current cash and cash equivalents and the anticipated cash flow from operations will be sufficient to meet
our anticipated working capital requirements and capital expenditures needs for the next 12 months. However, we may require additional
cash resources due to changing business conditions or other future developments, including any investments or acquisitions we may
decide to selectively pursue. If our existing cash resources are insufficient to meet our requirements, we may seek to sell equity
or equity-linked securities, debt securities or borrow from banks.
In March 2014, we issued an aggregate of
US$400.0 million 2.25% convertible senior notes due in 2019. The net proceeds from the sale of the notes were US$390.8 million
and will be used for general corporate purposes. As of December 31, 2016, the total carrying value of these notes were US$398.7
million. The notes bear interest at a rate of 2.25% per year, payable semiannually in arrears on April 1 and October 1 of each
year, and such notes will mature on April 1, 2019 unless earlier converted, redeem for certain tax-related events or repurchased
in accordance with their terms. We are not subject to any financial covenants or other significant restrictions under the notes.
We duly paid an interest of US$9.0 million and US$9.0 million on these convertible senior notes for 2015 and 2016, respectively,
as such interest became due. On April 1, 2017, the Company repurchased for cash the notes of an aggregate principal amount of US399.0
million. Following the settlement of the repurchase, US$1.0 million aggregate principal amount of the notes remain outstanding.
On May 4, 2014 and March 5, 2015, respectively,
our board of directors approved two share repurchase plans, the 2014 Share Repurchase Plan and the 2015 Share Repurchase Plan,
respectively, pursuant to which we may repurchase from time to time at management’s discretion, at prevailing market prices
in the open market in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, up to US$100 million for each share
repurchase plan in total of the our outstanding ADSs for a period not exceeding twelve (12) months from the date of approval by
board of directors. The 2014 Share Repurchase Plan and 2015 Share Repurchase Plan expired on May 4, 2015 and March 5, 2016, respectively.
For the year ended December 31, 2016, no share was repurchased under the 2015 Share Repurchase Plan.
On January 19, 2017, we entered into a
loan agreement with a bank, pursuant to which we borrowed a loan with a principal amount of US$30 million. The annualized
interest rate of the loan is 3-month LIBOR plus 1.5%, accruing from draw-down. The draw-down of US30 million took place on
March 8, 2017 and shall be repaid before March 1, 2018. Term deposit of RMB500 million was pledged as collateral for the loan
until March 13, 2018.
On February 17, 2017, we entered into
a loan agreement with a bank, pursuant to which we borrowed a loan with a total principal amount of US$60 million. The
annualized interest rate of the loan is 3-month LIBOR, accruing from draw-down. The first draw-down of US$45 million took
place on March 21, 2017 and the second draw-down of US$15 million took place on March 30, 2017. The loan shall be repaid
before February 9, 2018. Term deposit of RMB500 million was pledged as collateral for the loan until February 23, 2018.
As of December 31, 2014, 2015 and 2016,
we had RMB475.0 million, RMB928.9 million and RMB1,579.7 million (US$227.5 million), respectively, in cash and cash equivalents.
As of December 31, 2016, our subsidiaries,
VIEs, and VIE’s subsidiaries located in the PRC held cash and cash equivalents in the amount of RMB1,531.1 million (US$220.5
million). Aggregate undistributed earnings and reserves of our subsidiaries, VIEs, and VIE’s subsidiaries located in the
PRC that are available for distribution to the Company as of December 31, 2016 are approximately RMB4,784.4 million. We would need
to accrue and pay withholding taxes if we were to distribute funds from our subsidiaries in the PRC to our offshore subsidiaries.
We do not intend to repatriate such funds in the foreseeable future, as we plan to use existing cash balance in the PRC for general
corporate purposes.
The following table sets forth a summary
of our cash flows for the years indicated:
|
|
For the Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash provided by operating activities
|
|
|
1,301,351
|
|
|
|
1,823,442
|
|
|
|
2,421,135
|
|
|
|
348,715
|
|
Net cash used in investing activities
|
|
|
(3,954,055
|
)
|
|
|
(1,048,022
|
)
|
|
|
(1,783,138
|
)
|
|
|
(256,824
|
)
|
Net cash provided/(used in) by financing activities
|
|
|
2,402,762
|
|
|
|
(337,143
|
)
|
|
|
10,651
|
|
|
|
1,534
|
|
Net (decrease)/increase in cash and cash equivalents
|
|
|
(249,942
|
)
|
|
|
438,277
|
|
|
|
648,648
|
|
|
|
93,425
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
729,598
|
|
|
|
475,028
|
|
|
|
928,934
|
|
|
|
133,794
|
|
Effect of exchange rates change on cash and cash equivalents
|
|
|
(4,628
|
)
|
|
|
15,629
|
|
|
|
2,161
|
|
|
|
311
|
|
Cash and cash equivalents at the end of the year
|
|
|
475,028
|
|
|
|
928,934
|
|
|
|
1,579,743
|
|
|
|
227,530
|
|
Operating Activities
Net cash used in or generated from operating
activities consists primarily of our net income mitigated by non-cash adjustments, such as share-based compensation, depreciation
of property and equipment and deferred taxes, and adjusted by changes in operating assets and liabilities, such as accounts receivable
and accrued liabilities, prepayments and other assets, account payables and deferred revenue.
Net cash provided by operating activities
amounted to RMB2,421.1 million (US$348.7 million) for the year ended December 31, 2016, primarily resulting from RMB8,763.2 million
(US$1,262.2 million) of cash revenues we received, partially offset by our sales-related cash outflow of RMB4,052.2 million (US$583.6
million), which mainly consisted of the amounts due to third party game developers under revenue sharing arrangements, distributions
under arrangements with certain performers and channel owners, payment collection costs and business taxes, our employee salaries
and welfare payments of RMB863.7 million (US$124.4 million), our payments for the lease of bandwidth of RMB669.7 million (US$96.5
million) and our general operating costs of RMB756.5 million (US$109.0 million). The increasing cash provided by operating activities
was mainly due to the expansion of business.
Net cash provided by operating activities
amounted to RMB1,823.4 million for the year ended December 31, 2015, primarily resulting from RMB6,355.8 million of cash revenues
we received, partially offset by our sales-related cash outflow of RMB2,843.3 million, which mainly consisted of the amounts due
to third party game developers under revenue sharing arrangements, distributions under arrangements with certain performers and
channel owners, payment collection costs and business taxes, our employee salaries and welfare payments of RMB753.4 million, our
payments for the lease of bandwidth of RMB543.3 million and our general operating costs of RMB392.4 million. The increasing cash
provided by operating activities was mainly due to the expansion of business.
Net cash provided by operating activities
amounted to RMB1,301.4 million for the year ended December 31, 2014, primarily resulting from RMB3,988.2 million of cash revenues
we received, partially offset by our sales-related cash outflow of RMB1,533.6 million, which mainly consisted of the amounts due
to third party game developers under revenue sharing arrangements, distributions under arrangements with certain performers and
channel owners, payment collection costs and business taxes, our employee salaries and welfare payments of RMB651.5 million, our
payments for the lease of bandwidth of RMB327.2 million and our general operating costs of RMB174.5 million.
Investing Activities
Net cash used in investing activities largely
reflects placements of short-term deposits, purchases of property and equipment and other non-current assets in connection with
the expansion and upgrade of our technology infrastructure, and our acquisitions of and investments in certain companies.
Net cash used in investing activities amounted
to RMB1,783.1 million (US$256.8 million) in the year ended December 31, 2016. Net cash used in investing activities primarily resulted
from the placement of short-term deposits of RMB8,027.3 million (US$1,156.2 million), payments of RMB162.4 million (US$23.4 million)
for the purchase of property and equipment, which mainly consisted of the purchase of servers, and cash paid for certain acquisitions
and strategic investments of RMB199.2 million (US$28.7 million), partially offset by the maturity of short-term deposits and restricted
short-term deposits in various banks in the amount of RMB6,714.1 million (US$967.0 million). The increase in cash used in investing
activities was mainly due to the increase in investment in short-term deposit.
Net cash used in investing activities amounted
to RMB1,048.0 million in the year ended December 31, 2015. Net cash used in investing activities primarily resulted from the placement
of short-term deposits and restricted short-term deposits of RMB3,362.6 million, payments of an aggregate RMB1,926.2 million for
other non-current assets, mainly consisting of prepayments for purchasing land for future office space, payments of RMB219.8 million
for the purchase of property and equipment, which mainly consisted of the purchase of servers, and cash paid for certain acquisitions
and strategic investments of RMB358.4 million, partially offset by the maturity of short-term deposits and restricted short-term
deposits in various banks in the amount of RMB4,780.6 million. The decrease in cash used in investing activities was mainly due
to the decrease in investment in short-term deposit.
Net cash used in investing activities amounted
to RMB3,954.1 million in the year ended December 31, 2014. Net cash used in investing activities primarily resulted from the placement
of short-term deposits of RMB5,343.9 million, payments of an aggregate RMB 510.3 million for other non-current assets, mainly consisting
of prepayments for certain floors of an office building, payments of RMB178.5 million for the purchase of property and equipment,
which mainly consisted of the purchase of servers, and cash paid for certain acquisitions and strategic investments of RMB259.4
million, partially offset by the maturity of short-term deposits in various banks in the amount of RMB2,550.1 million.
Financing Activities
Net cash provided by financing activities
was RMB10.7 million (US$1.5 million) in 2016, primarily attributable to capital contributions from non-controlling interests.
Net cash used in financing activities was
RMB337.1 million in 2015, primarily attributable to the share repurchase of 3.1 million ADS for RMB1,041.7 million, partially offset
by net proceeds of RMB696.5 million from bank borrowings.
Net cash provided by financing activities
was RMB2,402.8 million in 2014, primarily attributable to the net proceeds of RMB2,402.6 million from the issuance of 2.25% convertible
senior note due 2019, issued in March 2014.
Capital Expenditures
We made capital expenditures of RMB744.7
million, RMB2,197.0 million and RMB237.8 million (US$34.3 million) in 2014, 2015 and 2016, respectively. Our capital expenditures
are primarily used to purchase office space, computers, servers, office furniture, operating rights for licensed games, software,
domain names and other assets.
C. Research and Development, Patents
and Licenses, Etc.
In order to support the kind of multi-user,
real-time online voice and video communications on a scale necessary for our platforms, we build and develop our own network infrastructure.
See “Item 4. Information on the Company—B. Business Overview—Research and Development” for a description
of the research and development aspect of our business and “Item 4. Information on the Company—B. Business Overview—Intellectual
Property” for a description of the protection of our intellectual property.
Research and development expenses consist
primarily of salaries and benefits for research and development personnel and rental and depreciation of office premises and servers
utilized by the research and development personnel. Research and development expenses greatly increased in the past three years
ended December 31, 2016, due to the need for additional research and development personnel to accommodate the rapid growth of our
business. We expect our research and development expenses in absolute amount to increase as we intend to retain existing research
and development personnel and also hire new ones to, among other things, develop new series of applications for our platforms,
improve technology infrastructure to further enhance user experience, and further develop enhanced features for our mobile applications
to reach more users. We incurred RMB431.2 million, RMB548.8 million and RMB675.2 million (US$97.3 million) of research and development
expenses in 2014, 2015 and 2016, respectively.
D. Trend Information
Other than as disclosed elsewhere in this
annual report, we are not aware of any trends, uncertainties, demands, commitments or events since the beginning of our fiscal
year 2016 that are reasonably likely to have a material effect on our net revenues, income from operations, profitability, liquidity
or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating
results or financial condition.
E. Off-Balance Sheet Arrangements
We have not entered into any financial guarantees
or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts
that are indexed to our shares and classified as shareholders’ (deficit)/equity, or that are not reflected in our consolidated
financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated
entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated
entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development
services with us.
F. Tabular Disclosure of Contractual
Obligations
The following table sets forth our contractual
obligations as of December 31, 2016:
|
|
Payment Due by Period
|
|
|
|
Total
|
|
|
Less than 1
year
|
|
|
1-2 years
|
|
|
3-5 years
|
|
|
More than 5
years
|
|
|
|
(in thousands)
|
|
Operating lease commitments
(1)
(in RMB)
|
|
|
72,503
|
|
|
|
41,848
|
|
|
|
28,335
|
|
|
|
1,984
|
|
|
|
336
|
|
Capital commitment
(2)
(in RMB)
|
|
|
144,301
|
|
|
|
144,301
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Convertible senior notes
(3)
(in US$)
|
|
|
404,500
|
|
|
|
404,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Operating lease commitments refer to the lease of offices under operating lease agreements, where a significant portion of
the risks and rewards of ownership are retained by the lessor. Payments made under operating leases are charged to the consolidated
statements of operations on a straight-line basis over the period of the lease, including any free lease periods.
|
|
(2)
|
Capital commitment refers to capital expenditure of a building.
|
|
(3)
|
The convertible senior notes were redeemable at the holders’ option on April 1, 2017. US$399,000,000 aggregate principal
amount of the notes were redeemed on April 1, 2017. We has accepted the repurchase and has forwarded cash in payment of the repurchase
price to the paying agent for distribution to the holders who had exercised the option. Following the repurchase, US$1,000,000
aggregate principal amount of the notes remains outstanding and will be due in 2019.
|
Our operating lease obligations decreased
from December 31, 2015 to December 31, 2016 primarily because we gradually ceased to renew certain leases for office spaces when
they expired as we have more self-owned office buildings available.
Other than the obligations set forth above,
we did not have any other long-term debt obligations, operating lease obligations, purchase obligations or other long-term liabilities
as of December 31, 2016.
G. Safe Harbor
See “Forward Looking Statements”
on page 2 of this annual report.
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A. Directors and Senior Management
The following table sets forth information
regarding our directors and executive officers as of the date of this annual report. There are no family relationships among any
of the directors or executive officers of our company.
Directors and Executive Officers
|
|
Age
|
|
Position/Title
|
David Xueling Li
|
|
44
|
|
Chairman of the Board and Director
|
Qin Liu
|
|
46
|
|
Director
|
Jenny Hong Wei Lee
|
|
46
|
|
Independent Director
|
Peter Andrew Schloss
|
|
56
|
|
Independent Director
|
Peng T. Ong
|
|
55
|
|
Independent Director
|
Richard Weidong Ji
|
|
51
|
|
Independent Director
|
David Tang
|
|
64
|
|
Independent Director
|
Zhou Chen
|
|
41
|
|
Chief Executive Officer
|
Rongjie Dong
|
|
42
|
|
Chief Executive Officer of Huya Broadcasting
|
Eric He
|
|
58
|
|
Chief Financial Officer
|
Mr. David Xueling Li
is our co-founder
and has been our chairman since August 2016. Mr. Li served as our chief executive officer since our inception to August 2016. Mr.
Li focuses on our broader corporate strategy and the development of new and emerging applications and products.
Before
founding our company, Mr. Li worked at Netease.com, Inc. from July 2003 to April 2005 and served as its chief editor. In 2000,
Mr. Li founded CFP.cn, a website that provided a copyright trading platform for journalists and amateur photographers. Mr. Li received
a bachelor’s degree in philosophy from Renmin University of China in 1997.
Mr. Qin Liu
has been a director of
our company since June 2008. Mr. Liu has been a director of Morningside China TMT Fund I, L.P. since its formation in 2008, where
he is primarily responsible for managing early-stage investments in the internet, wireless, media, entertainment and consumer services
sectors in China. He also serves as a director in several non-public portfolio companies of the fund. From 2000 through 2008, Mr.
Liu worked at Morningside IT Management Services (Shanghai) Co., Ltd. and established its print media business and served as publisher
of The Bund, an upscale lifestyle weekly publication. Mr. Liu received a master’s degree in business administration, or MBA,
from China Europe International Business School in 1999 and a bachelor’s degree in electrical engineering from Beijing Science
& Technology University in 1993.
Ms. Jenny Hong Wei Lee
has served
as our director since December 2009. Ms. Lee is currently a director of Pactera Technology International Ltd., a leading China-based
provider of outsourced information technology and research and development services, which was formerly listed on the NASDAQ Global
Select Market and subsequently privatized in 2014. She is also a director and a member of the audit committee of 21 Vianet Group,
Inc., a leading China-based carrier-neutral Internet data center services provider, which is listed on the NASDAQ Global Select
Market. In addition, Ms. Lee serves is a managing director of Granite Global Ventures III L.L.C., which is a general partner of
Granite Global Ventures III L.P. and GGV III Entrepreneurs Fund L.P. From 2002 to 2005, Ms. Lee served as a vice president of JAFCO
Asia. Ms. Lee received her bachelor’s degree in electrical engineering in 1994 and master’s degree in engineering in
1995 from Cornell University. Ms. Lee also has an MBA degree from Kellogg School of Management at Northwestern University in 2001.
Mr. Peter Andrew Schloss
has served
as our independent director since November 20, 2012. Mr. Schloss is managing director and CEO of CastleHill Partners and a partner
at Phoenix Media Fund. Since February 2016, Mr. Schloss has been an independent director of Zhaopin Limited (NYSE: ZPIN). Previously
Mr. Schloss was an independent director and audit committee chairman of Giant Interactive Group Inc., a NYSE-listed company, from
2007 to 2015. From 2008 to 2012, Mr. Schloss served as the chief executive officer of Allied Pacific Sports Network Limited, a
leading internet and wireless provider of live and on-demand sports programs in Asia. Prior to joining Allied Pacific Sports Network
Limited, Mr. Schloss worked at TOM Online Inc., serving as the chief financial officer from 2003 to 2005, as an executive director
from 2004 to 2007 and as the chief legal officer from 2005 to 2007. Mr. Schloss received a bachelor’s degree in political
science and a juris doctor degree from Tulane University.
Mr. Peng T. Ong
has served as our
independent director since November 20, 2012. Mr. Ong is a managing director of Monk’s Hill Ventures. Prior to founding Monk’s
Hill Ventures, he was a partner at GSR Ventures. Mr. Ong is a director of the Media Development Authority of Singapore. In addition,
he is a trustee of the Singapore University of Technology and Design and sits on the strategic advisory board of the Chancellor
of the University of Illinois. Mr. Ong was an independent director of Singapore Telecommunications Limited through July 2013 and
chairs SingTel’s group enterprise advisory committee. He was an independent director of the National Research Foundation
of Singapore from 2009 to 2013. He served as chairman of Infocomm Investments Pte Ltd, a venture capital fund in Singapore, from
2006 to 2013. Mr. Ong founded Interwoven Inc. (acquired by Autonomy Corporation plc., now part of Hewlett-Packard) and served as
its president and chief executive officer from 1995 to 1997 and its chairman from 1995 to 2002. Mr. Ong also founded Encentuate
Inc. which became the foundation of the IBM Singapore Software Lab after being acquired by IBM. In addition, Mr. Ong co-founded
Match.com (now part of IAC/InterActiveCorp) and served in various engineering and management positions at Illustra Information
Technologies, Inc. (now Informix Corporation, part of IBM), Sybase Inc. (now SAP America, Inc.) and Gensym Corporation. Mr. Ong
Peng received a bachelor’s degree in electrical engineering from University of Texas at Austin and a master’s degree
in computer science from University of Illinois at Urbana-Champaign.
Mr. Richard Weidong Ji
has served
as our independent director since May 2013. Mr. Ji is the cofounder and managing partner of All-Stars Investment Limited, which
focuses on investing in Internet technology leaders and consumer brands that help enhance the lives of Chinese consumers. From
2005 to 2012, Mr. Ji served as managing director and head of Asia-Pacific Internet/media investment research at Morgan Stanley
Asia Limited. During his time with Morgan Stanley, Mr. Ji was consistently rated as one of the top internet analysts covering the
Chinese internet according to the Institutional Investor and Greenwich Associates’ annual surveys. Over Mr. Ji’s career,
he has received many awards from reputable publications and research groups including the Financial Times, South China Morning
Post, Asiamoney, Absolute Return & Alpha magazine and iResearch Consulting Group. Mr. Ji holds a doctor of sciences degree
in biological science from Harvard University, an MBA from the Wharton School of Business at the University of Pennsylvania and
a Bachelor of Science from Fudan University in China. He also serves as an independent director of 58.com.
Mr. David Tang
has served as our
independent director since May 2013. Mr. Tang currently serves as a managing director of Nokia Growth Partners, a global venture
capital firm that specializes in investing in mobile technologies and mobile businesses. From 2011 to 2012, Mr. Tang was the vice
president of the European Union Chamber of Commerce in China, vice chairman of the China Association of Enterprises with Foreign
Investments, and vice chairman of the Beijing International Chamber of Commerce. Mr. Tang has spent nearly a decade with the Nokia
group, having served as the vice chairman of Nokia (China) Investment Co., Ltd. and chairman of Nokia Telecommunications Ltd. where
he was responsible for government relations, strategic partnerships, corporate development, and sustainability. Prior to serving
in those roles, he was the vice chairman and vice president of sales for Nokia in the greater China region from 2005 to 2009. Mr.
Tang has also held executive positions in other leading global technology firms such as Apple, AMD, 3Com, DEC, and AST. Mr. Tang
received his bachelor’s degree in Computer Science and Engineering from California State University at Long Beach and a master’s
degree in Business from California State University at Fullerton.
Mr. Zhou Chen has been our chief executive
officer since August 2016. He is primarily responsible for our overall management, major decision-making and strategic planning.
Mr. Chen served as the head of our music and entertainment business since 2011. Prior to joining us, he served as research and
development director for POPO at NetEase from 2001 to 2007. Mr. Chen received his bachelor’s degree in computer science from
Southwest Normal University in 1999.
Mr. Rongjie Dong
has been the president
of the technology department of Guangzhou Huaduo since October 2006 and is currently the chief executive officer of Huya broadcasting,
one of our business units. He serviced as our executive vice president from April 2013 to August 2016. Prior to joining us, he
served as product manager and head of the technology department of 163.com from 2000 to 2006. Mr. Dong received his bachelor’s
degree in computer hardware from Beijing Information Engineering Institute (now known as Beijing Information Science and Technology
University) in 1999.
Mr. Eric He
has been our chief financial
officer since August 2011. He currently also serves as an independent director of MOL Global, Inc. (NASDAQ: MOLG) and 51job (Nasdaq:
JOBS). Prior to joining us, Mr. He served as the chief financial officer of Giant Interactive Group, Inc., an NYSE-listed company,
from March 2007 to August 2011. He served as the chief strategy officer of Ninetowns Internet Technology Group from 2004 to 2007.
From 2002 to 2004, he served as a private equity investment director for AIG Global Investment Corp (Asia) Ltd. Mr. He received
a bachelor’s degree in accounting from National Taipei University and an MBA degree from the Wharton School of Business at
the University of Pennsylvania. Mr. He is a Certified Public Accountant and Chartered Financial Analyst in the United States.
B. Compensation of Directors and Executive
Officers
For the fiscal year ended December 31, 2016,
we paid an aggregate of RMB5.4 million (US$0.8 million) in cash, including salaries and bonuses, to our directors and executive
officers. For details on the share incentive grants to our directors and officers, see “—Share Incentive Plans.”
For the fiscal year ended December 31, 2016, we made contributions for our directors and executive officers for their pension insurance,
medical insurance, housing fund, unemployment and other statutory benefits as required by PRC laws in an aggregate amount of RMB0.3
million (US$0.04 million ). We did not set aside or accrue any other pension or retirement benefits for our directors and executive
officers for the fiscal year ended December 31, 2016.
Employment Agreements
We have entered into employment agreements
with our senior executive officers. We may terminate a senior executive officer’s employment for cause at any time without
remuneration for certain acts of the officer, such as being convicted of any criminal conduct, any act of gross or willful misconduct
or any serious, willful, grossly negligent or persistent breach of any employment agreement provision, or engaging in any conduct
which may make the continued employment of such officer detrimental to our company. We may also terminate a senior executive officer’s
employment by giving three months’ prior written notice. A senior executive officer may terminate his or her employment at
any time by giving three months’ written notice, provided that such notice may only be given by the officer any time after
the third anniversary of his or her employment.
Each senior executive officer has agreed
to hold all information, know-how and records in any way connected with the business of our company, including, without limitation,
all formulae, designs, specifications, drawings, data, operations and testing procedures, manuals and instructions and all customer
and supplier lists, sales information, business plans and forecasts and all technical or other expertise and all computer software
of our company, in strict confidence during and after his or her employment. Each officer also agrees that we shall own all the
intellectual property developed by such officer during his or her employment.
Share Incentive Plans
We have adopted two share incentive plans,
namely, the 2009 Scheme and the 2011 Plan. The purpose of these two share incentive plans is to attract and retain personnel by
linking the personal interests of the members of the board, officers, employees and consultants to the success of our business
and by providing such individuals with an incentive for outstanding performance. As of March 31, 2017, options to purchase 499,655
common shares, 8,370,112 restricted shares and 33,595,279 restricted share units were outstanding under the 2009 Scheme and the
2011 Plan.
2009 Employee Equity Incentive Scheme
We adopted the 2009 Scheme in December 2009.
In September 2011, YY Inc. assumed all the rights and obligations of Duowan Entertainment Corporation under all share-based compensation
previously issued by Duowan Entertainment Corporation, including under the relevant award agreement and under the 2009 Scheme,
if applicable, and undertook to issue its own common shares upon the exercise of any share-based compensation awards previously
issued by Duowan Entertainment Corporation, subject to compliance with the terms and conditions of the relevant award agreements
and the 2009 Scheme, if applicable.
Under the 2009 Scheme, the maximum number
of shares in respect of which options or restricted shares may be granted is 120,020,001.
The following paragraphs summarize the terms
of the 2009 Scheme.
Types of Awards.
The following
briefly describe the principal features of the various awards that may be granted under the 2009 Scheme.
|
·
|
Options.
Options provide for the right to purchase a specified number of our common shares at a specified price and
usually will become exercisable at the discretion of our plan administrator in one or more installments after the grant date. The
option exercise price may be paid, subject to the discretion of the plan administrator, in cash or check, in our common shares
which have been held by the option holder for such period of time as may be required to avoid adverse accounting consequences,
in other property with value equal to the exercise price, through a broker-assisted cashless exercise, or by any combination of
the foregoing.
|
|
·
|
Restricted Shares.
A restricted share award is the grant of our common shares which are subject to certain restrictions
and may be subject to risk of forfeiture. Unless otherwise determined by our plan administrator, a restricted share is nontransferable
and may be forfeited or repurchased by us upon termination of employment or service during a restricted period. Our plan administrator
may also impose other restrictions on the restricted shares, such as limitations on the right to vote or the right to receive dividends.
|
Plan Administration.
Our board
or a committee of one or more members of our board duly authorized for the purpose of the 2009 Scheme can act as the plan administrator.
Award Agreement.
Options or
restricted shares granted under the 2009 Scheme are evidenced by an award agreement that sets forth the terms, conditions and limitations
for each grant.
Option Exercise Price.
The
exercise price in respect of any option shall be fixed by reference to the date upon which the option (or the relevant part thereof)
is granted, and shall be, at the election of the plan administrator, (a) the latest valuation price per share certified by a third
party valuer prior to the date of grant of the relevant option (or relevant part thereof) or (b) the latest price per share at
which we have issued any shares prior to the date of grant of the relevant option (or relevant part thereof).
Eligibility.
We may grant
awards to our employees, officers and directors or consultants to our members.
Term of the Awards.
The 2009
Scheme shall be valid and effective for a period of ten years from the date of effectiveness. The term of each option or restricted
share grant shall be ten years from the date of the grant.
Vesting Schedule.
In general,
the plan administrator determines the vesting schedule, which is set forth in the award agreement.
Transfer Restrictions.
Awards
for options or restricted shares may not be transferred in any manner by the award holders and may be exercised only by such holders,
subject to limited exceptions. Restricted shares may not be transferred during the period of restriction.
Termination.
The plan administrator
may at any time terminate the operation of the 2009 Scheme.
Prior to the adoption of the 2009 Scheme,
we granted certain share options to our employees pursuant to certain share option agreements which carried substantially the same
terms and conditions with those stipulated in the 2009 Scheme.
2011 Share Incentive Plan
We adopted the 2011 Plan in September 2011.
Under the 2011 Plan, the maximum number
of common shares reserved for issuance under the plan is 43,000,000, plus an annual increase of 20,000,000 on the first day of
each fiscal year, beginning in 2013, or such smaller number of common shares as determined by our board of directors.
The following paragraphs summarize the terms
of the 2011 Plan.
Types of Awards.
The following
briefly describe the principal features of the various awards that may be granted under the 2011 Plan.
|
·
|
Options.
Options provide for the right to purchase a specified number of our common shares at a specified price and
usually will become exercisable at the discretion of our plan administrator in one or more installments after the grant date. The
option exercise price may be paid, subject to the discretion of the plan administrator, in cash or check, in our common shares
which have been held by the option holder for such period of time as may be required to avoid adverse accounting consequences,
in other property with value equal to the exercise price, through a broker-assisted cashless exercise, or by any combination of
the foregoing.
|
|
·
|
Restricted Shares.
A restricted share award is the grant of our common shares which are subject to certain restrictions
and may be subject to risk of forfeiture. Unless otherwise determined by our plan administrator, a restricted share is nontransferable
and may be forfeited or repurchased by us upon termination of employment or service during a restricted period. Our plan administrator
may also impose other restrictions on the restricted shares, such as limitations on the right to vote or the right to receive dividends.
|
|
·
|
Restricted Share Units.
A restricted share unit award is the grant of the right to receive a common share at a future
date and may be subject to forfeiture. Our plan administrator has the discretion to set performance objectives or other vesting
criteria that will determine the number or value of restricted share units to be granted. Unless otherwise determined by our plan
administrator, a restricted share unit is nontransferable and may be forfeited or repurchased by us upon termination of employment
or service during a restricted period. Our plan administrator, at the time of grant, specifies the dates on which the restricted
share units become fully vested.
|
Plan Administration.
Our board
or a committee of one or more members of our board duly authorized for the purpose of the 2011 Plan can act as the plan administrator.
Award Agreement.
Options,
restricted shares or restricted shares units granted under the 2011 Plan are evidenced by an award agreement that sets forth the
terms, conditions and limitations for each grant.
Option Exercise Price.
The
exercise price in respect of any option shall be determined by the plan administrator and set forth in the award agreement which
may be a fixed or variable price related to the fair market value of the shares. The exercise price per share subject to an option
may be amended or adjusted in the absolute discretion of the plan administrator, the determination of which shall be final, binding
and conclusive.
Eligibility.
We may grant
awards to our employees, consultants or directors.
Term of the Awards.
The 2011
Plan shall be valid and effective for a period of ten years from the date of effectiveness. The term of each option grant shall
not exceed ten years from the date of the grant.
Vesting Schedule.
In general,
the plan administrator determines the vesting schedule, which is set forth in the award agreement.
Transfer Restrictions.
Awards
for options, restricted shares or restricted share units may not be transferred in any manner by the award holders and may be exercised
only by such holders, subject to limited exceptions. Restricted shares may not be transferred during the period of restriction.
Termination.
The plan administrator
may at any time terminate the operation of the 2011 Plan.
The following table summarizes, as of March
31, 2017, the outstanding options granted to our executive officers, directors and other individuals as a group.
|
|
Common Shares
Underlying
Options Awarded
|
|
|
Exercise Price
(US$/Share)
|
|
|
Date of Grant
|
|
Date of Expiration
|
Other Individuals as a Group
|
|
|
10
|
|
|
|
—
|
|
|
January 1, 2008
|
|
December 31, 2015
|
|
|
|
51
|
|
|
|
0.005510
|
|
|
January 1, 2008
|
|
December 31, 2017
|
|
|
|
499,594
|
|
|
|
0.006735
|
|
|
January 1, 2009
|
|
December 31, 2018
|
Total
|
|
|
499,655
|
|
|
|
|
|
|
|
|
|
|
*
|
The aggregate number of common shares underlying the outstanding options held by this individual is less than 1% of our total
outstanding shares.
|
The following table summarizes, as of March
31, 2017, the outstanding restricted shares granted to our executive officers, directors and other individuals as a group.
Name
|
|
Restricted Shares Granted
|
|
|
Date of Grant
|
Other Individuals as a Group
|
|
|
3,989,838
|
|
|
January 1, 2010
|
|
|
|
425,734
|
|
|
February 1, 2010
|
|
|
|
2,930,600
|
|
|
July 1, 2010
|
|
|
|
250,000
|
|
|
October 1, 2010
|
|
|
|
773,940
|
|
|
January 1, 2011
|
Total
|
|
|
8,370,112
|
|
|
|
|
*
|
The aggregate number of common shares underlying the outstanding restricted shares held by each of these individuals is less
than 1% of our total outstanding shares.
|
The following table summarizes, as of March
31, 2017, the outstanding restricted share units granted to our executive officers, directors and other individuals as a group.
Name
|
|
Common Shares Underlying
Restricted Share Units Granted
|
|
|
Date of Grant
|
|
|
|
|
|
|
David Xueling Li
|
|
|
*
|
|
|
April 30, 2013
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
June 20, 2014
|
|
|
|
|
|
|
|
Jenny Hong Wei Lee
|
|
|
*
|
|
|
November 7, 2012
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
June 16, 2014
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
November 7, 2015
|
|
|
|
|
|
|
|
Peter Andrew Schloss
|
|
|
*
|
|
|
November 7, 2012
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
June 16, 2014
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
November 7, 2015
|
|
|
|
|
|
|
|
Peng T. Ong
|
|
|
*
|
|
|
November 7, 2012
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
June 16, 2014
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
November 7, 2015
|
|
|
|
|
|
|
|
Richard Weidong Ji
|
|
|
*
|
|
|
May 23, 2013
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
June 16, 2014
|
David Tang
|
|
|
*
|
|
|
May 23, 2013
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
June 16, 2014
|
|
|
|
|
|
|
|
Eric He
|
|
|
*
|
|
|
September 16, 2011
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
November 21, 2012
|
Name
|
|
Common Shares Underlying
Restricted Share Units Granted
|
|
|
Date of Grant
|
|
|
|
|
|
|
|
|
|
*
|
|
|
April 30, 2013
|
|
|
|
|
|
|
|
Rongjie Dong
|
|
|
*
|
|
|
April 30, 2013
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
July 19, 2013
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
June 20, 2014
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
Qin Liu
|
|
|
*
|
|
|
August 6, 2015
|
|
|
|
|
|
|
|
Zhou Chen
|
|
|
*
|
|
|
April 30, 2013
|
|
|
|
|
|
|
|
Other Individuals as a Group
|
|
|
3,800
|
|
|
January 1, 2011
|
|
|
|
1,260,690
|
|
|
September 16, 2011
|
|
|
|
233,220
|
|
|
January 1, 2012
|
|
|
|
264,259
|
|
|
March 31, 2012
|
|
|
|
122,280
|
|
|
July 15, 2012
|
|
|
|
1,464,080
|
|
|
September 1, 2012
|
|
|
|
7,180
|
|
|
September 30, 2012
|
|
|
|
93,750
|
|
|
March 31, 2013
|
|
|
|
7,589
|
|
|
April 18, 2013
|
|
|
|
7,124,860
|
|
|
April 30, 2013
|
|
|
|
607,120
|
|
|
July 19, 2013
|
|
|
|
11,540
|
|
|
October 1, 2013
|
|
|
|
40,000
|
|
|
November 1, 2013
|
|
|
|
120,000
|
|
|
February 1, 2014
|
|
|
|
180,000
|
|
|
April 1, 2014
|
|
|
|
80,000
|
|
|
April 30, 2014
|
|
|
|
220,000
|
|
|
May 1, 2014
|
|
|
|
2,345,543
|
|
|
June 20, 2014
|
|
|
|
361,333
|
|
|
October 30, 2014
|
|
|
|
225,980
|
|
|
April 30, 2015
|
|
|
|
49,180
|
|
|
May 1, 2015
|
|
|
|
9,353,477
|
|
|
July 1, 2015
|
|
|
|
140,000
|
|
|
October 30, 2015
|
|
|
|
20,000
|
|
|
December 30, 2015
|
|
|
|
152,000
|
|
|
January 1, 2016
|
|
|
|
1,125,008
|
|
|
June 30, 2016
|
|
|
|
1,045,000
|
|
|
March 22,2017
|
Total
|
|
|
33,595,279
|
|
|
|
|
*
|
The aggregate number of common shares underlying the outstanding restricted share units, or RSUs, held by each of these individuals
is less than 1% of our total outstanding shares.
|
C. Board Practices
Our board of directors currently consists
of seven directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director
may vote with respect to any contract, proposed contract, or arrangement in which he or she is materially interested. A director
may exercise all the powers of the company to borrow money, mortgage its business, property and uncalled capital, and issue debentures
or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. See “Item
6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers” for a description
of the employment agreements we have entered into with our senior executive officers.
Committees of the Board of Directors
We have established an audit committee,
a compensation committee and a corporate governance and nominating committee under the board of directors. We have adopted a charter
for each of the three committees. Each committee’s members and functions are described below.
Audit Committee.
Our audit
committee consists of Mr. Peter Andrew Schloss, Mr. Peng T. Ong and Mr. Richard Weidong Ji, and is chaired by Mr. Schloss. We have
determined that each of Mr. Schloss, Mr. Ong and Mr. Ji satisfies the “independence” requirements of Rule 5605(c)(2)
of the Listing Rules of the Nasdaq Global Market and meet the independence standards under Rule 10A-3 under the Securities Exchange
Act of 1934, as amended. We have determined that Mr. Schloss qualifies as an “audit committee financial expert.”
The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements
of our company. The audit committee is responsible for, among other things:
|
·
|
selecting the independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted
to be performed by the independent registered public accounting firm;
|
|
·
|
reviewing with the independent registered public accounting firm any audit problems or difficulties and management’s
response;
|
|
·
|
reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities
Act;
|
|
·
|
discussing the annual audited financial statements with management and the independent registered public accounting firm;
|
|
·
|
reviewing major issues as to the adequacy of our internal controls and any special audit steps adopted in light of any material
control deficiencies;
|
|
·
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
·
|
meeting separately and periodically with management and the independent registered public accounting firm; and
|
|
·
|
reporting regularly to the board.
|
Compensation Committee.
Our
compensation committee consists of Mr. David Xueling Li, Ms. Jenny Hong Wei Lee and Mr. David Tang, and is chaired by Mr. David
Xueling Li. We have determined that each of Ms. Lee and Mr. Tang satisfies the “independence” requirements of Rule
5605(c)(2) of the Listing Rules of the Nasdaq Global Market. The compensation committee assists the board in reviewing and approving
the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our directors
may not be present at any committee meeting during which their compensation is deliberated upon. The compensation committee is
responsible for, among other things:
|
·
|
reviewing the total compensation package for our executive officers and making recommendations to the board with respect to
it;
|
|
·
|
approving and overseeing the total compensation package for our executives other than the three most senior executives;
|
|
·
|
reviewing the compensation of our directors and making recommendations to the board with respect to it;
|
|
·
|
periodically reviewing and approving any long-term incentive compensation or equity plans, programs or similar arrangements,
annual bonuses, and employee pension and welfare benefit plans; and
|
|
·
|
selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant
to that person’s independence from management.
|
Corporate Governance and Nominating
Committee.
Our nominating committee consists of Mr. Peng T. Ong, Mr. Qin Liu and Mr. Peter Andrew Schloss, and is chaired
by Mr. Ong. We have determined that each of Mr. Ong and Mr. Schloss satisfies the “independence” requirements of Rule
5605(c)(2) of the Listing Rules of the Nasdaq Global Market. The nominating committee assists the board in selecting individuals
qualified to become our directors and in determining the composition of the board and its committees. The nominating committee
is responsible for, among other things:
|
·
|
recommending nominees to the board for election or re-election to the board, or for appointment to fill any vacancy on the
board;
|
|
·
|
reviewing annually with the board the current composition of the board with regards to characteristics such as independence,
age, skills, experience and availability of service to us;
|
|
·
|
selecting and recommending to the board the names of directors to serve as members of the audit committee and the compensation
committee, as well as of the nominating committee itself; and
|
|
·
|
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our
procedures to ensure proper compliance.
|
Investment Committee.
Our investment committee consists of Mr. Xueling Li, Ms. Jenny Hong Wei Lee and Mr. Qin Liu. The investment committee is
responsible for negotiating and determining the nature, timing, amount and other terms of an investment if such investment
amount ranges from US$10 million to US$30 million.
Independent Committee
.
In July 2015, our board of directors formed a special committee of independent directors consisting of Messrs. Peter Andrew Schloss,
David Tang, and Peng Tsing Ong in response to a preliminary non-binding proposal letter from the Buyer Group notifying our board
of directors of their interest in acquiring all of our outstanding shares not already beneficially owned by them in a proposed
going private transaction.
Duties of Directors
Under Cayman Islands law, our directors
have a common law duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty
to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable
circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of
association.
Terms of Directors and Officers
Our officers are elected by and serve at
the discretion of the board. Our directors are not subject to a term of office and hold office until such time as they are removed
from office by special resolution of all shareholders. A director will be removed from office automatically if, among other things,
the director (1) becomes bankrupt or makes any arrangement or composition with his creditors; or (2) dies or is found by our company
to be of unsound mind.
D. Employees
The following table sets forth the numbers
of our employees, categorized by function, as of December 31, 2016:
Functions
|
|
Number of Employees
|
|
Management
|
|
|
15
|
|
Customer services and operations
|
|
|
1,013
|
|
Engineering and maintenance
|
|
|
153
|
|
Research and development
|
|
|
1,700
|
|
Sales and marketing
|
|
|
227
|
|
General and administration
|
|
|
247
|
|
Total
|
|
|
3,355
|
|
We had a total of 2,889, 3,317 and 3,355
employees as of December 31, 2014, 2015 and 2016, respectively.
We have developed a corporate culture that
encourages initiative, technical superiority and self-development. In addition, we periodically evaluate our employees’ performance
and provide them with training sessions tailored to each job function to enhance performance and service quality.
As required by regulations in China, we
participate in various employee social security plans that are organized by municipal and provincial governments, including pension,
unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required
under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances
of our employees, up to a maximum amount specified by the local government from time to time. We believe that we maintain a good
working relationship with our employees and we have not experienced any significant labor disputes.
E. Share Ownership
Class A Common Shares
As of March 31, 2017, we had 765,096,228
Class A common shares outstanding. In addition, as of March 31, 2017, we have granted, and have outstanding, options to purchase
a total of 499,655 Class A common shares, 8,370,112 restricted shares and 33,595,279 restricted share units to our directors, executive
officers, other employees and consultants. For information regarding the Share Incentive Plans, see “Item 6.B. Compensation
of Directors and Executive Officers.”
Class B Common Shares
As of March 31, 2017, we had 347,982,976
Class B common shares outstanding.
Beneficial Ownership
The following table sets forth information
concerning the beneficial ownership of our common shares as of March 31, 2017, by:
|
·
|
each of our directors and executive officers; and
|
|
·
|
each person known to us to beneficially own more than 5% of our common shares.
|
Beneficial ownership is determined in accordance
with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage
ownership of that person, we have included shares that the person has the right to acquire or that would become unrestricted shares
within 60 days after March 31, 2017, the most recent practicable date, including through the exercise of any option, warrant, or
other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage
ownership of any other person.
The calculations in the table below assume
that there were 765,096,228 Class A common shares outstanding and 347,982,976 Class B common shares as of March 31, 2017.
|
|
Class
A Common Shares
Beneficially Owned
(1)
|
|
|
Class
B Common Shares
Beneficially Owned
(2)
|
|
|
Total
Common Shares
Beneficially Owned
|
|
|
Total
Voting
Power
(5)
|
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
|
Number
(3)
|
|
|
%
(4)
|
|
|
%
|
|
Directors
and Executive Officers:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Xueling Li
(6)
|
|
|
19,111,615
|
|
|
|
2.5
|
|
|
|
175.241,483
|
|
|
|
50.4
|
|
|
|
194,353,098
|
|
|
|
17.4
|
|
|
|
82.4
|
|
Jenny Hong
Wei Lee
(7)
|
|
|
11,419,300
|
|
|
|
1.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,419,300
|
|
|
|
1.0
|
|
|
|
0.3
|
|
Zhou Chen
|
|
|
**
|
|
|
|
**
|
|
|
|
-
|
|
|
|
-
|
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
Rongjie Dong
|
|
|
**
|
|
|
|
**
|
|
|
|
-
|
|
|
|
-
|
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
Eric He
|
|
|
**
|
|
|
|
**
|
|
|
|
-
|
|
|
|
-
|
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
Peter Andrew
Schloss
|
|
|
**
|
|
|
|
**
|
|
|
|
-
|
|
|
|
-
|
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
Peng T. Ong
|
|
|
**
|
|
|
|
**
|
|
|
|
-
|
|
|
|
-
|
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
Richard Weidong
Ji
|
|
|
**
|
|
|
|
**
|
|
|
|
-
|
|
|
|
-
|
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
David Tang
|
|
|
**
|
|
|
|
**
|
|
|
|
-
|
|
|
|
-
|
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
Qin Liu
|
|
|
**
|
|
|
|
**
|
|
|
|
-
|
|
|
|
-
|
|
|
|
**
|
|
|
|
**
|
|
|
|
**
|
|
All directors
and executive officers as a group
|
|
|
40,379,290
|
|
|
|
5.2
|
|
|
|
175,241,483
|
|
|
|
50.4
|
|
|
|
215,620,773
|
|
|
|
19.3
|
|
|
|
82.8
|
|
Principal
Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top Brand
Holdings Limited
(8)
|
|
|
-
|
|
|
|
-
|
|
|
|
172,741,483
|
|
|
|
49.6
|
|
|
|
172,741,483
|
|
|
|
15.5
|
|
|
|
-
|
|
YYME Limited
(9)
|
|
|
16,000,010
|
|
|
|
2.1
|
|
|
|
175,241,483
|
|
|
|
50.4
|
|
|
|
191,241,493
|
|
|
|
17.2
|
|
|
|
41.7
|
|
Notes:
|
*
|
Except for Ms. Jenny Hong Wei Lee, Mr. Peter Andrew Schloss, Mr. Peng T. Ong, Mr. Richard Weidong Ji, Mr. David Tang and Mr.
Qin Liu, the business address of our directors and executive officers is c/o Building B-1, North Block of Wanda Plaza No. 79 Wanbo
Er Road Nancun Town, Panyu District, Guangzhou, 511442, PRC.
|
|
**
|
The aggregate number of common shares beneficially owned by each of these individuals is less than 1% of our total outstanding
shares.
|
|
(1)
|
For each person and group included in this column, percentage ownership is calculated by dividing the number of Class A common
shares beneficially owned by such person or group, including shares that such person or group has the right to acquire within 60
days of March 31, 2017, by the sum of (i) 765,096,228, which is the total number of Class A common shares outstanding as of March
31, 2017, and (ii) the number of Class A common shares that such person or group has the right to acquire within 60 days of March
31, 2017.
|
|
(2)
|
For each person and group included in this column, percentage ownership is calculated by dividing the number of Class B common
shares beneficially owned by such person or group by 347,982,976, being the total number of Class B common shares outstanding as
of March 31, 2017.
|
|
(3)
|
Represents the sum of Class A and Class B common shares beneficially owned by such person or group.
|
|
(4)
|
For each person and group included in this column, percentage ownership is calculated by dividing the number of total common
shares beneficially owned by such person or group, by the sum of the number of common shares outstanding and the number of common
shares such person or group has the right to acquire upon exercise of the stock options or warrants within 60 days after March
31, 2017.
|
|
(5)
|
For each person or group included in this column, the percentage of total voting power represents voting power based on both
Class A and Class B common shares held by such person or group with respect to all of our outstanding Class A and Class B common
shares as one class. Each holder of Class A common shares is entitled to one vote per share. Each holder of our Class B common
shares is entitled to ten votes per share on all matters requiring a shareholders’ vote. Our Class B common shares are convertible
at any time by the holder into Class A common shares on a one-for-one basis, whereas Class A common shares are not convertible
into Class B common shares under any circumstances.
|
|
(6)
|
Representing (i) 16,000,000 Class A common shares represented by ADSs, (ii) 10 Class A common shares, (iii) 175,241,483 Class
B common shares held by YYME Limited, a BVI company wholly owned and controlled by Mr. David Xueling Li and (iv) 3,111,605 Class
A common shares underlying the options and restricted shares granted to Mr. David Xueling Li that have been fully vested or are
to be vested in 60 days. In August 2016, Mr. Jun Lei, who beneficially owned 172,741,482 Class B common shares as of March 31,
2017, delegated the voting rights of such shares to Mr. David Xueling Li.
|
|
(7)
|
Representing (i) 11,103,620 Class A common shares represented by ADSs held by Granite Global Ventures III L.P., (ii) 180,680
Class A common shares represented by ADSs held by GGV III Entrepreneurs Fund L.P. and (iii) 135,000 restricted share units granted
to Ms. Jenny Hong Wei Lee that have been fully vested and to be vested within 60 days. The business address of Ms. Lee is Unit
3501-3504, Two IFC, 8 Century Avenue, Pudong District, Shanghai 200120, PRC.
|
|
(8)
|
Representing 172,741,483 Class B common shares held by Top Brand Holdings Limited, a BVI company wholly owned and controlled
by Mr. Jun Lei. The voting rights of such 172,741,483 Class B common shares were delegated to Mr. David Xueling Li in August 2016.The
business address of Top Brand Holdings Limited is c/o Jun Lei, 19E, Huating Jiayuan, No.6 of Middle Beisihuan Road, Chaoyang District,
Beijing 100102, PRC.
|
|
(9)
|
Representing (i) 16,000,000 Class A common shares represented by ADSs, (ii) 10 Class A common shares and (iii) 175,241,483
Class B common shares held by YYME Limited, a BVI company wholly owned and controlled by Mr. David Xueling Li. The business address
of YYME Limited is c/o David Xueling Li, Building B-1, North Block of Wanda Plaza No. 79 Wanbo Er Road Nancun Town, Panyu District,
Guangzhou, 511442, PRC.
|
As of March 31, 2017, 1,113,079,204 of our
common shares were issued and outstanding, including 347,982,976 Class B common shares and 765,096,228 Class A common shares. Based
on a review of the register of members maintained by our Cayman Islands corporate administrator, we believe that as of March 31,
2017, 765,096,228 Class A common shares (excluding shares being held in reserve by our depositary for the exercise/vesting of the
share incentive awards we issue) representing approximately 68.7% of our total outstanding shares were held by three record holders
in the United States; all of the 765,096,228 Class A common shares were held of record by Deutsche Bank Trust Company Americas,
the depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger
than the number of record holders of our common shares in the United States. None of our existing shareholders have different voting
rights from other shareholders in the same class. See “Item 6. Directors, Senior Management and Employees—B. Compensation
of Directors and Executive Officers—Employee Agreements” for a description of the employment agreements we have entered
into with our senior executive officers.
Our common shares are divided into Class
A common shares and Class B common shares. Holders of Class A common shares are entitled to one vote per share, while holders of
Class B common shares are entitled to ten votes per share. We are not aware of any arrangement that may, at a subsequent date,
result in a change of control of our company.
|
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
A. Major Shareholders
Please refer to “Item 6. Directors,
Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Contractual Arrangements
The PRC government extensively regulates
foreign ownership of, and the licensing and permit requirements pertaining to, companies that provide internet-based services such
as our platforms. To comply with these restrictions, we conduct our operations primarily through Beijing Huanju Shidai’s
contractual arrangements with Beijing Tuda, Guangzhou Huaduo and their respective shareholders. As to Bilin business, there is
also a similar contractual arrangement among Bilin Changxiang, Bilin Online and its shareholder.
Contractual Arrangements with Beijing
Tuda
The following is a summary of the currently
effective contracts among our subsidiary, Beijing Huanju Shidai, our PRC consolidated affiliated entity, Beijing Tuda, and the
shareholders of Beijing Tuda.
Agreements that transfer economic benefits
to us
Exclusive Business Cooperation
Agreement
Under the exclusive business cooperation
agreement between Beijing Huanju Shidai and Beijing Tuda, as amended, Beijing Huanju Shidai has the exclusive right to provide
to Beijing Tuda technology support, business support and consulting services related to Beijing Tuda’s business, the scope
of which is to be determined by Beijing Huanju Shidai from time to time. Beijing Huanju Shidai owns the exclusive intellectual
property rights created as a result of the performance of this agreement. The service fee payable by Beijing Tuda to Beijing Huanju
Shidai is up to 100% of the net profit of Beijing Tuda, and the timing and amount of the fee payments shall be determined at the
sole discretion of Beijing Huanju Shidai. The term of this agreement will expire in 2039 and may be extended with Beijing Huanju
Shidai’s written confirmation prior to the expiration date. Beijing Huanju Shidai has sole discretion to terminate the agreement
at any time by providing 30 days’ prior written notice to Beijing Tuda, while neither Beijing Tuda nor its shareholders are
entitled to terminate the agreement.
Exclusive Technology Support and
Technology Services Agreement
Under the exclusive technology support and
technology services agreement between Beijing Huanju Shidai and Beijing Tuda, as amended, Beijing Huanju Shidai has the exclusive
right to provide to Beijing Tuda technology support and technology services related to all technologies needed for its business.
Beijing Huanju Shidai owns the exclusive intellectual property rights created as a result of the performance of this agreement.
The service fee payable by Beijing Tuda to Beijing Huanju Shidai is 10% of Beijing Tuda’s gross revenues. The term of this
agreement will expire in 2029 and may be extended with Beijing Huanju Shidai’s written confirmation prior to the expiration
date. Beijing Huanju Shidai has sole discretion to terminate the agreement at any time by providing 30 days’ prior written
notice to Beijing Tuda, while neither Beijing Tuda nor its shareholders are entitled to terminate the agreement.
Agreements that provide us effective
control over Beijing Tuda
Powers of Attorney
Under the irrevocable powers of attorney
executed by each shareholder of Beijing Tuda, each such shareholder appointed Beijing Huanju Shidai as its attorney-in-fact to
exercise such shareholders’ rights in Beijing Tuda, including, without limitation, the power to vote on its behalf on all
matters of Beijing Tuda requiring shareholder approval under PRC laws and regulations and the articles of association of Beijing
Tuda. Each power of attorney will remain in force until the shareholder ceases to hold any equity interest in Beijing Tuda.
Exclusive Option Agreement
Under the exclusive option agreement between
Beijing Huanju Shidai, each of the shareholders of Beijing Tuda and Beijing Tuda, each of the shareholders irrevocably granted
Beijing Huanju Shidai or its designated representative(s) an exclusive option to purchase, to the extent permitted under PRC law,
all or part of his or its equity interests in Beijing Tuda. Beijing Huanju Shidai or its designated representative(s) have sole
discretion as to when to exercise such options, either in part or in full. Without Beijing Huanju Shidai’s prior written
consent, Beijing Tuda’s shareholders shall not sell, transfer, mortgage or otherwise dispose their equity interests in Beijing
Tuda. The term of this agreement is ten years and may be extended at Beijing Huanju Shidai’s sole discretion.
Equity Interest Pledge Agreement
Under the equity interest pledge agreement
between Beijing Huanju Shidai and the shareholders of Beijing Tuda, the shareholders of Beijing Tuda have pledged all of their
equity interests in Beijing Tuda to Beijing Huanju Shidai to guarantee the performance by Beijing Tuda and its shareholders’
performance of their respective obligations under the exclusive business cooperation agreement, exclusive option agreement, exclusive
technology support and technology services agreement and powers of attorney. If Beijing Tuda or its shareholders breach their contractual
obligations under those agreements, Beijing Huanju Shidai, as the pledgee, will be entitled to certain rights, including the right
to sell the pledged equity interests. This pledge became effective on the date the pledged equity interests were registered with
the competent administration for industry and commerce and will remain effective until the pledgors are no longer the shareholders
of Beijing Tuda.
Contractual Arrangements with Guangzhou
Huaduo
In 2016, we received service fees of RMB305.8
million (US$44.0 million) from Guangzhou Huaduo. The following is a summary of the currently effective contracts among Beijing
Huanju Shidai, Guangzhou Huaduo and the shareholders of Guangzhou Huaduo.
Agreements that transfer economic benefits
to us
Exclusive Business Cooperation
Agreement
Under the exclusive business cooperation
agreement between Beijing Huanju Shidai and Guangzhou Huaduo, as amended, Beijing Huanju Shidai has the exclusive right to provide
to Guangzhou Huaduo technology support, business support and consulting services related to Guangzhou Huaduo’s business,
the scope of which is to be determined by Beijing Huanju Shidai from time to time. Beijing Huanju Shidai owns the exclusive intellectual
property rights created as a result of the performance of this agreement. The service fee payable by Guangzhou Huaduo to Beijing
Huanju Shidai is up to 100% of the net profit of Guangzhou Huaduo, and the timing and amount of the fee payments will be determined
at the sole discretion of Beijing Huanju Shidai. The term of this agreement will expire in 2038 and may be extended with Beijing
Huanju Shidai’s written confirmation prior to the expiration date. Beijing Huanju Shidai has sole discretion to terminate
the agreement at any time by providing 30 days’ prior written notice to Guangzhou Huaduo, while neither Guangzhou Huaduo
nor its shareholders are entitled to terminate the agreement.
Exclusive Technology Support and
Technology Services Agreement
Under the exclusive technology support and
technology services agreement between Beijing Huanju Shidai and Guangzhou Huaduo, as amended, Beijing Huanju Shidai has the exclusive
right to provide to Guangzhou Huaduo technology support and technology services related to all technologies needed for its business.
Beijing Huanju Shidai owns the exclusive intellectual property rights created as a result of the performance of this agreement.
The service fee payable by Guangzhou Huaduo to Beijing Huanju Shidai is 10% of Guangzhou Huaduo’s gross revenues. The term
of this agreement will expire in 2028 and may be extended with Beijing Huanju Shidai’s written confirmation prior to the
expiration date. Beijing Huanju Shidai has sole discretion to terminate the agreement at any time by providing 30 days’ prior
written notice to Guangzhou Huaduo, while neither Guangzhou Huaduo nor its shareholders are entitled to terminate the agreement.
Agreements that provide us effective
control over Guangzhou Huaduo
Powers of Attorney
Under the irrevocable powers of attorney
executed by each shareholder of Guangzhou Huaduo, each such shareholder appointed Beijing Huanju Shidai as its attorney-in-fact
to exercise such shareholders’ rights in Guangzhou Huaduo, including, without limitation, the power to vote on its behalf
on all matters of Guangzhou Huaduo requiring shareholder approval under PRC laws and regulations and the articles of association
of Guangzhou Huaduo. Each power of attorney will remain in force until the shareholder ceases to hold any equity interest in Guangzhou
Huaduo.
Exclusive Option Agreement
Under the exclusive option agreement between
Beijing Huanju Shidai, each of the shareholders of Guangzhou Huaduo and Guangzhou Huaduo, each of the shareholders irrevocably
granted Beijing Huanju Shidai or its designated representative(s) an exclusive option to purchase, to the extent permitted under
PRC law, all or part of his or its equity interests in Guangzhou Huaduo. Beijing Huanju Shidai or its designated representative(s)
have sole discretion as to when to exercise such options, either in part or in full. Without Beijing Huanju Shidai’s prior
written consent, Guangzhou Huaduo’s shareholders shall not sell, transfer, mortgage or otherwise dispose their equity interests
in Guangzhou Huaduo. The term of this agreement is ten years and may be extended at Beijing Huanju Shidai’s sole discretion.
Equity Interest Pledge Agreement
Under the equity interest pledge agreement
between Beijing Huanju Shidai and the shareholders of Guangzhou Huaduo, the shareholders of Guangzhou Huaduo have pledged all of
their equity interests in Guangzhou Huaduo to Beijing Huanju Shidai to guarantee the performance by Guangzhou Huaduo and its shareholders’
performance of their respective obligations under the exclusive business cooperation agreement, exclusive option agreement, exclusive
technology support and technology services agreement and powers of attorney. If Guangzhou Huaduo and/or its shareholders breach
their contractual obligations under those agreements, Beijing Huanju Shidai, as the pledgee, will be entitled to certain rights,
including the right to sell the pledged equity interests. The pledge became effective on the date the pledged equity interests
were registered with the competent administration for industry and commerce and will remain effective until the pledgors are no
longer the shareholders of Guangzhou Huaduo.
Contractual Arrangements with Bilin Online
In August 2015, we acquired Bilin business,
a mobile instant communication application and its relevant business line, by purchasing 55.05% of the equity interests in its
holding company BiLin Cayman. The Bilin entities had a complete VIE structure. Upon the consummation of the acquisition, Bilin
Changxiang, Bilin Online and its shareholder entered into a series of agreements, which is similar to the contractual arrangements
with Beijing Tuda and Guangzhou Huaduo, to reestablish the VIE structure. The agreements and related instruments include an Exclusive
Business Cooperation Agreement, a Powers of Attorney, an Exclusive Option Agreement, an Exclusive Assets Purchase Agreement, and
an Equity Interest Pledge Agreement. This arrangement ensures the transfer of economic benefits to us, and our effective control
over Bilin Online.
Transactions with Affiliates
Guangzhou Huaduo holds 36% equity interest
in Zhuhai Daren. Guangzhou Huaduo and Zhuhai Daren had entered into a series of cooperation agreements, under which Guangzhou Huaduo
and Zhuhai Daren agreed to cooperate with respect to the operation of certain online games developed by Zhuhai Daren. In the years
ended December 31, 2014, 2015 and 2016, the aggregate online game revenues shared from Zhuhai Daren was RMB25.6 million, RMB25.5
million and RMB29.7 million (US$4.3 million), respectively. In December 2015, Guangzhou Huaduo entered into an intangible assets
purchasing agreement with Zhuhai Daren to acquire operating rights for licensed games from Zhuhai Daren for RMB5.7 million.
In 2010 and 2011, Guangzhou Huaduo and Guangzhou
Shanghang Information Technical Co., Ltd., or Guangzhou Shanghang, entered into certain server co-location agreements, under which
Guangzhou Shanghang provides Guangzhou Huaduo with bandwidth and server co-location services in different cities in China. In addition,
Guangzhou Huaduo and Guangzhou Shanghang entered into two content delivery network acceleration service agreements, under which
Guangzhou Shanghang provides content delivery network acceleration services to Guangzhou Huaduo. Guangzhou Shanghang is 24.3% owned
by Mr. Jun Lei, our major shareholder, including approximately 7% beneficially owned by Mr. David Xueling Li, our chairman, and
6.4% owned by Shanghai Yilian, respectively. In the years ended December 31, 2014, 2015 and 2016, the bandwidth service that Guangzhou
Huaduo received from Guangzhou Shanghang amounted to RMB42.5 million, RMB74.7 million and RMB96.2 million (US$13.9 million), respectively.
Kingsoft Corporation, or Kingsoft, through
third party advertising agencies, has in the past placed advertisements on Duowan.com and YY Client. We indirectly derived revenues
through such third party advertising agencies from Kingsoft in 2014, which amounted to RMB0.4 million. Mr. Jun Lei, our major shareholder,
is currently chairman, non-executive director and minority shareholder of Kingsoft.
In March 2012 and 2013, Beijing Tuda invested
RMB1.0 million and RMB1.0 million respectively, and then held a 86.96% equity interest in total in, Zhuhai Lequ Technology Co.,
Ltd., or Zhuhai Lequ. We had reduced our equity holding in Zhuhai Lequ to 13.33% by transferring 73.63% of equity interest we held
to its founders as of December 31, 2013. We had further reduced our equity holding in Zhuhai Lequ to 10.57% by the disposal of
2.76% of the equity interest to Chengdu Xishanju Entertainment Technology Co., Ltd., a subsidiary of Kingsoft, for a cash consideration
of RMB1.6 million in September, 2014. In 2013, Guangzhou Huaduo and Zhuhai Lequ entered into a cooperation agreement, under which
Guangzhou Huaduo and Zhuhai Lequ agreed to cooperate with respect to the operation of certain online games developed by Zhuhai
Lequ and the aggregate online game revenues shared from Zhuhai Lequ was RMB2.6 million, RMB0.3 million and nil in 2014, 2015 and
2016, respectively.
In 2015, Guangzhou Huaduo and Xiaomi Corporation
entered into certain promotion arrangements where Guangzhou Huaduo placed promotion on Xiaomi platform amounting to RMB2.6 million.
Mr. Lei Jun, our major shareholder, is currently the chairman of Xiaomi Corporation.
In November 2013 and March 2014, Guangzhou
Huaduo invested RMB7.0 million and RMB15.0 million respectively, in Guangzhou Kuyou Information Technology Co., Ltd., or Guangzhou
Kuyou, subsequent to which, Guangzhou Huaduo held 20% equity interest in Guangzhou Kuyou. In 2014, Guangzhou Huaduo and Guangzhou
Kuyou entered into a series of cooperation agreements, under which Guangzhou Huaduo and Guangzhou Kuyou agreed to cooperate with
respect to the exclusive operation of certain online games developed by Guangzhou Kuyou. In September 2016, the percentage of quity
interest held by Guangzhou Huaduo in Guangzhou Kuyou was diluted to 16% due to the options granted by Guangzhou Kuyou to its management
and employees. The aggregate online game revenues shared from Guangzhou Kuyou was RMB37.0 million, RMB134.5 million and RMB8.6
million (US$1.2 million) in 2014, 2015 and 2016, respectively, and the purchase of operating rights for licensed games was RMB6.8
million, RMB3.4 million and nil in 2014, 2015 and 2016, respectively.
In September 2014, Guangzhou Huaduo invested
RMB6.0 million in Shenzhen Qingdou Network Technology Co., Ltd., or Shenzhen Qingdou. Guangzhou Huaduo holds 12% equity interest
in Shenzhen Qingdou with significant influence over its management and operating policies. Shenzhen Qingdou borrowed RMB1.0 million
in 2014 from Guangzhou Huaduo. As of December 31, 2014, Shenzhen Qingdou had repaid the loan in full.
In September 2014, Guangzhou Huaduo invested
RMB3.0 million in Guangzhou Muyou Network Technology Co., Ltd., or Guangzhou Muyou. Guangzhou Huaduo holds 15% equity interest
in Guangzhou Muyou with significant influence over its management and operating policies. Guangzhou Muyou borrowed RMB0.5 million
in 2014 from Guangzhou Huaduo, and had repaid the loan in full as of December 31, 2014.
In October 2014, we entered into an
agreement to inject our free voice-over IP service, Weihui, into Bigo Inc. or Bigo, a company set up and which was then
controlled by Mr. David Xueling Li. Following two independent third-party valuation assessments and a capital injection from
other investors of Bigo, including Mr. Li, we retained a 27.8% ownership stake in Bigo. We had paid daily operating expenses
of RMB61.0 million, RMB95.3 million and 53.6 million (US$7.7 million) on behalf of Bigo in 2014, 2015 and 2016, respectively.
Bigo borrowed RMB155.0 million and RMB25.0 million (US$ 3.6 million) from Guangzhou Huaduo in 2015 and 2016, respectively.
Bigo had repaid the abovementioned amount in full as of December 31, 2015 and 2016, respectively. In April 2015, Guangzhou
Huaduo entered into a sale of equipment agreement with Bigo amounting to 12.1 million.
In February 2015, Guangzhou Huaduo invested
RMB30.0 million in Shanghai Yaoyu Culture Media Co., Ltd., or Shanghai Yaoyu. Guangzhou Huaduo holds 10% equity interest in Shanghai
Yaoyu with significant influence over its management and operating policies. In January 2015, Guangzhou Huaduo entered into an
intangible assets purchasing agreement with Shanghai Yaoyu to acquire operating rights for game broadcasting amounting to RMB11.5
million.
In March 2015, Guangzhou huaduo and Shanghai
Jiazuo Internet and Technology Co., Ltd., or Shanghai Jiazuo, which is the wholly-owned subsidiary of Guangzhou Kuyou, entered
into a series of cooperation agreements, under which Guangzhou Huaduo and Shanghai Jiazuo agreed to cooperate with respect to the
operation of certain online games developed by Shanghai Jiazuo. The aggregate online game revenues shared from Shanghai Jiazuo
was RMB20.9 million and RMB48.4 million (US$7.0 million) in 2015 and 2016, respectively, and the purchase of operating rights for
licensed games was RMB6.8 million, RMB3.4 million and nil in 2014, 2015 and 2016, respectively.
In February and November 2015, Guangzhou
Huaduo invested RMB10.0 million and RMB10.0 million, respectively, and then held 45.0% equity interest in total in, Shanghai Rongyi
Culture Development Co., Ltd., or Shanghai Rongyi. Shanghai Rongyi borrowed RMB13.0 million (US$1.9 million) in 2016 from Guangzhou
Huaduo.
Registration Rights
We have granted certain registration rights
to our shareholders. Set forth below is a description of the registration rights granted under the agreement.
Demand Registration Rights.
At any time following May 20, 2013, upon a written request from the holders of at least 25% of the registrable securities held
by our then preferred shareholders, we shall file a registration statement on a form other than Form F-3 covering the offer and
sale of the registrable securities held by the requesting shareholders and other holders of registrable securities who choose to
participate in the offering, if the offering covers at least 20% of the then outstanding registrable securities or if the reasonable
anticipated offering price to the public, net of selling expenses, would exceed US$10.0 million. Registrable securities include,
among others, our common shares not previously sold to the public and common shares issued or issued upon conversion of the preferred
shares.
However, we are not obligated to proceed
with a demand registration if we have, within any six-month period, already effected a registration under the Securities Act pursuant
to the exercise of the holders’ demand registration rights. We have the right to defer filing of a registration statement
for up to 90 days if our board of directors determines in good faith that the filing of a registration statement would be materially
detrimental to us, but we cannot exercise the deferral right more than once in any 12-month period.
Form F-3 Registration Rights.
When we are eligible for registration on Form F-3, upon a written request from any holders of the registrable securities held by
our then preferred shareholders, we shall file a registration statement on Form F-3 covering the offer and sale of the registrable
securities.
We are not obligated to effect a Form F-3
registration, among other things, if we have, within any six-month period, already effected a registration under the Securities
Act pursuant to the exercise of the holders’ Form F-3 registration rights, or the dollar amount of securities to be sold
is of an aggregate price to the public of less than US$1.0 million. We have the right to defer filing of a registration statement
for up to 90 days if our board of directors, including a majority of the directors appointed by the preferred shareholders and
Tiger Global Six YY Holdings, determines in good faith that the filing of a registration statement would be materially detrimental
to us, but we cannot exercise the deferral right more than once in any 12-month period.
Piggyback Registration Rights.
If we propose to file a registration statement for a public offering of our common shares on a form that would be suitable only
for registrable securities, we must offer holders of registrable securities an opportunity to include in that registration all
or any part of their registrable securities. The underwriters of any underwritten offering have the right to limit the number of
shares with registration rights to be included in the registration statement, subject to certain limitations.
Expenses of Registration.
We will pay all expenses relating to any demand, Form F-3, or piggyback registration.
Termination of Obligations.
We shall have no obligation to effect any demand, Form F-3, or piggyback registration (a) five years after our initial public offering,
(b) if, in the opinion of counsel to us satisfactory to the holder, all such registrable securities proposed to be sold by a holder
may then be sold under Rule 144 or another similar exemption under the Securities Act in one transaction without exceeding the
volume limitations thereunder or (c) upon a liquidation event.
Employment Agreements
See “Item 6. Directors, Senior Management
and Employees—B. Compensation of Directors and Executive Officers—Employee Agreements” for a description of the
employment agreements we have entered into with our senior executive officers.
Share Incentives
See “Item 6. Directors, Senior Management
and Employees—B. Compensation of Directors and Executive Officers” for a description of share-based compensation awards
we have granted to our directors, officers and other individuals as a group.
See Note 25 to our financial statements
for further information about our related party transactions.
C. Interests of Experts and Counsel
Not applicable.
|
ITEM 8.
|
FINANCIAL INFORMATION
|
A. Consolidated Statements and Other
Financial Information
See “Item 18. Financial Statements.”
Legal Proceedings
Guangzhou NetEase Computer System Co., Ltd.
has initiated a lawsuit against us in Guangzhou in October 2014, claiming infringement of its rights of reproduction concerning
the online game of
Fantasy Westward Journey
in an amount of RMB100 million. Although we believe that the claim is unjustified
and commercially motivated, if the outcome of the proceeding is unfavorable to us, we may suffer considerable damage to our financial
position and reputation.
In April 2015, we initiated a litigation
on antitrust and unfair competition against Guangzhou NetEase Computer System Co., Ltd. in the amount of RMB10 million. In September
2015, we initiated three actions against three game commentators who have breached their exclusive live broadcasting obligations
owed to us, each in an amount of RMB15 million. In July 2016, we initiated a litigation against Shenzhen Yinghua Xunfang Communication Technology Co., Ltd.
which owned us payment in the amount of RMB11.6 million under a series of cooperation agreements.
Apart from the aforesaid lawsuits, we are
not currently a party to any pending material litigation or other material legal proceeding and are not aware of any pending or
threatened litigation or other legal proceeding that may have a material adverse impact on our business or operations. However,
we may be subject to various legal proceedings and claims that are incidental to our ordinary course of business. Regardless of
the outcome, legal or administrative proceedings or claims may have an adverse impact on us because of defense and settlement costs,
diversion of management attention and other factors.
Dividend Policy
We have not paid dividend in the past and
do not have any present plan to pay any dividend in the foreseeable future. We currently intend to retain most, if not all, of
our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in
the Cayman Islands. We may receive dividends from our PRC subsidiary for our cash requirements, including any payment of dividends
to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See “Item 3.
Key information—D. Risk Factors—Risks Related to Our Corporate Structure and Our Industry—Our PRC subsidiaries
and PRC consolidated affiliated entities are subject to restrictions on paying dividends or making other payments to us, which
may restrict our ability to satisfy our liquidity requirements” and “Item 4. Information on the Company—B. Business
Overview—PRC Regulation—Regulation of Foreign Currency Exchange and Dividend Distribution.”
Our board of directors has complete discretion
on whether to distribute dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay
dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay
any dividends, we will pay our ADS holders to the same extent as holders of our Class A common shares, subject to the terms of
the deposit agreement, including the fees and expenses payable thereunder. See “Item 12. Description of Securities Other
than Equity Securities—D. American Depositary Shares.” Cash dividends on our Class A common shares, if any, will be
paid in U.S. dollars.
B. Significant Changes
Except as disclosed elsewhere in this annual
report, we have not experienced any significant changes since the date of our audited consolidated financial statements included
in this annual report.
|
ITEM 9.
|
THE OFFER AND LISTING
|
A. Offering and Listing Details
See “—C. Markets” and
“Item 12. Description of Securities other than Equity Securities—D. American Depositary Shares.” We have a dual-class
common share structure in which Class A common shares have different voting rights from Class B common shares. Class B common shares
are each entitled to ten votes, whereas Class A common shares are each entitled to one vote. See “Item 3. Key Information—D.
Risk Factors—Risks Related to Our ADSs—Our dual class common share structure with different voting rights will limit
your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders
of our Class A common shares and ADSs may view as beneficial.”
B. Plan of Distribution
Not applicable.
C. Markets
Our ADSs, each representing twenty Class
A common shares, have been listed on the Nasdaq Global Market since November 21, 2012 and trade under the symbol “YY”.
The following table provides the high and low trading prices for our ADSs on the NASDAQ Global Market for the periods indicated.
|
|
Trading Price
|
|
|
|
High
|
|
|
Low
|
|
|
|
US$
|
|
|
US$
|
|
Annual Highs and Lows
|
|
|
|
|
|
|
|
|
Fiscal Year 2014
|
|
|
96.39
|
|
|
|
50.00
|
|
Fiscal Year 2015
|
|
|
81.70
|
|
|
|
50.52
|
|
Fiscal Year 2016
|
|
|
63.96
|
|
|
|
31.07
|
|
Quarterly Highs and Lows
|
|
|
|
|
|
|
|
|
First Fiscal Quarter of 2014
|
|
|
90.93
|
|
|
|
50.00
|
|
Second Fiscal Quarter of 2014
|
|
|
82.54
|
|
|
|
51.08
|
|
Third Fiscal Quarter of 2014
|
|
|
96.39
|
|
|
|
67.50
|
|
Fourth Fiscal Quarter of 2014
|
|
|
86.00
|
|
|
|
60.18
|
|
First Fiscal Quarter of 2015
|
|
|
73.04
|
|
|
|
50.52
|
|
Second Fiscal Quarter of 2015
|
|
|
81.70
|
|
|
|
54.16
|
|
Third Fiscal Quarter of 2015
|
|
|
69.68
|
|
|
|
51.02
|
|
Fourth Fiscal Quarter of 2015
|
|
|
65.53
|
|
|
|
53.34
|
|
First Fiscal Quarter of 2016
|
|
|
62.79
|
|
|
|
42.35
|
|
Second Fiscal Quarter of 2016
|
|
|
63.96
|
|
|
|
31.07
|
|
Third Fiscal Quarter of 2016
|
|
|
56.11
|
|
|
|
32.75
|
|
Fourth Fiscal Quarter of 2016
|
|
|
57.22
|
|
|
|
39.24
|
|
Monthly Highs and Lows
|
|
|
|
|
|
|
|
|
October 2016
|
|
|
57.22
|
|
|
|
48.00
|
|
November 2016
|
|
|
49.03
|
|
|
|
41.18
|
|
December 2016
|
|
|
44.94
|
|
|
|
39.24
|
|
January 2017
|
|
|
45.65
|
|
|
|
37.81
|
|
February 2017
|
|
|
49.90
|
|
|
|
40.28
|
|
March 2017
|
|
|
51.84
|
|
|
|
44.00
|
|
April 2017 (through April 19, 2017)
|
|
|
47.80
|
|
|
|
42.90
|
|
D.Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
|
ITEM 10.
|
ADDITIONAL INFORMATION
|
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
We are a Cayman Islands company and our
affairs are governed by our memorandum and articles of association and the Companies Law, Cap. 22 (Law 3 of 1961, as consolidated
and revised) of the Cayman Islands, referred to as the Companies Law below. The following are summaries of certain provisions of
our memorandum and articles of association in effect as of the date of this annual report insofar as they relate to the material
terms of our common shares.
Registered Office and Objects
Our registered office in the Cayman Islands
is located at Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KYI-1111, Cayman
Islands. The memorandum of association provides, inter alia, that the liability of the members of our company is limited to the
amount, if any, for the time being unpaid on the common shares. The objects for which our company is established are unrestricted
(including acting as an investment company), and we shall have and be capable of exercising all the functions of a natural person
of full capacity irrespective of corporate benefit, as provided in Section 27(2) of the Companies Law and in view of the fact that
we are an exempted Company, we will not trade in the Cayman Islands with any person, firm or corporation except in furtherance
of our business carried on outside the Cayman Islands.
Board of Directors
See “Item 6. Directors, Senior Management
and Employees—C. Board Practices—Duties of Directors” and “—Terms of Directors and Officers.”
Common Shares
General
Our common shares are divided into Class
A common shares and Class B common shares. Holders of Class A common shares and Class B common shares will have the same rights
except for voting and conversion rights. The holders of ADSs will not be treated as our shareholders and will be required to surrender
their ADSs for cancellation and withdrawal from the depositary facility in which the Class A common shares are held in accordance
with the provisions of the deposit agreement in order to exercise shareholders’ rights in respect of the Class A common shares.
The depositary will agree, so far as it is practical, to vote or cause to be voted the amount of Class A common shares represented
by ADSs in accordance with the non-discretionary written instructions of the holders of such ADSs.
All of our outstanding common shares are
fully paid and non-assessable. Certificates representing our common shares are issued in the registered form. Our shareholders
who are non-residents of the Cayman Islands may freely hold and vote their common shares.
Meetings
Shareholders’ meetings may be convened
by a majority of our board of directors or the chairman. Advance notice in writing of at least ten clear days is required for the
convening of our annual general meeting and any other general meeting of our shareholders. A quorum required for a meeting of shareholders
consists of at least one or more shareholders present in person or by proxy, or (in the case of a shareholder being a corporation)
by its duly authorized representative representing not less than one-third in nominal value of the total issued voting shares in
our company present throughout the meeting.
Notwithstanding that a meeting is called
by shorter notice than that mentioned above, but, subject to the Companies Law, it will be deemed to have been duly called, if
it is so agreed (a) in the case of a meeting called as an annual general meeting by all of our shareholders entitled to attend
and vote at the meeting; and (b) in the case of any other meeting, by a majority in number of the shareholders having the right
to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the issued shares giving
that right.
No business other than the appointment of
a chairman may be transacted at any general meeting unless a quorum is present at the commencement of business. However, the absence
of a quorum will not preclude the appointment of a chairman. If present, the chairman of our board of directors shall be the chairman
presiding at any shareholders’ meetings.
A corporation being a shareholder shall
be deemed for the purpose of our articles of association to be present in person if represented by its duly authorized representative
being the person appointed by resolution of the directors or other governing body of such corporation to act as its representative
at the relevant general meeting or at any relevant general meeting of any class of our shareholders. Such duly authorized representative
shall be entitled to exercise the same powers on behalf of the corporation that he represents as that corporation could exercise
if it were our individual shareholder.
The quorum for a separate general meeting
of the holders of a separate class of shares is described in “—Modification of Rights” below.
Our articles of association do not allow
our shareholders to approve matters to be determined at shareholders’ meetings by way of written resolutions without a meeting.
Voting Rights
In respect of all matters requiring a shareholders’
vote, each Class A common share is entitled to one vote, and each Class B common share is entitled to ten votes, voting together
as one class. At any shareholders’ meeting, on a show of hands, every shareholder present in person or by proxy (or, in the
case of a shareholder being a corporation, by its duly authorized representative) shall have one vote and on a poll, every shareholder
present in person or by proxy, or in the case of a shareholder being a corporation, by its duly authorized representative shall
have one vote for each fully paid share of which such shareholder is the holder.
No shareholder shall, unless the Board otherwise
determines, be entitled to vote or be reckoned in a quorum, in respect of any share, unless such shareholder is duly registered
as our shareholder and all calls or installments due by such shareholder to us have been paid.
If a clearing house (or its nominee(s))
or a central depositary entity, being a corporation, is a shareholder, it may authorize such person or persons as it thinks fit
to act as its representative(s) at any meeting or at any meeting of any class of shareholders, provided that the authorization
shall specify the number and class of shares in respect of which each such person is so authorized. A person so authorized is entitled
to exercise the same rights and powers on behalf of the clearing house or central depositary entity (or its nominee(s)) as if such
person was the registered holder of our shares held by the clearing house or central depositary entity (or its nominee(s)) including
the right to vote individually on a show of hands.
While there is nothing under the laws of
the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for the election of directors
of our company, it is not a concept that is accepted as a common practice in the Cayman Islands, and our company has made no provisions
in our articles of association to allow cumulative voting for such elections.
Conversion
Each Class B common share is convertible
into one Class A common share at any time by the holder thereof. Class A common shares are not convertible into Class B common
shares under any circumstances. Upon any transfer of Class B common shares by a holder to any person or entity which is not an
affiliate of such holder and which is not any of our founders or any affiliates of our founders, such Class B common shares shall
be automatically and immediately converted into the equivalent number of Class A common shares. In addition, if at any time, Messrs.
David Xueling Li, Jun Lei and their affiliates collectively beneficially own less than 5% of the total number of the issued and
outstanding Class B common shares, each issued and outstanding Class B common share will be automatically and immediately converted
into one Class A common share, and we will not issue any Class B common shares thereafter. Furthermore, if at any time more than
50% of the ultimate beneficial ownership of any holder of Class B common shares (other than our founders or our founders’
affiliates) changes, each such Class B common share will be automatically and immediately converted into one Class A common share.
Calls on Shares and Forfeiture of Shares
Subject to our memorandum and articles of
association, our directors may from time to time make such calls upon the members in respect of any amounts unpaid on the shares
held by them. The shares that have been called upon and remain unpaid on the specified time are subject to forfeiture.
Protection of Minority Shareholders
In principle, we will normally be the proper
plaintiff to sue for a wrong done to us as a company because as a general rule a derivative action may not be brought by a minority
shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands,
the Cayman Islands court can be expected to apply and follow the common law principles (namely the rule in Foss v. Harbottle and
the exceptions thereto) which permit a minority shareholder to commence a class action against, or derivative actions in the name
of, a company to challenge the following:
|
(i)
|
an acts which is illegal or ultra vires;
|
|
(ii)
|
an act which, although not ultra vires, could only be effected duly if authorized by a special or qualified majority vote that
has not been obtained; and
|
|
(iii)
|
an act which constitutes a fraud on the minority where the wrongdoers are themselves in control of the company.
|
In the case of a company (not being a bank)
having its share capital divided into shares, the Grand Court of the Cayman Islands may, on the application of members holding
not less than one fifth of the shares of the company in issue, appoint an inspector to examine the affairs of the company and to
report thereon in such manner as the Grand Court of the Cayman Islands shall direct.
Any of our shareholders may petition the
Grand Court of the Cayman Islands which may make a winding up order if the Grand Court of the Cayman Islands is of the opinion
that it is just and equitable that we should be wound up or, as an alternative to a winding up order, (a) an order regulating the
conduct of our affairs in the future, (b) an order requiring us to refrain from doing or continuing an act complained of by the
shareholder petitioner or to do an act which the shareholder petitioner has complained we have omitted to do, (c) an order authorizing
civil proceedings to be brought in our name and on our behalf by the shareholder petitioner on such terms as the Grand Court of
the Cayman Islands may direct, or (d) an order providing for the purchase of the shares of any of our shareholders by other shareholders
or us and, in the case of a purchase by us, a reduction of our capital accordingly.
Generally, claims against us must be based
on the general laws of contract or tort applicable in the Cayman Islands or individual rights as shareholders as established by
our articles of association.
Pre-Emption Rights
There are no pre-emption rights applicable
to the issue of new shares of our company under either Cayman Islands law or our memorandum and articles of association.
Liquidation Rights
Subject to any class or classes of shares
or future shares which are issued with specific rights, privileges or restrictions as to the distribution of available surplus
assets on liquidation, (a) if we are wound up and the assets available for distribution among our shareholders are more than sufficient
to repay the whole of the capital paid up at the commencement of the winding up, the excess shall be distributed
pari passu
among those shareholders in proportion to the amount paid up at the commencement of the winding up on the shares held by them,
respectively, and (b) if we are wound up and the assets available for distribution among the shareholders as such are insufficient
to repay the whole of the paid-up capital, those assets shall be distributed so that, as nearly as may be, the losses shall be
borne by the shareholders in proportion to the capital paid up at the commencement of the winding up on the shares held by them,
respectively.
If we are wound up (whether the liquidation
is voluntary or by the court), the liquidator may with the sanction of our special resolution and any other sanction required by
the Companies Law, divide among our shareholders in specie or kind the whole or any part of our assets (whether or not they shall
consist of property of the same kind) and may, for such purpose, set such value as the liquidator deems fair upon any property
to be divided and may determine how such division shall be carried out as between the shareholders or different classes of shareholders.
The liquidator may also vest the whole or any part of these assets in trustees upon such trusts for the benefit of the shareholders
as the liquidator shall think fit, but so that no shareholder will be compelled to accept any assets, shares or other securities
upon which there is a liability.
The consideration received by each holder
of a Class A common share and a holder of a Class B common share will be the same in any liquidation event.
Variation of Rights
Alterations to our memorandum and articles
of association may only be made by special resolution, meaning a majority of not less than two-thirds of votes cast at a shareholders’
meeting.
If at any time, our share capital is divided
into different classes of shares, all or any of the special rights attached to any class of shares may, subject to the provisions
of the Companies Law, be varied with the sanction of a special resolution passed at a general meeting of the holders of the shares
of that class. Consequently, the rights of any class of shares cannot be detrimentally altered without a majority of two-thirds
of the vote of all of the shares in that class. The provisions of our articles of association relating to general meetings shall
apply similarly to every such separate general meeting, but so that the quorum for the purposes of any such separate general meeting
or at the adjourned meeting shall be a person or persons together holding (or represented by proxy) on the date of the relevant
meeting not less than one-third in nominal value of the issued shares of that class, that every holder of shares of the class shall
be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class present
in person or by proxy may demand a poll.
The rights conferred upon the holders of
the shares of any class issued with special rights shall not, unless otherwise expressly provided by the terms of issue of the
shares of that class, be deemed to be varied by the creation or issue of further shares ranking
pari passu
with such existing
class of shares.
Alteration of Capital
We may from time to time by ordinary resolution
in accordance with the Companies Law alter the conditions of our memorandum of association to:
|
·
|
increase our capital by such sum, to be divided into shares of such amounts, as the resolution shall prescribe;
|
|
·
|
consolidate and divide all or any of our share capital into shares of larger amounts than our existing shares;
|
|
·
|
cancel any shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person,
and diminish the amount of its share capital by the amount of the shares so cancelled subject to the provisions of the Companies
Law;
|
|
·
|
sub-divide our shares or any of them into shares of smaller amount than is fixed by our memorandum of association, subject
nevertheless to the Companies Law, so that the resolution whereby any share is sub-divided may determine that, as between the holders
of the shares resulting from such subdivision, one or more of the shares may have any such preferred or other special rights over,
or may have such deferred rights or be subject to any such restrictions as compared with the others, as we have power to attach
to unissued or new shares; and
|
|
·
|
divide shares into several classes and without prejudice to any special rights previously conferred on the holders of existing
shares, attach to the shares respectively any preferential, deferred, qualified or special rights, privileges, conditions or such
restrictions that in the absence of any such determination in a general meeting may be determined by our directors.
|
We may, by special resolution, subject to
any confirmation or consent required by the Companies Law, reduce our share capital or any capital redemption reserve in any manner
authorized by law.
Transfer of Shares
Subject to any applicable restrictions set
forth in our articles of association, including, for example, the board of directors’ discretion to refuse to register a
transfer of any share (not being a fully paid up share) to a person of whom it does not approve, or any share issued under share
incentive plans for employees upon which a restriction on transfer imposed thereby still subsists, or a transfer of any share to
more than four joint holders, any of our shareholders may transfer all or any of his or her shares by an instrument of transfer
in the usual or common form or in a form prescribed by the Nasdaq Global Market or in another form that our directors may approve.
Our directors may decline to register any
transfer of any share which is not paid up or on which we have a lien. Our directors may also decline to register any transfer
of any share unless:
|
·
|
the instrument of transfer is lodged with us and is accompanied by the certificate for the shares to which it relates and such
other evidence as our directors may reasonably require to show the right of the transferor to make the transfer;
|
|
·
|
the instrument of transfer is in respect of only one class of share;
|
|
·
|
the instrument of transfer is properly stamped (in circumstances where stamping is required); and
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fee of such maximum sum as the Nasdaq Global Market may determine to be payable or such lesser sum as our directors may from
time to time require is paid to us in respect thereof.
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If our directors refuse to register a transfer,
they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and
the transferee notice of such refusal.
The registration of transfers may, after
compliance with any notice requirement of the Nasdaq Global Market, be suspended and the register closed at such times and for
such periods as our directors may from time to time determine; provided, however, that the registration of transfers
shall not be suspended nor the register closed for more than 30 days in any year as our directors may determine.
Register of Members
In accordance with Section 48 of the Companies
Law, the register of members is prima facie evidence of the registered holder or member of shares of a company. Therefore, a person
becomes a registered holder or member of shares of the company only upon entry being made in the register of members. Our directors
will maintain one register of members, at the office of Conyers Trust Company (Cayman) Limited, Cricket Square, Hutchins Drive,
P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands, which provides us with corporate administrative services. We will perform
the procedures necessary to register the shares in the register of members as required in “PART III—Distribution of
Capital and Liability of Members of Companies and Associations” of the Companies Law, and will ensure that the entries on
the register of members are made without any delay.
The depositary will be included in our register
of members as the only holder of the Class A common shares underlying the ADSs. The shares underlying the ADSs are not shares in
bearer form, but are in registered form and are “non-negotiable” or “registered” shares in which case the
shares underlying the ADSs can only be transferred on the books of the company in accordance with Section 166 of the Companies
Law.
In the event that we fail to update our
register of members, the recourse of investors is directly to the depositary under the terms of the deposit agreement, which is
governed by New York law. The depositary will have recourse against us under the terms of the deposit agreement, and also will
hold a share certificate evidencing the depositary as the registered holder of shares underlying the ADSs. Further, Section 46
of the Companies Law provides for recourse to be available to our investors in case we fail to update our register of members.
In the event we fail to update our register of members, the depositary, as the aggrieved party, may apply for an order with the
courts of the Cayman Islands for the rectification of the register of members.
Share Repurchases
We are empowered by the Companies Law and
our articles of association to purchase our own shares, subject to certain restrictions. Our directors may only exercise this power
on our behalf, subject to the Companies Law, our memorandum and articles of association and to any applicable requirements imposed
from time to time by the Nasdaq Global Market, the U.S. Securities and Exchange Commission, or by any other recognized stock exchange
on which our securities are listed.
Dividends
Subject to the Companies Law, our company
in a general meeting or our directors may declare dividends in any currency to be paid to our shareholders. Dividends may be declared
and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our directors determine is
no longer needed. Our board of directors may also declare and pay dividends out of the share premium account or any other fund
or account that can be authorized for this purpose in accordance with the Companies Law.
Except in so far as the rights attaching
to, or the terms of issue of, any share otherwise provides, (a) all dividends shall be declared and paid according to the amounts
paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated
for this purpose as paid up on that share and (b) all dividends shall be apportioned and paid pro rata according to the amounts
paid up on the shares during any portion or portions of the period in respect of which the dividend is paid.
Our directors may also pay interim dividends,
whenever our financial position, in the opinion of our directors, justifies such payment.
Our directors may deduct from any dividend
or bonus payable to any shareholder all sums of money (if any) presently payable by such shareholder to us on account of calls
or otherwise.
No dividend or other money payable by us
on or in respect of any share shall bear interest against us.
In respect of any dividend proposed to be
paid or declared on our share capital, our directors may resolve and direct that (a) such dividend be satisfied wholly or in part
in the form of an allotment of shares credited as fully paid up, provided that our shareholders entitled thereto will be entitled
to elect to receive such dividend (or part thereof if our directors so determine) in cash in lieu of such allotment or (b) the
shareholders entitled to such dividend will be entitled to elect to receive an allotment of shares credited as fully paid up in
lieu of the whole or such part of the dividend as our directors may think fit. Our shareholders may, upon the recommendation of
our directors, by ordinary resolution resolve in respect of any particular dividend that, notwithstanding the foregoing, a dividend
may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders
to elect to receive such dividend in cash in lieu of such allotment.
Any dividend interest or other sum payable
in cash to the holder of shares may be paid by check or warrant sent by mail addressed to the holder at his registered address,
or addressed to such person and at such addresses as the holder may direct. Every check or warrant shall, unless the holder or
joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the
holder whose name stands first on the register in respect of such shares, and shall be sent at his or their risk and payment of
the check or warrant by the bank on which it is drawn shall constitute a good discharge to us.
All dividends unclaimed for one year after
having been declared may be invested or otherwise made use of by our board of directors for the benefit of our company until claimed.
Any dividend unclaimed after a period of six years from the date of declaration of such dividend shall be forfeited and reverted
to us.
Whenever our directors have resolved that
a dividend be paid or declared, our directors may further resolve that such dividend be satisfied wholly or in part by the distribution
of specific assets of any kind, and in particular of paid up shares, debentures or warrants to subscribe for our securities or
securities of any other company. Where any difficulty arises with regard to such distribution, our directors may settle it as they
think expedient. In particular, our directors may issue fractional certificates, ignore fractions altogether or round the same
up or down, fix the value for distribution purposes of any such specific assets, determine that cash payments shall be made to
any of our shareholders upon the footing of the value so fixed in order to adjust the rights of the parties, vest any such specific
assets in trustees as may seem expedient to our directors, and appoint any person to sign any requisite instruments of transfer
and other documents on behalf of the persons entitled to the dividend, which appointment shall be effective and binding on our
shareholders.
Untraceable Shareholders
We are entitled to sell any shares of a
shareholder who is untraceable, provided that no such sale shall be made unless:
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all checks or warrants in respect of dividends of such shares, not being less than three in number, for any sums payable in
cash to the holder of such shares have remained un-cashed for a period of 12 years prior to the publication of the advertisement
and during the three months referred to in the third bullet point below;
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we have not during that time received any indication of the whereabouts or existence of the shareholder or person entitled
to such shares by death, bankruptcy or operation of law; and
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we, if so required by the rules of the Nasdaq Global Market, have caused an advertisement to be published in newspapers in
accordance with such applicable rules giving notice of our intention to sell these shares, and a period of three months (or such
shorter period as permitted under the applicable rules) has elapsed since such advertisement.
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The net proceeds of any such sale shall
belong to us, and when we receive these net proceeds we shall become indebted to the former shareholder for an amount equal to
such net proceeds.
Inspection of Books and Records
Holders of our common shares will have no
general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate records. However,
we will provide our shareholders with annual audited financial statements.
C.Material Contracts
We have not entered into any material contracts
other than in the ordinary course of business and other than those described elsewhere in “Item 4. Information on the Company—B.
Business Overview,” “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,”
or elsewhere in this annual report.
D. Exchange Controls
See “Item 4. Information on the Company—B.
Business Overview—PRC Regulation—Regulation of Foreign Currency Exchange and Dividend Distribution.”
E. Taxation
Cayman Islands Taxation
See “Item 5. Operating and Financial
Review and Prospects—A. Operating Results—Discussion of Selected Statements of Operations Items—Taxation—Cayman
Islands.”
People’s Republic of China Taxation
Under the existing tax laws in the PRC,
we are qualified as a non-resident enterprise. We are a holding company incorporated in the Cayman Islands; our holding company
indirectly holds 100% of the equity interests in our PRC subsidiaries through Duowan BVI, NeoTasks Cayman, NeoTasks HK and BiLin Cayman.
Our business operations are principally conducted through our PRC subsidiaries and our PRC consolidated affiliated entities. The
PRC Enterprise Income Tax Law and its implementation rules, both of which became effective on January 1, 2008, provide that China-sourced
income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent that is not a PRC resident enterprise
and has no establishment in the PRC, will normally be subject to PRC withholding tax at a rate of 10% (a further reduced WHT rate
may be available according to the applicable double tax treaty or arrangement).
If the PRC tax authorities determine that
YY Inc., our Cayman Islands holding company, is a PRC resident enterprise for enterprise income tax purposes, our world-wide income
could be subject to PRC tax at a rate of 25%, which could materially reduce our net income. In addition, we will also be subject
to PRC enterprise income tax reporting obligations. Furthermore, although dividends paid by one PRC tax resident to another PRC
tax resident should qualify as “tax-exempt income” under the PRC Enterprise Income Tax Law, we cannot assure you that
dividends by our PRC subsidiaries to our Cayman holding company will not be subject to a 10% withholding tax, as the PRC foreign
exchange control authorities, which enforce the withholding tax on dividends, and the PRC tax authorities have not yet issued guidance
with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise
income tax purposes. In addition, ADS holders may be subject to PRC withholding tax on dividends payable by us and gains realized
on the sale or other disposition of ADSs or common shares, if the PRC tax authorities determine that our Cayman Islands holding
company is a PRC resident enterprise for enterprise income tax purposes. See “Risk Factors—Risks Related to Doing Business
in China—Under the PRC enterprise income tax law, we may be classified as a PRC “resident enterprise,” which
could result in unfavorable tax consequences to us and our shareholders and have a material adverse effect on our results of operations
and the value of your investment.”
United States Federal Income Tax Considerations
The following is a summary of certain United
States federal income tax considerations relating to the ownership and disposition of our ADSs or common shares by a U.S. holder
(as defined below) that holds our ADSs or common shares as “capital assets” (generally, property held for investment)
under the United States Internal Revenue Code of 1986, as amended (the “Code”). This summary is based upon existing
United States federal income tax law, which is subject to differing interpretations or change, possibly with retroactive effect.
This summary does not discuss all aspects of United States federal income taxation that may be important to particular holders
in light of their particular circumstances, including holders subject to special tax rules (for example, banks and other financial
institutions, insurance companies, broker-dealers, pension plans, cooperatives, real estate investment trusts, regulated investment
companies, traders in securities that have elected the mark-to-market method of accounting for their securities, partnerships and
their partners, and tax-exempt organizations (including private foundations)), holders who are not U.S. holders, holders who own
(directly, indirectly, or constructively) 10% or more of our voting stock, holders that hold their ADSs or common shares as part
of a straddle, hedge, conversion, constructive sale, or other integrated transaction for United States federal income tax purposes,
persons who acquired ADSs or common shares pursuant to the exercise of any employee share option or otherwise as compensation,
or holders that have a functional currency other than the United States dollar, all of whom may be subject to tax rules that differ
significantly from those summarized below. In addition, except to the extent described below, this summary does not discuss any
state, local or non-United States tax considerations, Medicare tax, the alternative minimum tax or any non-income tax (such as
the United States federal estate or gift tax) considerations. Each U.S. holder is urged to consult its tax advisor regarding the
United States federal, state, local, and non-United States income and other tax considerations relating to the ownership and disposition
of our ADSs or common shares.
General
For purposes of this summary, a “U.S.
holder” is a beneficial owner of our ADSs or common shares that is, for United States federal income tax purposes, (i) an
individual who is a citizen or resident of the United States, (ii) a corporation (or other entity treated as a corporation for
United States federal income tax purposes) created in, or organized under the law of, the United States or any state thereof or
the District of Columbia, (iii) an estate the income of which is includible in gross income for United States federal income tax
purposes regardless of its source, or (iv) a trust (A) the administration of which is subject to the primary supervision of a United
States court and which has one or more United States persons who have the authority to control all substantial decisions of the
trust or (B) that has otherwise elected to be treated as a United States person.
If a partnership (or other entity treated
as a partnership for United States federal income tax purposes) is a beneficial owner of our ADSs or common shares, the tax treatment
of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships
holding our ADSs or common shares and partners in such partnerships are urged to consult their tax advisors regarding the ownership
and disposition of our ADSs or common shares.
It is generally expected that a holder of
ADSs should be treated, for United States federal income tax purposes, as the beneficial owner of the underlying shares represented
by the ADSs. The remainder of this discussion assumes that a holder of ADSs will be treated in this manner. Predicated upon such
treatment, deposits or withdrawals of common shares for ADSs will not be subject to United States federal income tax.
Passive Foreign Investment Company Considerations
A non-United States corporation, such as
our company, will be classified as a “passive foreign investment company,” or “PFIC”, for United States
federal income tax purposes, for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain
types of “passive” income or (ii) 50% or more of its average quarterly assets (as determined on the basis of fair market
value) during such year produce or are held for the production of passive income. For this purpose, cash and assets readily convertible
into cash are categorized as passive assets and the company’s unbooked intangibles are taken into account for determining
the value of its assets. We will be treated as owning our proportionate share of the assets and earning our proportionate share
of the income of any other corporation in which we own, directly or indirectly, more than 25% (by value) of the stock.
Although the law in this regard is unclear,
we treat Guangzhou Huaduo, Beijing Tuda and Bilin Online as being owned by us for United States federal income tax purposes, not
only because we exercise effective control over the operation of such entities but also because we are entitled to substantially
all of their economic benefits, and, as a result, we consolidate their operating results in our consolidated financial statements.
Assuming that we own Guangzhou Huaduo, Beijing
Tuda and Bilin Online for United States federal income tax purposes, we do not believe that we were a PFIC, for United States federal
income tax purposes, for the taxable year ended December 31, 2016, and do not anticipate becoming a PFIC in future taxable years.
However, because PFIC status is a factual determination made annually after the close of each taxable year on the basis of the
composition of our income and assets, there can be no assurance that we will not be a PFIC for the current taxable year or any
future taxable year. The value of our assets, for purposes of the PFIC test, will generally be determined by reference to the market
price of our ADSs and common shares. Accordingly, fluctuations in the market price of our ADSs and common shares may cause us to
become a PFIC for the current taxable year or future taxable years. It is also possible that the Internal Revenue Service may challenge
our classification or valuation of our goodwill and other unbooked intangibles, which may result in our company being or, becoming
classified as, a PFIC for the current or future taxable years. The determination of whether we will be or become a PFIC will also
depend, in part, upon the nature of our income and assets over time, which are subject to change from year to year. There can be
no assurance our business plans will not change in a manner that will affect our PFIC status.
The discussion below under “Dividends”
and “Sale or Other Disposition of ADSs or Common Shares” is written on the basis that we will not be classified as
a PFIC for United States federal income tax purposes. The United States federal income tax rules that apply if we are classified
as a PFIC for the current taxable year or any subsequent taxable year are generally discussed below under “Passive Foreign
Investment Company Rules.”
Dividends
Subject to the PFIC rules discussed below,
any cash distributions (including the amount of any taxes withheld) paid on our ADSs or common shares out of our current or accumulated
earnings and profits, as determined under United States federal income tax principles, will generally be includible in the gross
income of a U.S. holder as dividend income on the day actually or constructively received by the U.S. holder, in the case of common
shares, or by the Depositary, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis
of United States federal income tax principles, any distribution paid will generally be reported as a “dividend” for
United States federal income tax purposes. A non-corporate recipient of dividend income will generally be subject to tax on dividend
income from a “qualified foreign corporation” at a reduced United States federal tax rate rather than the marginal
tax rates generally applicable to ordinary income provided that certain holding period requirements are met.
A non-United States corporation (other than
a corporation that is classified as a PFIC for the taxable year in which the dividend is paid or the preceding taxable year) will
generally be considered to be a qualified foreign corporation with respect to any dividend it pays on stock (or ADSs in respect
of such stock) which is readily tradable on an established securities market in the United States or, in the event that the company
is deemed to be a PRC resident under the PRC Enterprise Income Tax Law, the company is eligible for the benefits of the United
States-PRC treaty. Although no assurances may be given, our ADSs are expected to be readily tradable on the Nasdaq Global Market,
which is an established securities market in the United States. Since we do not expect that our common shares will be listed on
established securities markets, it is unclear whether dividends that we pay on our common shares that are not backed by ADSs currently
meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable
on an established securities market in the current taxable year or future taxable years.
Dividends received on the ADSs or common
shares are not expected to be eligible for the dividends received deduction allowed to corporations. Each U.S. holder is advised
to consult its tax advisor regarding the rate of tax that will apply to such holder with respect to dividend distributions, if
any, received from us.
Dividends generally will be treated as income
from foreign sources for United States foreign tax credit purposes and generally will constitute passive category income. A U.S.
holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding
taxes imposed on dividends received on ADSs or common shares. A U.S. holder who does not elect to claim a foreign tax credit for
foreign tax withheld, may instead claim a deduction, for United States federal income tax purposes, in respect of such withholdings,
but only for a year in which such U.S. holder elects to do so for all creditable foreign income taxes. The rules governing the
foreign tax credit are complex. Each U.S. holder is advised to consult its tax advisor regarding the availability of the foreign
tax credit under their particular circumstances.
Sale or Other Disposition of ADSs or
Common Shares
Subject to the PFIC rules discussed below,
a U.S. holder generally will recognize capital gain or loss upon the sale or other disposition of ADSs or common shares in an amount
equal to the difference between the amount realized upon the disposition and the U.S. holder’s adjusted tax basis in such
ADSs or common shares. Any capital gain or loss will be long-term if the ADSs or common shares have been held for more than one
year and will generally be United States source gain or loss for United States foreign tax credit purposes. The deductibility of
a capital loss may be subject to limitations. Each U.S. holder is advised to consult its tax advisor regarding the tax consequences
if a foreign tax is imposed on a disposition of our ADSs or common shares, including the availability of the foreign tax credit
under their particular circumstances.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable
year during which a U.S. holder holds our ADSs or common shares, and unless the U.S. holder makes a mark-to-market election (as
described below), the U.S. holder will generally be subject to special tax rules that have a penalizing effect, regardless of whether
we remain a PFIC, on (i) any excess distribution that we make to the U.S. holder (which generally means any distribution paid during
a taxable year to a U.S. holder that is greater than 125% of the average annual distributions paid in the three preceding taxable
years or, if shorter, the U.S. holder’s holding period for the ADSs or common shares), and (ii) any gain realized on the
sale or other disposition, including, under certain circumstances, a pledge, of ADSs or common shares. Under the PFIC rules:
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such excess distribution and/or gain will be allocated ratably over the U.S. holder’s holding period for the ADSs or
common shares;
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such amount allocated to the current taxable year and any taxable years in the U.S. holder’s holding period prior to
the first taxable year in which we are classified as a PFIC, or pre-PFIC year, will be taxable as ordinary income;
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such amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate
in effect applicable to the U.S. holder for that year; and
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an interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable
year, other than a pre-PFIC year.
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If we are a PFIC for any taxable year during
which a U.S. holder holds our ADSs or common shares and any of our non-United States subsidiaries is also a PFIC, such U.S. holder
would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC and would be subject to the rules
described above on certain distributions by a lower-tier PFIC and a disposition of shares of a lower-tier PFIC even though such
U.S. holder would not receive the proceeds of those distributions or dispositions. Each U.S. holder is advised to consult its tax
advisor regarding the application of the PFIC rules to any of our subsidiaries.
As an alternative to the foregoing rules,
a U.S. holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election for such stock
to elect out of the tax treatment discussed above. The mark-to-market election is available only for “marketable stock,”
which is stock that is traded in other than
de minimis
quantities on at least 15 days during each calendar quarter (“regularly
traded”) on a qualified exchange or other market, as defined in applicable United States Treasury regulations. Our ADSs are
listed on the NASDAQ, which is a qualified exchange or market for these purposes. We anticipate that our ADSs should qualify as
being regularly traded, but no assurances may be given in this regard. Because a mark-to-market election cannot be made for equity
interests in any lower-tier PFICs that we own, a U.S. holder may continue to be subject to the PFIC rules with respect to its indirect
interest in any investments held by us that are treated as an equity interest in a PFIC for United States federal income tax purposes.
If a mark-to-market election is made, the U.S. holder will generally (i) include as ordinary income for each taxable year that
we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis
of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market
value of such ADSs held at the end of the taxable year, but only to the extent of the net amount previously included in income
as a result of the mark-to-market election. The U.S. holder’s adjusted tax basis in the ADSs would be adjusted to reflect
any income or loss resulting from the mark-to-market election.
If a U.S. holder makes a mark-to-market
election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the U.S. holder
will not be required to take into account the mark-to-market gain or loss described above during any period that such corporation
is not classified as a PFIC.
We do not intend to provide information
necessary for U.S. holders to make qualified electing fund elections, which, if available, would result in tax treatment different
from (and generally less adverse than) the general tax treatment for PFICs described above.
If a U.S. holder owns our ADSs or common
shares during any taxable year that we are a PFIC, such holder is required to file an annual report containing such information
as the United States Treasury Department may require and may be required to file an annual IRS Form 8621. Each U.S. holder is advised
to consult its tax advisors regarding the potential tax consequences to such holder if we are or become classified as a PFIC, including
the possibility of making a mark-to-market election.
Information Reporting
U.S. holders may be subject to information
reporting to the Internal Revenue Service with respect to dividends on and proceeds from the sale or other disposition of our ADSs
or common shares. Each U.S. holder is advised to consult with its tax advisor regarding the application of the United States information
reporting rules to their particular circumstances.
An individual U.S. holder and certain entities
may be required to submit to the United States Internal Revenue Service certain information with respect to his or her beneficial
ownership of the ADSs or common shares, if such ADSs or common shares are not held on his or her behalf by a U.S. financial institution.
This law also imposes penalties if an individual U.S. holder is required to submit such information to the United States Internal
Revenue Service and fails to do so in a timely manner. Each U.S. holder is urged to consult its tax advisor as to any such reporting
requirements.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We previously filed with the SEC a registration
statement on Form F-1 under the Securities Act with respect to our initial public offering of our Class A common shares represented
by ADSs.
We are subject to the periodic reporting
and other informational requirements of the Securities Exchange Act of 1934 or the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within
four months after the end of each fiscal year which is December 31. The SEC maintains a website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its
EDGAR system. Copies of reports and other information, when filed, may also be inspected without charge and may be obtained at
prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.
The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. As
a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly
reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing
profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish Deutsche Bank Trust Company
Americas, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated
financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and
communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications
available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice
of a shareholders’ meeting received by the depositary from us.
I. Subsidiary Information
For a listing of our subsidiaries, see “Item
4. Information on the Company—C. Organizational Structure.”
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Foreign Exchange Risk
The revenues and expenses of our subsidiaries
and PRC consolidated affiliated entities are generally denominated in Renminbi and their assets and liabilities are denominated
in Renminbi. Our financing activities are denominated in U.S. dollars.
To date, we have not entered into hedging
transactions in an effort to reduce our exposure to foreign currency exchange risk. Although our exposure to foreign exchange risks
is generally limited, the value of your investment in our ADSs will be affected by the exchange rate between the U.S. dollar and
the Renminbi because the value of our business is effectively denominated in Renminbi, while our ADSs will be traded in U.S. dollars.
The Renminbi is not freely convertible into
foreign currencies. Remittances of foreign currencies into the PRC and exchange of foreign currencies into Renminbi require approval
by foreign exchange administrative authorities and certain supporting documentation. The State Administration for Foreign Exchange,
under the authority of the People’s Bank of China, controls the conversion of Renminbi into other currencies.
The value of the RMB against the U.S. dollar
and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange
policies, among other things. In July 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to
the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008
and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band.
Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015,
the Executive Board of the International Monetary Fund (IMF) completed the regular five-year review of the basket of currencies
that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to
be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the
Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging
U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards
interest rate liberalization and Renminbi internationalisation, the PRC government may in the future announce further changes to
the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against
the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange
rate between the RMB and the U.S. dollar in the future. To the extent that we need to convert U.S. dollars we receive from our
initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse
effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert the Renminbi into U.S. dollars
for the purpose of making payments for dividends on our common shares or ADSs or for other business purposes, appreciation of the
U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.
Interest Rate Risk
Our exposure to interest rate risk primarily
relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. Interest-earning
instruments carry a degree of interest rate risk. We have not been exposed to, nor do we anticipate being exposed to, material
risks due to changes in market interest rates. However, our future interest income may fall short of expectations due to changes
in market interest rates. A hypothetical one percentage point decrease in interest rates would have resulted in a decrease of approximately
US$4.7 million in our interest income for the year ended December 31, 2016.
|
ITEM 12.
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Fees and Charges Our ADS holders May
Have to Pay
As an ADS holder, you will be required to
pay the following service fees to the depositary bank:
Service
|
|
Fees
|
● Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
|
|
Up to $0.05 per ADS issued
|
● Cancellation of ADSs, including the case of termination of the deposit agreement
|
|
Up to $0.05 per ADS cancelled
|
● Distribution of cash dividends or other cash distributions
|
|
Up to $0.05 per ADS held
|
● Distribution of ADSs pursuant to share dividends, free share distributions or exercise of rights
|
|
Up to $0.05 per ADS held
|
● Distribution of securities other than ADSs or rights to purchase additional ADSs
|
|
A fee equivalent to the fee that would be payable if securities distributed to you had been Class A common shares and the Class A common shares had been deposited for issuance of ADSs
|
● Depositary services
|
|
Up to $0.05 per ADS held on the applicable record date(s) established by the depositary bank
|
● Transfer of ADSs
|
|
$1.50 per certificate presented for transfer
|
As an ADS holder, you will also be responsible
to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges (in addition to any
applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your
ADSs), such as:
|
·
|
Fees for the transfer and registration of Class A common shares charged by the registrar and transfer agent for the Class A
common shares in the Cayman Islands (i.e., upon deposit and withdrawal of Class A common shares).
|
|
·
|
Expenses incurred for converting foreign currency into U.S. dollars.
|
|
·
|
Expenses for cable, telex and fax transmissions and for delivery of securities.
|
|
·
|
Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding
taxes (i.e., when Class A common shares are deposited or withdrawn from deposit).
|
|
·
|
Fees and expenses incurred in connection with the delivery or servicing of Class A common shares on deposit.
|
|
·
|
Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements
applicable to Class A common shares, deposited securities, ADSs and ADRs.
|
|
·
|
Any applicable fees and penalties thereon.
|
The depositary fees payable upon the issuance
and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly
issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank
for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions
of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record
of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions
are generally deducted from the cash being distributed or by selling a portion of distributable property to pay the fees. In the
case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS
record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated
or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the
case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems
provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in
their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’
accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary
fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received
or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
Fees and Other Payments Made by the Depositary
to Us
Deutsche Bank Trust Company Americas, as
our depositary, has agreed to reimburse us for a portion of certain expenses we incur that are related to establishment and maintenance
of the ADS program, including investor relations expenses. There are limits on the amount of expenses for which the depositary
will reimburse us, but the amount of reimbursement available to us is not related to the amounts of fees the depositary collects
from investors. Further, the depositary has agreed to reimburse us certain fees payable to the depositary by holders of ADSs. For
the year ended December 31, 2016, we have received US$0.3 million from the depositary as reimbursement for our expenses incurred
in connection with the establishment and maintenance of our ADS program.
(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.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are
an integral part of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
1.
|
Organization and 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, Duowan.com, and 100.com.
The Company was incorporated
in the Cayman Islands on July 22, 2011.
The Group began its operations
in the PRC in April 2005 through its PRC domestic company, Guangzhou Huaduo Network Technology Co., Ltd. (“Guangzhou Huaduo”).
Guangzhou Huaduo holds the licenses and approvals to operate internet-related businesses in the PRC.
For the period between July
2006 and April 2007, the Group undertook a reorganization (the “First Reorganization”) and established Duowan Limited
(“Duowan Limited”), an investment holding company under the laws of the British Virgin Islands (the “BVI”),
Duowan (Hong Kong) Limited (“Duowan (Hong Kong)”), a Hong Kong incorporated company wholly owned by Duowan Limited,
and Guangzhou Duowan Information Technology Co., Ltd. (“Guangzhou Duowan”), a wholly-owned foreign enterprise (“WOFE”)
in the PRC owned by Duowan (Hong Kong) (collectively “Duowan Limited Group Structure”). The First Reorganization was
necessary to comply with PRC laws and regulations which prohibit or restrict foreign ownership of companies that provide internet
content services in the PRC where licenses are required.
By entering into a series
of agreements among Guangzhou Huaduo, founders of Guangzhou Huaduo and Guangzhou Duowan (collectively, “First VIE agreements”),
Guangzhou Huaduo became a VIE of Guangzhou Duowan. Guangzhou Duowan became the primary beneficiary of Guangzhou Huaduo.
In November 2007, Duowan Entertainment
Corporation (“Duowan BVI”) was incorporated in the BVI. In March 2008, Duowan BVI established Duowan Entertainment
Information Technology (Beijing) Co., Ltd. (“Duowan Entertainment”), as a WOFE in the PRC and a wholly-owned subsidiary
of Duowan BVI. The Group undertook a second reorganization (the “Second Reorganization”) whereby the First VIE agreements
among Guangzhou Huaduo, founders of Guangzhou Huaduo and Guangzhou Duowan were terminated and a new series of VIE agreements (collectively,
“Second VIE agreements”) were signed among Guangzhou Huaduo, founders of Guangzhou Huaduo and Duowan Entertainment,
through which Duowan Entertainment became the primary beneficiary and exercised effective control over the operations of Guangzhou
Huaduo. Duowan BVI became the then holding company of the Group.
In August 2008, Duowan Entertainment
purchased all the equity interests in Guangzhou Duowan from Duowan (Hong Kong).
In December 2008, the Group
undertook another reorganization (the “Third Reorganization”) and acquired all of the equity interests of NeoTasks
Inc. (“NeoTasks”), a Cayman Islands company, together with its wholly-owned subsidiary, NeoTasks Limited, its WOFE,
NeoTasks International Media Technology (Beijing) Co., Ltd. (“NeoTasks Beijing”), and its VIE, Beijing Tuda Science
and Technology Co., Limited (“Beijing Tuda”).
In July 2009, Guangzhou Duowan
was renamed as Zhuhai Duowan Information Technology Co., Ltd. (“Zhuhai Duowan”).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
1.
|
Organization
and principal activities (continued)
|
|
(b)
|
Reorganization (continued)
|
In December 2009, another series of VIE agreements
(collectively, “Third VIE agreements”) were entered into amongst the legal shareholders of Beijing Tuda and Duowan
Entertainment and thus completing the Third Reorganization. Through the aforementioned activities, Beijing Tuda became a VIE,
whose primary beneficiary is Duowan Entertainment.
In December 2010, Duowan BVI
established Zhuhai Duowan Technology Co., Ltd. (“Zhuhai Duowan Technology”), which is directly 100% owned by Duowan
BVI.
On September 6, 2011,
pursuant to a share swap agreement, all the then existing shareholders of Duowan BVI exchanged their respective shares, including
the Series A, Series B, Series C-1 and Series C-2 Preferred Shares, of Duowan BVI for equivalent classes of shares of the Company
on a 1 for 1 basis (the “Share Swap”). The Company became the holding company of the Group.
In May 2012, Duowan Entertainment
was renamed as Huanju Shidai Technology (Beijing) Co., Ltd. (“Beijing Huanju Shidai”).
In September 2012, Zhuhai
Duowan Technology was renamed as Guangzhou Huanju Shidai Information Technology Co., Ltd. (“Guangzhou Huanju Shidai”).
The First Reorganization,
the Second Reorganization, the Third Reorganization and the Share Swap were all reorganization of entities under common control
and have been accounted for in a manner akin to a pooling of interest as if the Company, through its wholly owned subsidiaries,
had been in existence and been the primary beneficiary of the VIEs throughout the periods presented in the consolidated financial
statements. As a result of these arrangements, the Company, through its wholly owned subsidiaries, is considered the primary beneficiary
of two VIEs, Guangzhou Huaduo and Beijing Tuda, and accordingly, their results of operation and financial conditions are consolidated
in the financial statements of the Group.
|
(c)
|
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. The net proceeds received by the Company, after deducting commissions and offering expenses, amounted
to approximately US$82,055. 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
1.
|
Organization and principal
activities (continued)
|
|
(d)
|
Principal subsidiaries and VIEs
|
The details of the principal subsidiaries and VIEs
through which the Company conducts its business operations as of December 31, 2016 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”)
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
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 Technology Co., Ltd.
|
|
PRC
|
|
August 10, 2016
|
|
|
100
|
%
|
|
Software development
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
1.
|
Organization
and principal activities (continued)
|
|
(e)
|
Variable Interest Entities
|
To comply with PRC laws and regulations
that prohibit or restrict foreign ownership of companies that provide internet-content, the Group conducts its operations primarily
through its principal VIE Guangzhou Huaduo, which holds the internet value-added service license and approvals to provide such
internet services in the PRC. Beijing Huanju Shidai entered into a series of contractual agreements among Beijing Huanju Shidai,
Guangzhou Huaduo and its legal shareholders.
The Company’s relationships
with Guangzhou Huaduo and its shareholders are governed by the following contractual arrangements:
|
•
|
Exclusive
Technology Support and Technology Services Agreement
|
Under the exclusive technology
support and technology services agreement between Beijing Huanju Shidai and Guangzhou Huaduo, Beijing Huanju Shidai has the exclusive
right to provide to Guangzhou Huaduo technology support and technology services related to all technologies needed for its business.
Beijing Huanju Shidai owns the exclusive intellectual property rights created as a result of the performance of this agreement.
The service fee payable by Guangzhou Huaduo to Beijing Huanju Shidai is determined by various factors, including the expenses
Beijing Huanju Shidai incurs for providing such services and Guangzhou Huaduo’s revenues. The term of this agreement will
expire in 2028 and may be extended with Beijing Huanju Shidai’s written confirmation prior to the expiration date. Beijing
Huanju Shidai is entitled to terminate the agreement at any time by providing 30 days’ prior written notice to Guangzhou
Huaduo.
|
•
|
Exclusive
Business Cooperation Agreement
|
Under the exclusive business
cooperation agreement between Beijing Huanju Shidai and Guangzhou Huaduo, Beijing Huanju Shidai has the exclusive right to provide
to Guangzhou Huaduo technology support, business support and consulting services related to the services provided by Guangzhou
Huaduo, the scope of which is to be determined by Beijing Huanju Shidai from time to time. Beijing Huanju Shidai owns the exclusive
intellectual property rights created as a result of the performance of this agreement. The service fee payable by Guangzhou Huaduo
to Beijing Huanju Shidai is a certain percentage of its earnings. The term of this agreement will expire in 2039 and may be extended
with Beijing Huanju Shidai’s written confirmation prior to the expiration date. Beijing Huanju Shidai is entitled to terminate
the agreement at any time by providing 30 days’ prior written notice to Guangzhou Huaduo.
|
•
|
Exclusive
Option Agreement
|
The parties to the exclusive
option agreement are Beijing Huanju Shidai, Guangzhou Huaduo and each of the shareholders of Guangzhou Huaduo. Under the exclusive
option agreement, each of the shareholders of Guangzhou Huaduo irrevocably granted Beijing Huanju Shidai or its designated representative(s)
an exclusive option to purchase, to the extent permitted under PRC law, all or part of his or its equity interests in Guangzhou
Huaduo. Beijing Huanju Shidai or its designated representative(s) have sole discretion as to when to exercise such options, either
in part or in full. Without Beijing Huanju Shidai’s prior written consent, Guangzhou Huaduo’s shareholders shall not
sell, transfer, mortgage or otherwise dispose their equity interests in Guangzhou Huaduo. The term of this agreement is ten years
and may be extended at Beijing Huanju Shidai’s sole discretion.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
1.
|
Organization
and principal activities (continued)
|
|
(e)
|
Variable Interest Entities (continued)
|
Pursuant to the irrevocable power
of attorney executed by each shareholder of Guangzhou Huaduo, each such shareholder appointed Beijing Huanju Shidai as its attorney-in-fact
to exercise such shareholders’ rights in Guangzhou Huaduo, including, without limitation, the power to vote on its behalf
on all matters of Guangzhou Huaduo requiring shareholder approval under PRC laws and regulations and the articles of association
of Guangzhou Huaduo. Each power of attorney will remain in force until the shareholder ceases to hold any equity interest in Guangzhou
Huaduo.
Pursuant to the share pledge
agreement between Beijing Huanju Shidai and the shareholders of Guangzhou Huaduo, the shareholders of Guangzhou Huaduo have pledged
all of their equity interests in Guangzhou Huaduo to Beijing Huanju Shidai to guarantee the performance by Guangzhou Huaduo and
its shareholders’ performance of their respective obligations under the exclusive business cooperation agreement, exclusive
option agreement, exclusive technology support and technology services agreement and powers of attorney. If Guangzhou Huaduo and/or
its shareholders breach their contractual obligations under those agreements, Beijing Huanju Shidai, as pledgee, will be entitled
to certain rights, including the right to sell the pledged equity interests.
Through the aforementioned contractual
agreements, Guangzhou Huaduo is considered a VIE in accordance with Generally Accepted Accounting Principles in the United States
(“U.S. GAAP”) because the Company, through Beijing Huanju Shidai, has the ability to:
|
•
|
exercise
effective control over Guangzhou Huaduo;
|
|
•
|
receive
substantially all of the economic benefits and residual returns, and absorb substantially all the risks and expected losses from
VIEs as if it were their sole shareholder; and
|
|
•
|
have
an exclusive option to purchase all of the equity interests in the VIEs.
|
In
addition to the aforementioned contractual agreements between Beijing Huanju Shidai and Guangzhou Huaduo, Beijing Huanju Shidai
also entered into similar contractual agreements with Beijing Tuda Science and Technology Co., Ltd. ("Beijing Tuda").
Beijing Bilin Changxiang Information Technology Co., Ltd. (“Bilin Changxiang”), a subsidiary of the Company, also
entered into similar contractual agreements with Beijing Bilin Online Information Technology Co., Ltd. ("Bilin Online").
Through these contractual agreements, Beijing Tuda and Bilin Online are considered VIEs of the Group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
1.
|
Organization
and principal activities (continued)
|
|
(e)
|
Variable Interest Entities (continued)
|
In accordance with the aforementioned
agreements, the Company has power to direct activities of the VIEs, and can have assets transferred out of the VIEs. Therefore
the Company considers that there is no asset in the VIEs that can be used only to settle obligations of the VIEs, except for registered
capital and PRC statutory reserves of the VIEs amounting to RMB2,580,160 as of December 31, 2016. As the VIEs were incorporated
as limited liability companies under the PRC Company Law, the creditors do not have recourse to the general credit of the Company
for all the liabilities of the VIEs.
Currently there is no contractual
arrangement that could require the Company to provide additional financial support to the VIEs. As the Company is conducting its
PRC internet value-added services business through the VIEs, the Company will, if needed, provide such support on a discretional
basis in the future, which could expose the Company to a loss.
There is no VIE where the Company
has variable interest but is not the primary beneficiary.
Please refer to Note 3(a) for
the consolidated financial information of the Group’s VIEs as of December 31, 2016.
|
2.
|
Principal
accounting policies
|
|
(a)
|
Basis
of presentation
|
The consolidated financial statements have been
prepared in accordance with the U.S. GAAP to reflect the financial position and results of operations of the Group.
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, Bilin Changxiang and ultimately the Company hold all the variable interests
of the VIEs and has been determined to be the primary beneficiary of the VIEs.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
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.
The preparation of the Company’s
consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, mezzanine equity and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ materially from such estimates. The Company believes that the user relationship period related to online games revenue,
assessment of whether the Group acts as a principal or an agent in different revenue streams, classification of perpetual items
versus consumable items under item-based model, the determination of estimated selling prices of multiple element revenue contracts,
income taxes, allowances for doubtful accounts, determination of share based compensation expenses, impairment assessment of goodwill,
long-lived assets and intangible assets, tax considerations for earnings retained in the Group’s VIEs, fair value determination
related to the accounting for business combinations and subsequent measurement of contingent consideration following business
combinations, assessment on the probability of exercisability of the put option related to business combinations, assessment on
the probability of performance condition affiliated in equity-classified award under ASC 718 that affect vesting, represent critical
accounting policies that reflect more significant judgments and estimates used in the preparation of its consolidated financial
statements.
Management bases the estimates
on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis
for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates.
|
(d)
|
Foreign
currency translation
|
The Group uses Renminbi (“RMB”)
as its reporting currency. The functional currency of the Company and its subsidiaries incorporated in the Cayman Islands, British
Virgin Islands, and Hong Kong is United States dollar (“US$”), while the functional currency of the other entities
and VIEs in the Group is RMB, which is their respective local currency. In the consolidated financial statements, the financial
information of the Company and its subsidiaries, which use US$ as their functional currency, have been translated into RMB. Assets
and liabilities are translated at the exchange rates on the balance sheet date, equity amounts are translated at historical exchange
rates, and revenues, expenses, gains, and losses are translated using the average exchange rate for the period. Translation adjustments
arising from these are reported as foreign currency translation adjustments and are shown as a component of other comprehensive
income or loss in the statement of operations and comprehensive income.
Foreign currency transactions
denominated in currencies other than functional currency are translated into the functional currency using the exchange rates
prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance
sheet date are remeasured at the applicable rates of exchange in effect at that date. Foreign exchange gains and losses resulting
from the settlement of such transactions and from remeasurement at year-end are recognized in foreign currency exchange gains/losses,
net in the consolidated statement of operations.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(e)
|
Convenience
translation
|
Translations of amounts from
RMB into US$ for the convenience of the reader were calculated at the noon buying rate of US$1.00 = RMB 6.9430 on December 31,
2016 as set forth in the H.10 statistical release of the U.S. Federal Reserve Board. No representation is made that the RMB amounts
could have been, or could be, converted into US$ at such rate.
|
(f)
|
Fair
value of financial instruments
|
U.S. GAAP establishes a three-tier
hierarchy to prioritize the inputs used in the valuation methodologies in measuring the fair value of financial instruments. This
hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The three-tier fair value hierarchy is:
Level 1—observable inputs
that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—other inputs
that are directly or indirectly observable in the marketplace.
Level 3—unobservable
inputs which are supported by little or no market activity.
The carrying values of cash and
cash equivalents, short-term deposits, restricted short-term deposits, accounts receivable, other receivables, amounts due from
(to) related parties, accounts payable, and other payables approximate their fair values because of their generally short maturities,
and the carrying value of convertible bonds also approximates their fair value, as they bear interest at rates determined based
on prevailing interest rates in the market.
The fair value of the contingent
consideration recognized on the acquisition date was measured using unobservable input (level 3). Trinomial Tree model was applied
in determining the fair value of the contingent consideration. Under this model, the Group performs scenario analysis and calculates
the fair value of the contingent consideration based on the net present value of the total contingent payments under each scenario
and the expected probability of each scenario. Contingent consideration is remeasured at fair value at each reporting date since
initial recognition.
The Group recorded two of its
investments as available-for-sale securities and subsequently measured at its fair value (Note 10). One of the available-for-sale
securities was classified within Level 1 and valued based on observable inputs that reflected quoted prices (unadjusted) for identical
assets or liabilities in active markets. The other one of the available-for-sale securities was classified within Level 3 and
valued based on a model utilizing unobservable inputs which required management judgment and estimation. There was no significant
change in fair value of the investment classified within Level 3 from the initial investment date to December 31, 2016.
|
(g)
|
Cash
and cash equivalents
|
Cash includes currency on hand
and deposits held by financial institutions that can be added to or withdrawn without limitation. Cash equivalents represent short-term
and highly liquid investments placed with banks, which have both of the following characteristics:
|
i)
|
Readily convertible to known amounts of cash throughout
the maturity period;
|
|
ii)
|
So near their maturity that they present insignificant
risk of changes in value because of changes in interest rates.
|
Short-term deposits represent
time deposits placed with banks with original maturities of less than one year. Interest earned is recorded as interest income
in the consolidated statements of operations during the periods presented.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
Accounts receivable are presented
net of allowance for doubtful accounts. The Group uses specific identification in providing for bad debts when facts and circumstances
indicate that collection is doubtful and a loss is probable and estimable. If the financial conditions of its customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required.
The Company maintains an allowance
for doubtful accounts which reflects its best estimate of amounts that potentially will not be collected. The Company determines
the allowance for doubtful accounts on an individual basis taking into consideration various factors including but not limited
to historical collection experience and credit-worthiness of the debtors as well as the age of the individual receivables balance.
Additionally, the Company makes specific bad debt provisions based on any specific knowledge the Company has acquired that might
indicate that an account is uncollectible. The facts and circumstances of each account may require the Company to use substantial
judgment in assessing its collectability.
The equity investment is comprised
of investments in privately-held entities. The Group accounts for its equity investment over which it has significant influence
but does not own a majority equity interest or otherwise control using the equity method. The Group adjusts the carrying amount
of the investment and recognizes investment income or loss for share of the earnings or loss of the investee after the date of
investment. The Group assesses its equity investment for other-than-temporary impairment by considering factors including, but
not limited to, current economic and market conditions, operating performance of the entities, including current earnings trends
and undiscounted cash flows, and other entity-specific information. The fair value determination, particularly for investment
in privately-held entities, requires judgment to determine appropriate estimates and assumptions. Changes in these estimates and
assumptions could affect the calculation of the fair value of the investment and determination of whether any identified impairment
is other-than-temporary.
The cost investment is comprised
of investments in privately-held entities. The Group accounts for cost investment which has no readily determinable fair value
using the cost method. Under the cost method, the investment is measured initially at cost. The investment carried at cost should
recognize income when dividends are received from the distribution of the investee’s earnings. The Group periodically evaluates
the carrying value of investments accounted for under the cost method of accounting and any impairment is included in the consolidated
statements of operations.
|
(l)
|
Available-for-sale
investment
|
The Group classifies its investments
in debt and equity securities into one of three categories and accounts for these as follows: (i) debt securities that the Group
has the positive intent and the ability to hold to maturity are classified as “held to maturity” and reported at amortized
cost; (ii) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are
classified as “trading securities” with unrealized holding gains and losses included in earnings; (iii) debt and equity
securities not classified as held to maturity or as trading securities are classified as “available-for-sale” and
reported at fair value. The Group has designated its investments in redeemable preferred shares of one company and common shares
of one listed company as available-for-sale securities in accordance with ASC 320 (Note 10). Unrealized gains and losses on available-for-sale
securities are excluded from earnings and reported as accumulated other comprehensive income/loss, net of tax. Realized gains
or losses upon disposal are charged to earnings during the period in which the gains or losses are realized. An impairment loss
on the available-for-sale securities is recognized in the consolidated statements of operations and comprehensive income when
the decline in value is determined to be other-than-temporary.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(m)
|
Property
and equipment
|
Property and equipment are stated
at historical cost less accumulated depreciation and impairment loss, if any. Depreciation is calculated using the straight-line
method over their estimated useful lives. Residual rate is determined based on the economic value of the property and equipment
at the end of the estimated useful lives as a percentage of the original cost.
|
|
Estimated useful lives
|
|
Residual
rate
|
|
|
|
|
|
|
|
Buildings
|
|
40 years
|
|
|
0
|
%
|
Servers, computers and equipment
|
|
3 years
|
|
|
0%-5
|
%
|
Leasehold improvements
|
|
Shorter of lease term or 5 years
|
|
|
0
|
%
|
Decoration of buildings
|
|
10 years
|
|
|
0
|
%
|
Motor vehicles
|
|
4 years
|
|
|
5
|
%
|
Furniture, fixture and office equipment
|
|
5 years
|
|
|
0%-5
|
%
|
Expenditures for maintenance
and repairs are expensed as incurred. The gain or loss on the disposal of property and equipment is the difference between the
net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of operations.
All direct and indirect costs
that are related to the construction of property and equipment and incurred before the assets are ready for their intended use
are capitalized as construction in progress. Construction in progress is transferred to specific property and equipment items
and depreciation of these assets commences when they are ready for their intended use.
|
(n)
|
Business
combinations
|
Business combinations are recorded
using the purchase method of accounting, and the cost of an acquisition is measured as the aggregate of the fair values at the
date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations
and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed
as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their
fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total
of consideration of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously
held equity interest in the subsidiary acquired over (ii) the fair value of the identifiable net assets of the subsidiary acquired
is recorded as goodwill. If the consideration of acquisition is less than the fair value of the net assets of the subsidiary acquired,
the difference is recognized directly in the consolidated statements of operations and comprehensive income.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
Intangible assets mainly consist
of brand names, operating rights for licensed games, software, operating rights for game broadcasting, domain names and technology.
Identifiable intangible assets are carried at acquisition cost less accumulated amortization and impairment loss, if any. Finite-lived
intangible assets are tested for impairment if impairment indicators arise. Amortization of finite-lived intangible assets is
computed using the straight-line method over their estimated useful lives, which are as follows:
|
Estimated useful lives
|
|
|
Brand
names
|
1-15 years
|
Operating
rights for game broadcasting
|
Over
the contract terms
|
Operating
rights for licensed games
|
Shorter
of the economic life or license period of relevant online game
|
Software
|
3 -5 years
|
Domain
names
|
15 years
|
Technology
|
5 years
|
Others
|
3-5
years
|
Land use right is carried at
cost less accumulated amortization. Amortization of the land use right is made on straight-line basis over 40 years from the date
when the Group first obtained the land use right certificate from the local authorities.
|
(q)
|
Impairment
of long-lived assets
|
For long-lived assets other than
investments and goodwill whose impairment is discussed elsewhere in the financial statements, the Group evaluates for impairment
whenever events or changes (triggering events) indicate that the carrying amount of an asset may no longer be recoverable. The
Group assesses the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated
undiscounted future cash flows expected to receive from use of the assets and their eventual disposition. Such assets are considered
to be impaired if the sum of the expected undiscounted cash flows is less than the carrying amount of the assets. The impairment
to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The
Group tests impairment of long-lived assets at the reporting unit level when impairment indicator appeared and recognizes impairment
in the event that the carrying value exceeds the fair value of each reporting unit.
The impairment charges of intangible
assets recorded in general and administrative expenses for the years ended December 31, 2014, 2015 and 2016 were amounting to
RMB5,697, RMB57,199 and RMB3,828, respectively.
Goodwill represents the excess
of the purchase price over the amounts assigned to the fair value of the assets acquired and the liabilities assumed of an acquired
business.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(s)
|
Annual
test for impairment of goodwill
|
Goodwill assessment for impairment
is performed on at least an annual basis on October 1 or whenever events or changes in circumstances indicate that the carrying
value of the asset may not be recoverable. The Group performs a two-step goodwill impairment test. The first step compares the
fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its
carrying amount, goodwill is not considered impaired and the second step will not be required. If the carrying amount of a reporting
unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s goodwill to
the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a
business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities
of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities
is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment
and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess
in the carrying value of goodwill over the implied fair value of goodwill. The judgment in estimating the fair value of reporting
units includes estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these
estimates and assumptions could materially affect the determination of the fair value of each reporting unit.
The Group determines
the appropriate accounting treatment of its convertible bonds in accordance with the terms in relation to the conversion
feature, call and put options, and beneficial conversion feature. After considering the impact of such features, the Group
may account for such instrument as a liability in its entirety, or separate the instrument into debt and equity components
following the respective guidance described under ASC 815 Derivatives and Hedging and ASC 470 Debt. The debt discount, if
any, together with related issuance cost are subsequently amortized as interest expense, using the effective interest method,
from the issuance date to the earliest conversion date. Interest expenses are recognized in profit or loss in the period in
which they are incurred.
|
(u)
|
Mezzanine
equity and non-controlling interest
|
Mezzanine equity
Mezzanine equity consists of
non-controlling interests in certain subsidiaries with put option pursuant to which the non-controlling shareholders had the right
to put their equity interests in certain subsidiaries to the Group at fair value if certain subsidiaries achieved specified performance
milestones and met other pre-determined conditions before the expiry of the put option. Since the occurrence of the put was not
solely within the Group’s control, the Group classifies the non-controlling interests as mezzanine equity instead of permanent
equity in the Group’s consolidated financial statements.
In accordance with ASC subtopic
480-10, the Group calculated, on an accumulative basis from the acquisition date, (i) the amount of accretion that would
increase the balance of non-controlling interests to their estimated redemption value over the period from the date of acquisition
to the earliest redemption date of the non-controlling interests and (ii) the amount of net (loss) / profit attributable
to non-controlling shareholders of certain subsidiaries based on their ownership percentage. The carrying value of the non-controlling
interests as mezzanine equity was adjusted by an accumulative amount equal to the higher of (i) and (ii).
Non-controlling interest
Non-controlling interests are
recognized to reflect the portion of the equity of majority-owned subsidiaries and VIEs which is not attributable, directly or
indirectly, to the controlling shareholder. Currently, the non-controlling interests in the Group’s consolidated financial
statements consist primarily of non-controlling interests for Engage L.P. and Shanghai Yilian.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
For the year ended December
31, 2016, revenue presentation has been changed to live streaming, online games, membership and others to better reflect the way
the Company generates revenues. The revenue presentation for the year ended December 31, 2015 and 2014 are also retrospectively
changed to be consistent with the year ended December 31, 2016. For the years ended December 31, 2015 and 2014, revenues were
originally presented as internet value-added service (“IVAS”) and other revenues. In the category of IVAS, there were
four sub-categories: online music and entertainment, online games, online dating and other IVAS. In the new presentation, revenues
from online music and entertainment, online dating and other IVAS (excluding revenues from membership and a few minor revenue
streams that do not meet the criteria of live streaming), which are under YY Live platform and Huya broadcasting platform, are
categorized as live streaming revenues. Revenues from online games and membership are presented separately. Other revenues and
those revenues streams previously categorized in other IVAS that do not meet the criteria of live streaming are categorized as
“others”. The change in revenue presentation has no impact on the amount of total net revenues.
The Group generates revenues
from live streaming, online games, membership and others. Revenues from live streaming are generated from YY Live platform and
Huya broadcasting platform. Revenues from online games are generated from providing online game platform and access of the games
for the game players. Membership subscription program enhanced user privileges when using YY Client. Other revenues mainly include
online education revenue and advertising revenue. Online education services consist of vocational training and language training
courses. Online advertising revenues are primarily generated from sales of different forms of advertising on the Group’s
platforms. Revenue is recognized when persuasive evidence of an arrangement exists, service has been rendered, the price is fixed
or determinable and collection is reasonably assured.
The Group operates a virtual
currency system, under which, the users can directly purchase virtual currency on live streaming channels or pay membership subscription
fees via online payment systems provided by third parties including payments using mobile phone, internet debit/credit card payment
and other third party payment systems. The virtual currency can be converted into game tokens that can be used to purchase virtual
items on live streaming channels, or used to purchase virtual items in online games (both developed by third parties and self-developed),
or used to pay membership subscription fees. Virtual currency sold but not yet consumed by the purchasers is recorded as “Advances
from customers” and upon conversion or being used, is recognized as revenue according to the respective prescribed revenue
recognition policies addressed below unless otherwise stated.
Live streaming mainly consists
of YY Live platform and Huya broadcasting platform. The Group creates and offers virtual items to be used by users on live streaming
channels, which the Group operates and maintains. The virtual items are offered free of charge or sold to users at different specified
prices as pre-determined by the Company. Live streaming revenue consists of sales of virtual items. Users purchase consumable virtual
items from the Group and present them to performers to show support for their favorite performers or time-based virtual items,
which provide users with recognized status, such as priority speaking rights or special symbols on the channels for a specific
period of time. In order to attract user traffic, the Group shares revenues with certain popular performers and channel owners
in accordance with the revenue sharing arrangements with the Group. The portion of the revenues shared with the performers and
channel owners are accounted for as cost of revenues by the Group. Performers and channel owners, who do not have revenue sharing
arrangements with the Group, are not entitled to share any revenue derived from the virtual items sold. The Group does not recognize
any revenue from offering free virtual items nor share any revenue with performers or channel owners when free virtual items are
presented to performers by the users. Accordingly, live streaming revenue is recognized for the sale of virtual items in live streaming
channels immediately if the virtual item is a consumable or, in the case of time-based virtual items, recognized ratably over the
period when the virtual item is made available to the user, which does not exceed one year. The Group does not have further obligations
to the user after the virtual items are consumed. Virtual items may be sold individually or bundled into one arrangement. When
the Group’s users purchase multiple virtual items bundled within the same arrangement, the Group evaluates such arrangements
under ASC 605-25 Multiple-Element Arrangements. The Group identifies individual elements under the arrangement and determines if
such elements meet the criteria to be accounted for as separate units of accounting. The Group allocates the arrangement consideration
to the separate units of accounting based on their relative selling price.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(v)
|
Revenue
recognition (continued)
|
|
(i)
Live streaming (continued)
|
The following hierarchy has been
followed when determining the relative selling price for each element: (1) vendor specific objective evidence (“VSOE”),
(2) third party evidence (“TPE”), and (3) best estimate of selling price (“BESP”). Given that
the VSOE of the selling price cannot be determined, the Group has adopted a policy to allocate the consideration of the whole
arrangement to different virtual item elements based on the TPE of selling price or the BESP for each virtual item element. The
Group determines the fair values of virtual items sold in a bundle based on similar products sold separately on the YY Live platform
and Huya broadcasting platform based on the TPE of the selling price and determines the fair values of virtual items without similar
products sold separately on the YY Live platform and Huya broadcasting platform based on the BESP. The BESP is generally based
on the selling prices of the various elements of a similar nature when they are sold to users on a stand-alone basis. The BESP
may also be based on an estimated stand-alone pricing when the element has not previously been sold on a stand-alone basis.
These estimates are generally determined based on
pricing strategies, market factors and strategic objectives. The Group recognizes revenue for each virtual item element in accordance
with the applicable revenue recognition method.
|
(ii) Online games revenue
|
The Group generates revenues
from offering virtual items in online games developed by third parties or the Group itself to gaming players. Historically, the
majority of online games revenues for the three years ended December 31, 2014, 2015 and 2016 were derived from third parties
developed games.
Users play games through the
Group’s platform free of charge and are charged for purchases of virtual items including consumable and perpetual items,
which can be utilized in the online games to enhance their game-playing experience. Consumable items represent virtual items that
can be consumed by a specific user within a specified period of time. Perpetual items represent virtual items that are accessible
to the users’ account over the life of the online games.
The Group recognizes revenue
when recognition criteria defined under U.S. GAAP are satisfied. For purposes of determining when the service has been provided
to the paying player, the Group has determined that an implied obligation exists to the paying player to continue providing access
to the games such that the users can utilize the virtual items purchased. Game players need to log on and access the games through
the Group’s platform because their game tokens, virtual items, and game history are specific to the Group’s game accounts
and non-transferable to other platforms. To purchase in-game virtual items, players can either charge their game accounts by purchasing
game tokens or virtual currency from the Group’s platform, which is convertible into game tokens based on a predetermined
exchange rate agreed among the Group and the relevant game developers.
The proceeds from the sales of
the Group’s virtual currency is recorded as “advances from customers”, representing prepayments received from
users in the form of the Group’s virtual currency not yet converted into game specific tokens. Upon the conversion into
a game token from the Group’s virtual currency or upon the direct purchase of a game token, whichever is applicable, the
proceeds will be shared between the Group and the relevant game developer based on a predetermined contractual ratio. Game tokens
are non-refundable and non-exchangeable among different games. The Group’s portion, net of the game developer’s entitled
consideration, is recorded as deferred revenue and amortized according to the prescribed revenue recognition policies described
below. Users typically do not convert the virtual currency into game tokens or purchase the game tokens unless they plan to purchase
in-game virtual items soon.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(v)
|
Revenue
recognition (continued)
|
|
(ii) Online games revenue (continued)
|
There are two types of third
party developed online games:
|
-
|
Non-exclusive third party developed games
|
|
-
|
Exclusive third party developed games
|
Under the non-exclusive arrangement,
game developers license the games to various platforms and the Group is only one of the platforms. Game developers will receive
only revenue shared from the Group pursuant to the mutually agreed sharing percentage.
Under the exclusive arrangement,
game developers only license the game to the Group as the exclusive licensee. The Group can sub-license the games to other platforms
and receive a portion of revenue sharing from sub-licensees. In addition to the revenue shared to the game developers, the Group
should also pay an exclusive license fee to the game developers.
|
-
|
Non-exclusive third party developed games
|
Pursuant to contracts signed
between the Group and the respective game developers, revenues from the sale or conversion of game tokens for the purchase of
in-game virtual items from online games developed by third parties are shared between the Group and the game developers based
on a pre-agreed ratio for each game. These revenue-sharing contracts typically last for one to two years.
The third party developed games
under non-exclusive licensing contracts are maintained and updated by the game developers. The Group views the game developers
to be the Group’s customers and considers the Group’s responsibilities under the agreements with the game developers
to offer certain standard promotions that include providing access to the platform, announcing the new games to users on the platform,
and occasional advertising on the Group’s platforms. The determination of whether to record these revenues using gross or
net method is based on an assessment of various factors. The primary factors are whether the Group is acting as the principal
in offering services to the game players or as agent in the transaction, and the specific requirement of each contract. The Group
determined that for third party developed games, the third party game developers are the principals given the game developers
design and develop the online game services offered, have reasonable latitude to establish prices of game tokens, and are responsible
for maintaining and upgrading the game contents and virtual items. Accordingly, the Group records online games revenue, net of
the pre-agreed portion of sharing of the revenues with the game developers.
Given that third party developed
games under non-exclusive licensing contracts are managed and administered by the third party game developers, the Group does
not have access to the data on the consumption details such as when the game token is spent on the virtual items or the types
of virtual items (consumable or perpetual items) purchased by each individual game player. However, the Group maintains historical
data on timing of the conversion of its virtual currency into game specific tokens and the amount of purchases of game tokens.
The Group believes that its performance for, and obligation to, the game developers correspond to the game developers’ services
to the users. The Group has adopted a policy to recognize revenues relating to game tokens for third party developed games over
the estimated user relationship period with the Group on a game-by-game basis, which is approximately one to six months for the
periods presented. Future usage patterns may differ from historical usage patterns and therefore the estimated user relationship
period with the Group may change in the future.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(v)
|
Revenue
recognition (continued)
|
|
(ii) Online games revenue (continued)
|
|
-
|
Non-exclusive third party developed games (continued)
|
When the Group launches a new
game, it estimates the user relationship period based on other similar types of games in the market until the new game establishes
its own history. The Group considers the game’s profile, attributes, target audience, and its appeal to players of different
demographics groups in estimating the user relationship period.
The estimated user relationship
period is based on data collected from those users who have acquired game tokens. To estimate the user relationship period, the
Group maintains a system that captures the following information for each user: (a) the frequency that users log into each
game via the Group’s platform, and (b) the amount and the timing of when the users convert or charge his or her game
tokens. The Group estimates the user relationship period for a particular game to be the date a player purchases or converts from
virtual currency to a game token through the date the Group estimates the user plays the game for the last time. This computation
is performed on a user by user basis. Then, the results for all analyzed users are averaged to determine an estimated end user
relationship period for each game. Revenues from in-game payments of each month are recognized over the user relationship period
estimated for that game.
The consideration of user relationship
period with each online game is based on the Group’s best estimate that takes into account all known and relevant information
at the time of assessment. The Group assesses the estimated user relationship period for each game on a quarterly basis. Any adjustments
arising from changes in the user relationship period as a result of new information will be accounted as a change in accounting
estimate in accordance with ASC 250 Accounting Changes and Error Corrections.
|
-
|
Exclusive third party developed games
|
Under certain exclusive arrangements,
the Group pays additional license fees to the game developers as the Group is entitled to an exclusive right to operate third
party developed games in specified geographic areas. Based on ASC 350, the Group has adopted an accounting policy to recognize
the exclusive license fee as an intangible asset upon the commercial launch of the related online games. This intangible asset
is amortized on a straight-line basis over the shorter of the economic life or license period of the relevant online game.
Pursuant to the exclusive licensing
contracts signed between the Group and the third party game developers, the Group’s responsibilities in operating the licensed
games vary for each game. The determination of whether to record these revenues using gross or net method is based on an assessment
of various factors, including but not limited to whether the Group (i) is the primary obligor in the arrangement; (ii) has latitude
in establishing the selling price; (iii) changes the product or performs part of the service, (iv) has involvement in the determination
of product and service specifications.
For the game license arrangements
under which the Group takes primary responsibilities of game operation, including determining distribution and payment channels,
providing customer services, hosting game servers, if needed, and controlling game and services specifications and pricing, the
Group considered itself to be the principal in these arrangements. Accordingly, the Group records online games revenues from these
third party licensed games on a gross basis. Commission fees paid to distribution channels and payment channels and content fees
paid to third party game developers are recorded as cost of revenues.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(v)
|
Revenue
recognition (continued)
|
|
(ii) Online games revenue (continued)
|
|
-
|
Exclusive third party developed games (continued)
|
For the game license arrangements
under which the Group’s responsibilities are limited to publishing, providing payment solutions and game operating advice,
the Group views the game developers to be its customers and considers itself to be the agent in the arrangements. Accordingly,
the Group records online games revenues from these third party licensed games, net of fees paid to third parties upon the provision
of service.
Pursuant to the terms and conditions
of certain online game exclusive license agreements entered into between game developers and the Group, the Group, as the exclusive
licensee, could sublicense a non-exclusive, non-transferable and limited license to any third party without the prior formal consent
of game developers. Under the non-exclusive and non-transferable limited license, the sub-licensee cannot further license the
game to other platforms. The Group received monthly revenue-based royalty payments from all sub-licensees. The Group views the
third-party sub-licensees operators as its customers and recognizes revenues on a net basis, as the Group does not have the primary
responsibility for fulfillment and acceptability of the game services.
Similar to other online games,
the exclusive third party developed games are free to play and players can pay for virtual items for better in-game experience.
For exclusive third party games, the consumption details can be provided by third party developers or the Group has access to
such data. Therefore, the Group recognizes revenues based on item-based model: (1) for consumable items, the revenue is recognized
immediately upon consumption; (2) for perpetual items, the revenue is recognized ratably over the user relationship period of
a specific game as described. The determination of user relationship period is the same as what is described in “
Non-exclusive
third party developed games
” above.
Revenues derived from self-developed
games are recorded on a gross basis as the Group acts as a principal to fulfill all obligations. Considering that revenues derived
from self-developed games were immaterial to the Group for the years presented, the Group does not maintain information on consumption
details of in-game virtual items, and only maintains limited information related to the frequency of log-ons for its self-developed
games. Given that certain historical data is not available, the Group uses the user relationship period of third party games with
similar popularity, gaming experience and sales to determine the estimated period of user relationship for its self-developed
games.
The Group operates a membership
subscription program where subscription members can have enhanced user privileges when using YY Client and live streaming channels.
The membership fee is collected up-front from subscribers. The receipt of the revenue is initially recorded as deferred revenue
and revenue is recognized ratably over the period of the subscription when services are rendered. Unrecognized portion beyond
12 months from balance sheet date is classified as long-term deferred revenue.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(v)
|
Revenue
recognition (continued)
|
Other revenues mainly include
online education revenues and advertising revenues.
|
(1) Online education revenues
|
Educational programs and services
consist of vocational training and language training courses. The course fee is generally paid in advance and is initially recorded
as deferred revenue. Revenue for regular courses is recognized proportionately as the classes are attended, and is reported net
of scholarships and course fee refunds. Students are entitled to one trial class of the purchased course and course fee is fully
refundable if a student decides not to take the remaining course after the trial class. No refund will be provided to a student
who withdraws from a course after the trial period, and revenue is recognized for the amount collected. Course fee refunds were
insignificant over the period presented.
In addition to regular courses,
the Company also provides a package of several regular courses to students, which has individual fair value in the market. Pursuant
to the applicable accounting guidance, the Company has accounted for these course packages as a multiple-element arrangement because
each individual course qualifies as a single unit of accounting, and allocated the course fee from the course package to each
individual course in the package based on its relative fair value. The Company recognizes revenue equal to the fair value allocated
to individual courses proportionately as the classes are attended.
Students are granted a right
to retake the courses at a substantial discount in the circumstances where the students fail to achieve certain score targets
for some specific courses. The discount arrangement has a stand-alone value and qualifies as a separate unit of accounting under
U.S. GAAP. Therefore, the Company has accounted for those courses as a multiple-element arrangement and allocated a portion of
the initial course fee to the substantial discount based on a breakage rate. The breakage rate is determined based on our historical
data. The amount allocated to the substantial discount is deferred and recognized as revenue upon the expiration of the retaking
right, which is generally six months after the end of the initial course term.
The Company also sells pre-paid
cards primarily to distributors. Pre-paid card sales represent prepaid service fees received from students for online courses.
The prepaid service fee is recorded as deferred revenue upon receiving the upfront cash payment. Revenue is recognised on a gross
basis based on the selling price of the distributors to the students and is recognized over the period the online course is available
to the students, which generally is from the enrolment date to the completion of the relevant professional examination date.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(v)
|
Revenue
recognition (continued)
|
The Group primarily generate advertising
revenues from sales of various forms of advertising and provision of promotion campaigns on the live streaming platforms by way
of advertisement display or integrated promotion activities in shows and programs on the live streaming platforms. Advertisements
on the Group’s platforms are generally charged on the basis of duration, and advertising contracts are signed to establish
the fixed price and the advertising services to be provided. Where collectability is reasonably assured, advertising revenues from
advertising contracts are recognized ratably over the contract period of display.
The Group enters into advertising
contracts directly with advertisers or third party advertising agencies that represent advertisers. Contract terms generally range
from 1 to 3 months. Both third party advertising agencies and direct advertisers are generally billed at the end of the display
period and payments are due usually within 6 months.
Where customers purchase multiple
advertising spaces with different display periods in the same contract, the Group allocates the total consideration to the various
advertising elements based on the relative selling price method and recognizes revenue for the different elements over their respective
display periods. The following hierarchy should be followed when determining the appropriate selling price for each element: (1) vendor
specific objective evidence (“VSOE”), (2) third party evidence (“TPE”), and (3) best estimate
of selling price (“BESP”). Given that the VSOE or TPE of the selling price cannot be determined, the Group has adopted
a policy to allocate the fair values of different advertising elements based on the best estimate selling prices of each advertisement
within the contract taking into consideration the standard price list and historical discounts granted. The Group recognizes revenue
on the elements delivered and defers the recognition of revenue for the fair value of the undelivered elements until the remaining
obligations have been satisfied. Where all of the elements within an arrangement are delivered uniformly over the agreement period,
the revenues are recognized on a straight line basis over the contract period.
Transactions with third party
advertising agencies
For contracts entered into with
third party advertising agencies, the third party advertising agencies will in turn sell the advertising services to advertisers.
Revenue is recognized ratably over the contract period of display based on the following criteria:
|
•
|
There
is persuasive evidence that an arrangement exists—the Group will enter into framework and execution agreements with the
advertising agencies, specifying price, advertising content, format and timing.
|
|
•
|
Price
is fixed or determinable—price charged to the advertising agencies are specified in the agreements, including relevant discount
and rebate rates.
|
|
•
|
Services
are rendered—the Group recognizes revenue ratably as the element are delivered over the contract period of display.
|
|
•
|
Collectability
is reasonably assured—the Group assesses credit history of each advertising agency before entering into any framework and
execution agreements. If the collectability from the agencies is assessed as not reasonably assured, the Group recognizes revenue
only when the cash is received and all the other revenue criteria are met.
|
The Group provides sales incentives
in the forms of discounts and rebates to third party advertising agencies based on purchase volume. As the advertising agencies
are viewed as the customers in these transactions, revenue is recognized based on the price charged to the agencies, net of sales
incentives provided to the agencies. Sales incentives are estimated and recorded at the time of revenue recognition based on the
contracted rebate rates and estimated sales volume based on historical experience.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(v)
|
Revenue
recognition (continued)
|
|
(2) Advertising revenues (continued)
|
Transactions with advertisers
The Group also enters into advertisement
contracts directly with advertisers. Similar to transactions with third party advertising agencies, the Group recognizes revenue
ratably as the elements are delivered over the contract period of display. The terms and conditions, including price, are fixed
according to the contract between the Group and the advertisers. The Group also performs a credit assessment of all advertisers
prior to entering into contracts. Revenue is recognized based on the amount charged to the advertisers, net of discounts.
|
(w)
|
Advances
from customers and deferred revenue
|
Advances from customers primarily
consist of prepayments from users in the form of the Group’s virtual currency that are not yet consumed or converted into
game tokens, and upon the consumption or conversion, are recognized as revenue according to the prescribed revenue recognition
policies described above.
Deferred revenue primarily consists
of the unamortized game tokens, prepaid subscriptions under the membership program and unamortized revenue from virtual items
in various channels in the Group’s platforms, where there is still an implied obligation to be provided by the Group, which
will be recognized as revenue when all of the revenue recognition criteria are met.
Amounts recorded as cost of revenue
relate to direct expenses incurred in order to generate revenue. Such costs are recorded as incurred. Cost of revenues consists
primarily of (i) revenue sharing fees and content costs, including payments to various channel owners and performers, and content
providers, (ii) bandwidth costs, (iii) salary and welfare, (iv) depreciation and amortization expense for servers, other
equipment and intangibles directly related to operating the platform, (v) payment handling cost, (vi) business taxes
and surcharges, (vii) share based compensation, and (viii) other costs.
In the PRC, business taxes were
imposed by the government on revenues reported by any selling entity for the provision of taxable services in the PRC. The business
tax rate varied depending on the nature of the revenues. The Group was also subject to cultural development fee at a tax rate
of 3% on service income from provision of advertising services in the PRC.
Except for online games revenues,
the Group’s live streaming revenues and membership revenues became subject to VAT from June 1, 2014, at a rate of 6%, while
they were subject to business taxes at a rate of 3% prior to June 1, 2014. Other revenues of the Group, including online games
revenues, are subject to VAT for all the periods presented.
The Group is subject to surcharges
of business taxes and VAT, which are calculated based on 12% of the business taxes and VAT paid for the years ended December 31,
2014, 2015 and 2016.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(x)
|
Cost
of revenues (continued)
|
The Group reported business taxes
and surcharges, and cultural development fees in cost of revenues.
Based on the Group’s corporate
structure and the contractual arrangements among the Group’s PRC subsidiaries, the Group’s VIEs and their shareholders,
the Group is effectively subject to 6% or 17% VAT and related surcharges on revenues generated by the Group’s subsidiaries
based on the Group’s contractual arrangements entered into with the Group’s VIEs.
|
(y)
|
Research
and development expenses
|
Research and development expenses
consist primarily of (i) salary and welfare for research and development personnel, (ii) share based compensation for research
and development personnel, (iii) rental expenses and (iv) depreciation of office premise and servers utilized by research
and development personnel. Costs incurred during the research stage are expensed as incurred. Costs incurred in the development
stage, prior to the establishment of technological feasibility, which is when a working model is available, are expensed when
incurred.
The Company recognizes internal
use software development costs in accordance with guidance on intangible assets and internal use software. This requires capitalization
of qualifying costs incurred during the software’s application development stage and to expense costs as they are incurred
during the preliminary project and post implementation/operation stages. The Company has not capitalized any costs related to
internal use software during the years ended December 31, 2014, 2015 and 2016, respectively.
|
(z)
|
Sales
and marketing expenses
|
Sales and marketing expenses
consist primarily of (i) advertising and market promotion expenses, (ii) salary and welfare for sales and marketing personnel,
and (iii) rental expenses. The advertising and market promotion expenses amounted to approximately RMB76,192, RMB253,210 and RMB298,681
during the years ended December 31, 2014, 2015 and 2016, respectively.
|
(aa)
|
General
and administrative expenses
|
General and administrative expenses
consist primarily of (i) salary and welfare for general and administrative personnel, (ii) share based compensation for management
and administrative personnel, and (iii) impairment charges of intangible assets and other non-current assets.
|
(bb)
|
Employee
social security and welfare benefits
|
Employees of the Group in the
PRC are entitled to staff welfare benefits including pension, work-related injury benefits, maternity insurance, medical insurance,
unemployment benefit and housing fund plans through a PRC government-mandated multi-employer defined contribution plan. The Group
is required to accrue for these benefits based on certain percentages of the employees’ salaries, up to a maximum amount
specified by the local government. The Group is required to make contributions to the plans out of the amounts accrued. The PRC
government is responsible for the medical benefits and the pension liability to be paid to these employees and the Group’s
obligations are limited to the amounts contributed and no legal obligation beyond the contributions made. Employee social security
and welfare benefits included as expenses in the accompanying statements of operations amounted to RMB115,012, RMB171,349 and
RMB206,704 for the years ended December 31, 2014, 2015 and 2016, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(cc)
|
Share
based compensation
|
The Company grants stock-based
award, such as, but not limited to, share options, restricted shares, and restricted share units to eligible employees, officers,
directors, and non-employee consultants.
Awards granted to employees,
officers, and directors are initially accounted for as equity-classified awards. The related share based compensation expenses
are measured at the grant date fair value of the award and are recognized using the graded vesting method, net of estimated forfeiture
rates, over the requisite service period, which is generally the vesting period. Forfeitures are estimated at the time of grant
based on historical forfeiture rates and will be revised in the subsequent periods if actual forfeitures differ from those estimates.
Duowan BVI also granted share options, restricted shares and restricted share units to non-employees, which are also initially
accounted for as equity-classified awards. Awards granted to non-employees are initially measured at fair value on the grant date
and periodically re-measured thereafter until the earlier of the performance commitment date or the date the service is completed
and recognized over the period the service is provided. Awards are re-measured at each reporting date using the fair value as
at each period end until the measurement date, generally when the services are completed and share based awards are vested. Changes
in fair value between the interim reporting dates are recorded in consistent with the method used in recognizing the original
compensation costs.
Following the listing of the
Company, the grant date fair value of share based awards is based on stock price of the Company in the NASDAQ Global Market.
For an award with a performance
and/or service condition that affects vesting, the performance and/or service condition is not considered in determining the award’s
fair value on the grant date. Performance and service conditions should be considered when the Company is estimating the quantity
of awards that will vest. Compensation cost will reflect the number of awards that are expected to vest and will be adjusted to
reflect those awards that do ultimately vest. The Group recognizes compensation cost for awards with performance conditions if
and when the Group concludes that it is probable that the performance condition will be achieved, net of an estimate of pre-vesting
forfeitures over the requisite service period. The Group reassesses the probability of vesting at each reporting period for awards
with performance conditions and adjusts compensation cost based on its probability assessment, unless on certain situations, the
Group may not be able to determine that it is probable that a performance condition will be satisfied until the event occurs.
Other income primarily consists
of government grants which represent cash subsidies received from the PRC government by the Group entities. Government grants
are originally recorded as deferred revenue when received upfront. After all of the conditions specified in the grants have been
met, the grants are recognized as operating income.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
Current income taxes are provided
on the basis of net income for financial reporting purposes, adjusted for income and expense items which are not assessable or
deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes
are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences
of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed
to that asset or liability for tax purpose. The effect on deferred taxes of a change in tax rates is recognized in statement of
operations and comprehensive income in the period of change. A valuation allowance is provided to reduce the amount of deferred
tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.
Uncertain tax positions
The guidance on accounting for
uncertainties in income taxes prescribes a more likely than not threshold for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. Guidance was also provided on derecognition of income tax assets
and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, accounting for income taxes in interim periods, and income tax disclosures. Significant judgment
is required in evaluating the Group’s uncertain tax positions and determining its provision for income taxes. The Group
recognizes interests and penalties, if any, under accrued expenses and other current liabilities on its balance sheet and under
other expenses in its statements of operations. The Group did not recognize any significant interest and penalties associated
with uncertain tax positions for the years ended December 31, 2014, 2015 and 2016. As of December 31, 2015 and 2016,
the Group did not have any significant unrecognized uncertain tax positions.
The Group’s subsidiaries
and VIEs established in the PRC are required to make appropriations to certain non-distributable reserve funds.
In accordance with the laws applicable
to China’s Foreign Investment Enterprises, the Group’s subsidiaries registered as wholly-owned foreign enterprises
have to make appropriations from its after-tax profit (as determined under the Accounting Standards for Business Enterprises as
promulgated by the Ministry of Finance of the People’s Republic of China (“PRC GAAP”)) to reserve funds including
general reserve fund, and staff bonus and welfare fund. The appropriation to the general reserve fund must be at least 10% of
the after-tax profits calculated in accordance with PRC GAAP. Appropriation is not required if the reserve fund has reached 50%
of the registered capital of the company. Appropriation to the staff bonus and welfare fund is at the company’s discretion.
In addition, in accordance with
the Company Laws of the PRC, the VIEs of the Company registered as PRC domestic companies must make appropriations from its after-tax
profit as determined under the PRC GAAP to non-distributable reserve funds including a statutory surplus fund and a discretionary
surplus fund. The appropriation to the statutory surplus fund must be at least 10% of the after-tax profits as determined under
the PRC GAAP. Appropriation is not required if the surplus fund has reached 50% of the registered capital of the company. Appropriation
to the discretionary surplus fund is made at the discretion of the company.
The use of the general reserve
fund, statutory surplus fund and discretionary surplus fund are restricted to the off-setting of losses or increasing capital
of the respective company. The staff bonus and welfare fund is a liability in nature and is restricted to fund payments of special
bonus to staff and for the collective welfare of employees. All these reserves are not allowed to be transferred to the Company
in terms of cash dividends, loans or advances, nor can they be distributed except under liquidation.
During the year ended December
31, 2014, 2015 and 2016, appropriations to general reserve fund and statutory surplus fund amounted to RMB15,812, RMB38 and RMB2,350,
respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
Parties are considered to be
related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over
the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to
common control or significant influence, such as a family member or relative, shareholder, or a related corporation.
Dividends are recognized when
declared. No dividends were declared for the years ended December 31, 2014, 2015 and 2016, respectively. The Group does not
have any present plan to pay any dividends on common shares in the foreseeable future. The Group currently intends to retain the
available funds and any future earnings to operate and expand its business.
Basic income per share is computed
on the basis of the weighted-average number of common shares outstanding during the period under measurement. Diluted income per
share is based on the weighted-average number of common shares outstanding and potential common shares. Potential common shares
result from the assumed exercise of outstanding share options, RSs and RSUs or other potentially dilutive equity instruments,
when they are dilutive under the treasury stock method or the if-converted method.
|
(jj)
|
Comprehensive
income
|
Comprehensive income is defined
as the change in equity of the Company during a period arising from transactions and other events and circumstances excluding
transactions resulting from investments by shareholders and distributions to shareholders. Comprehensive income is reported in
the consolidated statements of operations and comprehensive income. Accumulated other comprehensive income/loss of the Group includes
the unrealized gain of available-for-sale securities and the foreign currency translation adjustments.
Operating segments are defined
as components of an enterprise engaging in businesses activities for which separate financial information is available that is
regularly evaluated by the Group’s chief operating decision makers (“CODM”) 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.
|
(ll)
|
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 a team and started
the assessment of each revenue stream in accordance with the new revenue standard to determine the impact to the consolidated
financial statements, if any.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(ll)
|
Recently
issued accounting pronouncements (continued)
|
In November 2015, the FASB issued
ASU No. 2015-17, Income Taxes (Topic 740): 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 Company will apply this
guidance retrospectively to all period presented. Following the adoption of this guidance in 2017, RMB107,309 of current deferred
tax assets as of December 31, 2016 will be reclassified to non-current assets.
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.
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 (“ASU 2016-09”): Compensation – Stock Compensation: Improvements to Employee Share-Based Payment
Accounting, which relates to the accounting for employee share-based payments. This standard addresses several aspects of the
accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as
either equity or liabilities; and (c) classification on the statement of cash flows; (d) accounting for forfeitures of share-based
payments. This standard will be effective for fiscal years beginning after December 15, 2016, 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
2.
|
Principal
accounting policies (continued)
|
|
(ll)
|
Recently
issued accounting pronouncements (continued)
|
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.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
3.
|
Certain
risks and concentration
|
Foreign ownership of internet-based
businesses is subject to significant restrictions under the current PRC laws and regulations. The PRC government regulates internet
access, the distribution of online information and the conduct of online commerce through strict business licensing requirements
and other government regulations. These laws and regulations also limit foreign ownership in PRC companies that provide internet
information distribution services. Specifically, foreign ownership in an internet information provider or other value-added telecommunication
service providers may not exceed 50%. Foreigners or foreign invested enterprises are currently not able to apply for the required
licenses for operating online games in the PRC. The Company is incorporated in the Cayman Islands and accordingly, the Company
is considered as a foreign invested enterprise under PRC law.
As mentioned in Note 1(e), in
order to comply with the PRC laws restricting foreign ownership in the online business in China, the Group operates the online
business in China through contractual arrangements with its principal VIE, namely Guangzhou Huaduo. As of December 31, 2016,
Beijing Tuda owns majority equity interests of Guangzhou Huaduo’s.
Guangzhou Huaduo holds the licenses
and permits necessary to conduct its internet value-added services and online advertising in the PRC. If the Company had direct
ownership of the VIE, it would be able to exercise its rights as a shareholder to effect changes in the board of directors, which
in turn could affect changes at the management level, subject to any applicable fiduciary obligations. However, under the current
contractual arrangements, it relies on the VIE and its shareholders’ performance of their contractual obligations to exercise
effective control. In addition, the Group’s contractual agreements have terms range from 10 to 30 years, which are subject
to Beijing Huanju Shidai’s unilateral termination right. Under the respective service agreements, Beijing Huanju Shidai
will provide services including technology support, technology services, business support and consulting services to Guangzhou
Huaduo in exchange for service fees. The amount of service fees payable is determined by various factors, including (a) a
percentage of Guangzhou Huaduo’s revenues or earnings, and (b) the expenses that Beijing Huanju Shidai incurs for providing
such services. Beijing Huanju Shidai may charge up to 100% of the income in Guangzhou Huaduo and a multiple of the expenses incurred
for providing such services, as determined by Beijing Huanju Shidai from time to time. The service fees payable by Guangzhou Huaduo
to Beijing Huanju Shidai are determined to be up to 100% of the profits of Guangzhou Huaduo, with the timing of such payment to
be determined at the sole discretion of Beijing Huanju Shidai. If fees were incurred, it would be significant to the Company and
the operating companies’ economic performance because it will be incurred and paid at up to 100% of the earnings of the
VIE. Fees incurred would be remitted, subject to further PRC restrictions. None of the VIEs or their shareholders are entitled
to terminate the contracts prior to the expiration date, unless under remote circumstances such as a material breach of agreement
or bankruptcy as it pertains to the service and business operation agreements and their amendment. For the years ended December 31,
2014, 2015 and 2016, Guangzhou Huanju Shidai and Beijing Huanju Shidai determined that service fees of RMB363,117 , RMB274,285
and RMB305,792 were charged to Guangzhou Huaduo. The service fees are typically determined based on the costs and expenses that
WOFEs incurs for providing relevant technology support to Guangzhou Huaduo, as well as the consideration of Guangzhou Huaduo’s
future business development plan and its increasingly growing and diverse operational needs.
As of December 31, 2016, Beijing
Tuda and Bilin Online, as the Group’s VIEs, still have no substantial business operation. Therefore no service fees were
charged by Beijing Huanju Shidai and Bilin Changxiang respectively for the periods presented as both of the two VIEs have accumulated
losses since inception.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data,
unless otherwise stated)
|
3.
|
Certain
risks and concentration (continued)
|
|
(a)
|
PRC
regulations (continued)
|
Further, the Group believes that
the contractual arrangements among Beijing Huanju Shidai and Bilin Changxiang, the VIEs, and their shareholders are in compliance
with PRC law and are legally enforceable. However, the PRC government may issue from time to time new laws or new interpretations
on existing laws to regulate this industry. Regulatory risk also encompasses the interpretation by the tax authorities of current
tax laws, and the Group’s legal structure and scope of operations in the PRC, which could be subject to further restrictions
resulting in limitations on the Company’s ability to conduct business in the PRC. The PRC government may also require the
Group to restructure the Group’s operations entirely if it finds that its contractual arrangements do not comply with applicable
laws and regulations. Furthermore, it could revoke the Group’s business and operating licenses, require it to discontinue
or restrict its operations, restrict its right to collect revenues, block its website, require it to restructure its operations,
impose additional conditions or requirements with which the Group may not be able to comply, or take other regulatory or enforcement
actions against the Group that could be harmful to its business. The imposition of any of these penalties may result in a material
and adverse effect on the Group’s ability to conduct the Group’s business. In addition, if the imposition of any of
these penalties causes the Group to lose the rights to direct the activities of the VIEs or the right to receive their economic
benefits, the Group would no longer be able to consolidate the VIEs. The Group does not believe that any penalties imposed or
actions taken by the PRC government would result in the liquidation of the Company, Beijing Huanju Shidai and Bilin Changxiang,
and the VIEs.
On
January 19, 2015, the Ministry of Commerce of the PRC, or (the “MOFCOM”) released on its Website for public comment
a proposed PRC law (the “Draft FIE Law”) that appears to include VIEs within the scope of entities that could be considered
to be foreign invested enterprises (or “FIEs”) that would be subject to restrictions under existing PRC law on foreign
investment in certain categories of industry. Specifically, the Draft FIE Law introduces the concept of “actual control”
for determining whether an entity is considered to be an FIE. In addition to control through direct or indirect ownership or equity,
the Draft FIE Law includes control through contractual arrangements within the definition of “actual control.” If
the Draft FIE Law is passed by the People’s Congress of the PRC and goes into effect in its current form, these provisions
regarding control through contractual arrangements could be construed to reach the Group’s VIE arrangements, and as a result
the Group’s VIEs could become explicitly subject to the current restrictions on foreign investment in certain categories
of industry. The Draft FIE Law includes provisions that would exempt from the definition of foreign invested enterprises entities
where the ultimate controlling shareholders are either entities organized under PRC law or individuals who are PRC citizens. The
Draft FIE Law does not make clear how “control” would be determined for such purpose, and is silent as to what type
of enforcement action might be taken against existing VIEs that operate in restricted industries and are not controlled by entities
organized under PRC law or individuals who are PRC citizens. If a finding were made by PRC authorities, under existing law and
regulations or under the Draft FIE Law if it becomes effective, that the Group’s operation of certain of its businesses
through VIEs violates the Draft FIE Law, regulatory authorities with jurisdiction over the licensing and operation of such operations
and businesses may require the Group to take various actions as discussed in the paragraph above.
The
Group’s management considers the possibility of such a finding by PRC regulatory authorities under the Draft FIE Law, if
it becomes effective, to be remote.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
3.
|
Certain risks and concentration (continued)
|
|
(a)
|
PRC regulations (continued)
|
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 years ended:
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
403,722
|
|
|
|
1,397,738
|
|
Short-term deposits
|
|
|
250,000
|
|
|
|
1,235,000
|
|
Restricted short-term deposits
|
|
|
110,000
|
|
|
|
-
|
|
Accounts receivable, net
|
|
|
127,365
|
|
|
|
165,971
|
|
Inventory
|
|
|
14,385
|
|
|
|
2,266
|
|
Amounts due from related parties
|
|
|
5,164
|
|
|
|
135,245
|
|
Prepayments and other current assets
|
|
|
117,536
|
|
|
|
207,245
|
|
Deferred tax assets
|
|
|
87,492
|
|
|
|
83,242
|
|
Total current assets
|
|
|
1,115,664
|
|
|
|
3,226,707
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
3,363
|
|
|
|
10,502
|
|
Investments
|
|
|
285,292
|
|
|
|
496,870
|
|
Property and equipment, net
|
|
|
292,340
|
|
|
|
261,915
|
|
Intangible assets, net
|
|
|
110,214
|
|
|
|
27,241
|
|
Land use right, net
|
|
|
-
|
|
|
|
1,872,394
|
|
Goodwill
|
|
|
136,066
|
|
|
|
2,527
|
|
Other non-current assets
|
|
|
1,932,356
|
|
|
|
85,583
|
|
Total non-current assets
|
|
|
2,759,631
|
|
|
|
2,757,032
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
3,875,295
|
|
|
|
5,983,739
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
108,500
|
|
|
|
117,917
|
|
Deferred revenue
|
|
|
385,300
|
|
|
|
429,883
|
|
Advances from customers
|
|
|
45,189
|
|
|
|
56,108
|
|
Income taxes payable
|
|
|
80,978
|
|
|
|
112,779
|
|
Accrued liabilities and other current liabilities
|
|
|
579,760
|
|
|
|
988,911
|
|
Amounts due to related parties
|
|
|
23,684
|
|
|
|
91,245
|
|
Total current liabilities
|
|
|
1,223,411
|
|
|
|
1,796,843
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
20,752
|
|
|
|
19,125
|
|
Deferred tax liabilities
|
|
|
12,592
|
|
|
|
4,777
|
|
Total non-current liabilities
|
|
|
33,344
|
|
|
|
23,902
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,256,755
|
|
|
|
1,820,745
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
3.
|
Certain risks and concentration (continued)
|
|
(a)
|
PRC regulations (continued)
|
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
3,543,994
|
|
|
|
5,821,305
|
|
|
|
8,164,100
|
|
Net income
|
|
|
1,136,570
|
|
|
|
1,267,111
|
|
|
|
1,874,435
|
|
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,313,521
|
|
|
|
2,164,953
|
|
|
|
2,538,836
|
|
Net cash used in investing activities
|
|
|
(994,574
|
)
|
|
|
(2,251,207
|
)
|
|
|
(1,313,002
|
)
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
704,298
|
|
|
|
8,508
|
|
|
|
|
318,947
|
|
|
|
618,044
|
|
|
|
1,234,342
|
|
|
(b)
|
Foreign exchange risk
|
The revenues and expenses of the
Group’s subsidiaries and VIEs in the PRC are generally denominated in RMB and their assets and liabilities are denominated
in RMB. The Group’s financing activities are denominated in U.S. dollars. The RMB is not freely convertible into foreign
currencies. Remittances of foreign currencies into the PRC or remittances of RMB out of the PRC as well as exchange between RMB
and foreign currencies require approval by foreign exchange administrative authorities and certain supporting documentation. The
State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of
RMB into other currencies.
|
(i)
|
Concentration of revenue
|
No individual customer accounted
for more than 10% of net revenues for the years ended December 31, 2014, 2015 and 2016.
|
(ii)
|
Concentration of accounts
receivable
|
The Group collects accounts receivable
from payment platforms, external game platforms and advertising customers. The Group depends on payments from a limited number
of payment platforms. The top 10 accounts receivable accounted for 82% and 75% of the total accounts receivable as of December 31,
2015 and 2016, respectively. The following table summarizes the percentage of accounts receivable from payment platforms with over
10% of total accounts receivable:
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
Payment platforms
|
|
|
|
|
|
|
|
|
B1
|
|
|
35
|
%
|
|
|
19
|
%
|
B2
|
|
|
|
*
|
|
|
17
|
%
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
3.
|
Certain risks and concentration
(continued)
|
As of December 31, 2015 and
2016, substantially all of the Group’s cash and cash equivalents and short-term deposits were placed with the PRC and international
financial institutions. Management chooses these institutions because of their reputations and track records for stability, and
their known large cash reserves, and management periodically reviews these institutions’ reputations, track records, and
reported reserves. Management expects that any additional institutions that the Group uses for its cash and bank deposits will
be chosen with similar criteria for soundness. Nevertheless under the PRC law, it is required that a commercial bank in the PRC
that holds third party cash deposits should maintain a certain percentage of total customer deposits taken in a statutory reserve
fund for protecting the depositors’ rights over their interests in deposited money. PRC banks are subject to a series of
risk control regulatory standards; PRC bank regulatory authorities are empowered to take over the operation and management of any
PRC bank that faces a material credit crisis. The Group believes that it is not exposed to unusual risks as these financial institutions
are either PRC banks or international banks with high credit quality. The Group had not experienced any losses on its deposits
of cash and cash equivalents and term deposits during the years ended December 31, 2014, 2015 and 2016 and believes that its
credit risk to be minimal.
|
4.
|
Business combination
and disposal of subsidiaries
|
Acquisition and disposal of Shanghai
Beifu Culture Communication Co., Ltd. (“Beifu”)
In February 2015, the Group acquired
70% of the equity interests of Beifu from the founders of Beifu for a fixed cash consideration of RMB39 million, plus additional
variable cash consideration that is contingent upon the achievement of pre-established performance metrics for years 2015 through
2017. Beifu is primarily engaged in the operation of E-commerce, which is based on YY’s existing user base. The purpose of
the acquisition was to integrate the Group's technology and huge user base together with Beifu's successful experience in the operation
of E-commerce area. On the acquisition date, the allocation of the consideration of the assets acquired and liabilities assumed
based on their fair value was as follows:
|
|
RMB
|
|
|
|
|
|
Cash consideration
|
|
|
39,200
|
|
Contingent consideration
|
|
|
107,306
|
|
Total consideration
|
|
|
146,506
|
|
|
|
|
|
|
Net assets acquired
|
|
|
31,994
|
|
Identifiable intangible assets acquired
|
|
|
12,900
|
|
Goodwill
|
|
|
147,388
|
|
Deferred tax liabilities
|
|
|
(3,225
|
)
|
Non-controlling interest
|
|
|
(42,551
|
)
|
Total
|
|
|
146,506
|
|
The agreements for the acquisition
of Beifu included a contingent consideration arrangement that required additional consideration to be paid by the Group based on
the achievement of pre-established performance metrics as stipulated in the agreements for years 2015 through 2017. The undiscounted
amounts the Group shall pay when Beifu achieves 100% of the performance metrics from 2015 through 2017 is RMB219 million. The actual
contingent payments would be adjusted based on the degree of how the actual revenue and net profit are higher or lower than the
performance metrics from 2015 through 2017. The fair value of the contingent consideration recognized on the acquisition date of
RMB107 million was determined by the Group using the Trinomial Tree model. Under this model, the Group performed scenario analysis
by assuming different scenarios under which Beifu achieved different performance for years 2015 through 2017. Under different scenarios,
the amount of contingent consideration differed according to the stipulation in the agreements. The Group then calculated the fair
value of the contingent consideration based on the net present value of the total contingent consideration under different scenarios
and the expected probability of each scenario. Please refer to note 25 for the key parameters adopted in the valuation.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
4.
|
Business combination and disposal of subsidiaries (continued)
|
Acquisition and disposal of Beifu
(continued)
The
fair value of non-controlling interest in Beifu was determined mainly based on the number of shares held by non-controlling shareholders
and the equity value close to the acquisition date, taking into consideration of other factors, as appropriate. If Beifu achieved
specified performance metrics and did not complete an initial public offering, and the founders of Beifu remained being employed
by the Group, the non-controlling shareholders had the right to put their equity interests in Beifu to the Group at the fair value
(“the put option”).
The Group considered
the probability of the exercise of the put option and believed that the exercise of the put option was not probable upon the acquisition
date and as of December 31, 2015.
Pursuant to ASC 480, considering
the non-controlling interests were redeemable upon the occurrence of an event that was not solely within the control of the Group,
the Group classified the non-controlling interests with the written put option as mezzanine equity in the Company’s consolidated
financial statements. The aforementioned put option of Beifu has been cancelled upon the date of disposal.
The business combination was completed
on February 3, 2015. The excess of the purchase price over tangible assets, identifiable intangible assets acquired, and liabilities
assumed and fair value of the non-controlling interest was recorded as goodwill. The acquired identifiable intangible assets were
valued by various approaches, including the income approach and the replacement cost approach, as appropriate. Acquisition related
costs were immaterial and were included in general and administrative expenses for the year ended December 31, 2015.
Pro forma results of operations
related to the acquisition have not been presented because they were not material to the Group’s consolidated statements
of operations and comprehensive income.
There were no indemnification assets
involved. Total identifiable intangible assets acquired upon acquisition mainly included cooperation agreements with online game
hosts and non-compete agreements, which had an estimated useful life of three and seven years, respectively. Total goodwill of
RMB147 million primarily represented the expected synergies from combining operations of Beifu with those of the Group, which were
expected to be complementary to each other. In accordance with ASC350, goodwill has not been amortized but tested for impairment
and was not deductible for tax purposes.
In the 2015 annual goodwill impairment
assessment, the Group has noted impairment indicator for Beifu and recognised an impairment charge of RMB128,035 against the goodwill
related to the acquisition of Beifu (Note 14).
In June 2016, the Group disposed
60% equity interest of Beifu for a total consideration of RMB3,500. After the disposal, the Group retained 10% equity interest
of Beifu and accounted for the investment in Beifu as an equity investment as the Group still had significant influence over Beifu.
As a result, Beifu ceased to be a subsidiary of the Group. A total loss of RMB23,474 was recognised, which is the difference between
(a) the aggregate of the fair value of consideration received, the fair value of the retained non-controlling interests and the
carrying amount of non-controlling interests being deconsolidated, amounting to RMB13,236 collectively and (b) the carrying amount
of the assets and liabilities being deconsolidated, amounting to RMB36,710. As part of the total loss recognized, the loss related
to the remeasurement of the retained non-controlling investment to fair value was RMB3,088.
Disposal of Beijing Huanqiu Xingxue
Technology Development Co., Ltd. (“Xingxue”)
Xingxue, a company engaged in online
vocational education, was acquired by the Group in 2014.
In December 2016, the Group disposed
33.86% equity interest of Xingxue for a total consideration of RMB118,500. After the disposal, the Group retained 31.14% equity
interest of Xingxue. As a result, Xingxue ceased to be a subsidiary of the Group. A total income of RMB127,434 was recognised,
which is the difference between (a) the aggregate of the fair value of consideration received, the fair value of the retained non-controlling
interests and the carrying amount of non-controlling interests being deconsolidated, amounting to RMB282,433 collectively and (b)
the carrying amount of the assets and liabilities being deconsolidated, amounting to RMB154,999. As part of the total loss recognized,
the gain related to the remeasurement of the retained non-controlling investment to fair value was RMB57,791.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
5.
|
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,
2015 and 2016 primarily consist of the following currencies:
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
RMB
equivalent
|
|
|
Amount
|
|
|
RMB
equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
450,802
|
|
|
|
450,802
|
|
|
|
1,536,947
|
|
|
|
1,536,947
|
|
US$
|
|
|
73,632
|
|
|
|
478,132
|
|
|
|
6,171
|
|
|
|
42,796
|
|
Total
|
|
|
|
|
|
|
928,934
|
|
|
|
|
|
|
|
1,579,743
|
|
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, 2015
and 2016 primarily consist of the following currencies:
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
RMB
equivalent
|
|
|
Amount
|
|
|
RMB
equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
1,235,000
|
|
|
|
1,235,000
|
|
US$
|
|
|
253,322
|
|
|
|
1,644,946
|
|
|
|
362,882
|
|
|
|
2,516,519
|
|
Total
|
|
|
|
|
|
|
1,894,946
|
|
|
|
|
|
|
|
3,751,519
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
7.
|
Restricted short-term deposits
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Pledge short-term deposits for one pending litigation (i)
|
|
|
110,000
|
|
|
|
-
|
|
Pledge short-term deposits for bank borrowing facilities (ii)
|
|
|
279,221
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
389,221
|
|
|
|
-
|
|
(i) As of December 31, 2015, the
Group had restricted short-term deposits balance of RMB110 million representing pledged deposit for one pending litigation in which
the Group was the claimant and had applied to the court to freeze the assets of the defendant. Pursuant to relevant PRC laws and
regulations, the Group had to deposit a certain amount of cash as pledged deposit in order to submit the application to the court
requesting to freeze the defendant’s assets.
As of December 31, 2016, the pledged
deposits has been unfrozen due to the settlement of the litigation.
(ii) As of December 31, 2015, the
Company had offshore restricted short-term deposits balance set aside for a period of 12 months or less of approximately RMB279
million for bank borrowing facilities.
|
8.
|
Accounts receivable, net
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Accounts receivable, gross
|
|
|
191,144
|
|
|
|
224,791
|
|
Less: allowance for doubtful receivables
|
|
|
(58,791
|
)
|
|
|
(55,220
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
132,353
|
|
|
|
169,571
|
|
The following table summarized the
details of the Company’s allowance for doubtful accounts:
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
|
(31,214
|
)
|
|
|
(57,342
|
)
|
|
|
(58,791
|
)
|
(Additions)/reversals charged to general and administrative expenses, net
|
|
|
(26,246
|
)
|
|
|
(1,449
|
)
|
|
|
3,571
|
|
Write-off during the year
|
|
|
118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
|
(57,342
|
)
|
|
|
(58,791
|
)
|
|
|
(55,220
|
)
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
9.
|
Prepayments and other current assets
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Receivables from disposal of a subsidiary
|
|
|
-
|
|
|
|
95,166
|
|
Prepayments and deposits to vendors and content providers
|
|
|
71,354
|
|
|
|
70,347
|
|
Interests receivable
|
|
|
41,220
|
|
|
|
17,050
|
|
Rental and other deposits
|
|
|
12,111
|
|
|
|
13,015
|
|
Employee advances
|
|
|
12,484
|
|
|
|
12,245
|
|
Rental prepayments
|
|
|
1,333
|
|
|
|
6,462
|
|
Others
|
|
|
9,321
|
|
|
|
10,447
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
147,823
|
|
|
|
224,732
|
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Cost investments (i)
|
|
|
516,446
|
|
|
|
477,733
|
|
Equity investments(ii)
|
|
|
44,994
|
|
|
|
252,272
|
|
Available-for-sale securities (iii)
|
|
|
6,117
|
|
|
|
188,597
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
567,557
|
|
|
|
918,602
|
|
|
(i)
|
In 2015 and 2016, the Group
entered into agreements to acquire minority stake of a number of privately-held entities with total consideration of RMB351,800
and RMB90,234 respectively. 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)
|
In 2016, the Group acquired minority stake of a number
of privately-held entities with total consideration of RMB107,010. Investments have been accounted for under the equity method
where the Group has significant influence in these investments and the investments are considered as in substance ordinary shares.
|
In 2016, following the deconsolidation
and disposal of Xingxue (Note 4), the Group reclassified the remaining 31.14% equity interest of Xingxue as an equity investment,
as the Group still can exercise significant influence over Xingxue.
|
(iii)
|
In 2015, the Group entered into share purchase agreements
to acquire 4.25% equity stake of a company with a total consideration of RMB6,117. The Group recorded this investment as an available-for-sale
debt security since the preferred shares purchased by the Group are redeemable at the option of the Group. Subsequent to initial
recognition, the available-for-sale debt security is measured at fair value at every period end. There was no significant change
in fair value of the investment from the investment date to December 31, 2016.
|
In 2016, one of the Group's investees
became listed on NASDAQ Global Market. As the investment has readily determinable fair value upon listing, the Group reclassified
this investment as an available-for-sale security upon its listing and recorded the investment at fair value with unrealized holding
gain or loss recognized in other comprehensive income under ASC 320.
|
(iv)
|
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. In 2014, 2015 and
2016, based on the Group's assessment, an impairment charge of RMB4,000, RMB6,000 and RMB80,104 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.
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
11.
|
Property and equipment,
net
|
Property and equipment consists
of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
482,387
|
|
|
|
482,333
|
|
Servers, computers and equipment
|
|
|
453,441
|
|
|
|
565,786
|
|
Leasehold improvements
|
|
|
69,929
|
|
|
|
80,812
|
|
Decoration of buildings
|
|
|
66,140
|
|
|
|
68,981
|
|
Motor vehicles
|
|
|
12,835
|
|
|
|
24,016
|
|
Furniture, fixture and office equipment
|
|
|
26,098
|
|
|
|
23,259
|
|
Construction in progress
|
|
|
1,937
|
|
|
|
5,586
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,112,767
|
|
|
|
1,250,773
|
|
Less: accumulated depreciation
|
|
|
(269,318
|
)
|
|
|
(412,023
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
843,449
|
|
|
|
838,750
|
|
Depreciation expense for the years
ended December 31, 2014, 2015 and 2016 were RMB68,035, RMB122,098 and RMB 173,625, respectively.
Land use right consists of the following:
|
|
December 31, 2016
|
|
|
|
RMB
|
|
|
|
|
|
Gross carrying amount
|
|
|
1,916,309
|
|
Less: accumulated amortization
|
|
|
(43,915
|
)
|
|
|
|
|
|
Land use right, net
|
|
|
1,872,394
|
|
Land use right was acquired in 2016
and amortization expense for the year ended December 31, 2016 was RMB43,915.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
13.
|
Intangible assets, net
|
The following table summarizes the
Group’s intangible assets:
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
|
|
|
|
|
|
Brand names
|
|
|
102,654
|
|
|
|
59,034
|
|
Operating rights for game broadcasting
|
|
|
35,071
|
|
|
|
58,655
|
|
Operating rights for licensed games
|
|
|
46,879
|
|
|
|
40,274
|
|
Software
|
|
|
38,307
|
|
|
|
30,632
|
|
Domain names
|
|
|
25,902
|
|
|
|
27,311
|
|
Technology
|
|
|
17,621
|
|
|
|
18,282
|
|
Others
|
|
|
31,200
|
|
|
|
18,300
|
|
|
|
|
|
|
|
|
|
|
Total of gross carrying amount
|
|
|
297,634
|
|
|
|
252,488
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
|
|
Brand names
|
|
|
(20,294
|
)
|
|
|
(21,810
|
)
|
Operating rights for game broadcasting
|
|
|
(23,278
|
)
|
|
|
(46,855
|
)
|
Operating rights for licensed games
|
|
|
(15,010
|
)
|
|
|
(30,804
|
)
|
Software
|
|
|
(9,464
|
)
|
|
|
(13,110
|
)
|
Domain names
|
|
|
(6,249
|
)
|
|
|
(8,449
|
)
|
Technology
|
|
|
(7,712
|
)
|
|
|
(9,457
|
)
|
Others
|
|
|
(5,478
|
)
|
|
|
(3,592
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated amortization
|
|
|
(87,485
|
)
|
|
|
(134,077
|
)
|
|
|
|
|
|
|
|
|
|
Less: accumulated impairment
|
|
|
(63,712
|
)
|
|
|
(59,485
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
146,437
|
|
|
|
58,926
|
|
In 2015, the Group performed interim
and annual goodwill impairment test for the goodwill generated from the acquisition of 100 Online Education Technology (Beijing)
Co., Ltd. (“100 Online”) and Beifu, due to the poor financial performance of these two VIEs (Note 14), and recognized
impairment loss of intangible assets of RMB48,814 and RMB8,385, respectively, which was mainly made against the carrying amount
of the brand names.
In 2016, the Group performed goodwill impairment test for the goodwill generated from the acquisition of 100 Online due to
the poor financial performance of 100 Online. The recognized impairment loss of intangible assets of RMB3,828 was mainly made
against the carrying amount of the brand name due to the goodwill impairment.
Income approach was adopted in the above impairment assessments for the determination of fair value of
the intangible assets.
Amortization expense for the years ended December 31,
2014, 2015 and 2016 were RMB12,598, RMB64,201 and RMB 56,977, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
13.
|
Intangible assets, net (continued)
|
The estimated amortization expenses
for each of the following five years are as follows:
|
|
Amortization expense
of intangible assets
|
|
|
|
|
|
2017
|
|
|
25,606
|
|
2018
|
|
|
10,453
|
|
2019
|
|
|
6,032
|
|
2020
|
|
|
4,708
|
|
2021
|
|
|
1,925
|
|
The weighted
average amortization periods of intangible assets as of December 31, 2015 and 2016 are as below:
|
|
December 31,
|
|
|
2015
|
|
2016
|
|
|
|
|
|
Domain names
|
|
15 years
|
|
15 years
|
Technology
|
|
5 years
|
|
5 years
|
Software
|
|
5 years
|
|
5 years
|
Operating rights for licensed games
|
|
3 years
|
|
2 years
|
Operating rights for game broadcasting
|
|
1 year
|
|
1 year
|
Brand names
|
|
10 years
|
|
Not applicable
|
Others
|
|
3-5 years
|
|
Not applicable
|
The changes
in the carrying amount of goodwill for the years ended December 31, 2015 and 2016 are as follows:
|
|
YY Live
|
|
|
100 Education
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
|
4,107
|
|
|
|
296,275
|
|
|
|
300,382
|
|
Increase in goodwill related to acquisition (i)
|
|
|
161,326
|
|
|
|
-
|
|
|
|
161,326
|
|
Impairment charges (iii)
|
|
|
(128,035
|
)
|
|
|
(182,089
|
)
|
|
|
(310,124
|
)
|
Foreign currency translation adjustment
|
|
|
54
|
|
|
|
-
|
|
|
|
54
|
|
Balance as of December 31, 2015
|
|
|
37,452
|
|
|
|
114,186
|
|
|
|
151,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in goodwill related to disposal(ii)
|
|
|
(19,354
|
)
|
|
|
(100,382
|
)
|
|
|
(119,736
|
)
|
Impairment charges (iii)
|
|
|
(3,861
|
)
|
|
|
(13,804
|
)
|
|
|
(17,665
|
)
|
Foreign currency translation adjustment
|
|
|
63
|
|
|
|
-
|
|
|
|
63
|
|
Balance as of December 31, 2016
|
|
|
14,300
|
|
|
|
-
|
|
|
|
14,300
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
(i) In February 2015, the Group purchased 70% equity
interest of Beifu. Goodwill of RMB147,388 was recognized in the segment of YY Live from this business acquisition (Note 4).
Goodwill represented the synergy effects of the business
combination.
(ii) In June 2016, the Group disposed 60% equity interest
of Beifu and ceased to consolidate Beifu as a subsidiary. Goodwill of RMB19,354 was derecognized in the segment of YY Live (Note
4).
In December 2016, the Group disposed 33.86% equity interest
of Xingxue and ceased to consolidate Xingxue as a subsidiary. Goodwill of RMB100,382 was derecognized in the segment of 100 Education
upon this disposal (Note 4).
(iii) The Group performs its annual goodwill impairment
test of each reporting unit as of October 1, or more frequently, if certain events or circumstances warrant. Events or changes
in circumstances which might indicate potential impairment in goodwill include the entity-specific factors, including, but not
limited to, stock price volatility, market capitalization relative to net book value, and projected revenue, market growth and
operating results.
In June 2015, it was noted that 100 Online’s financial
and operational performance in the first half year of 2015 was behind the original budget resulting from unexpected fierce market
competition and the resignation of a number of key personnel in 100 Online. Accordingly, the Group performed an interim assessment
on the goodwill impairment related to 100 Online and recognized an estimated goodwill impairment charge of RMB110,699. Correspondingly,
long-term payable amounting to RMB111,547 in relation to the contingent consideration was reversed. The unobservable inputs used
in the assessment included risk free rate, discount rate and etc. The risk free rate and discount rate were 4.07% and 21.5%, respectively.
In the 2015 annual goodwill impairment
assessment, the Group has noted further impairment indicator for 100 Online as well as impairment indicator for Beifu as certain
key personnel of 100 Online and Beifu resigned in the third quarter of 2015. Based on the result of the annual impairment assessment
for 100 Online, an impairment charge of RMB71,390 was recognised and correspondingly, long-term payable amounting to RMB73,618
in relation to the contingent consideration was reversed; For Beifu, an impairment charge of RMB128,035 was recognised and correspondingly,
long-term payable amounting to RMB 107,306 in relation to the contingent consideration was reversed. As of December 31, 2015, balance
of long-term payable in relation of the contingent consideration was 0. The unobservable inputs used in the assessment, included
the risk free rate, discount rate and etc. For the goodwill impairment assessment of 100 Online and Beifu, the risk free rate were
both 3.85% and the discount rate were 23% and 24.5%, respectively.
In December 2016, the Group has identified further impairment
indicator for 100 Online as well as impairment indicator for Bilin Online. Based on the results of the impairment assessment, an
impairment charge of RMB13,804 for 100 Online and an impairment charge of RMB3,861 for Bilin Online were recognized, respectively.
The above goodwill impairment assessments on 100 Online,
Beifu and Bilin Online adopted the income approach and considered a combination of factors, including, but not limited to, market
conditions, expected future cash flows, growth rates and discount rates, which required the Group to make certain estimates and
assumptions regarding industry economic factors and future profitability of the business.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Deferred revenue, current:
|
|
|
|
|
|
|
|
|
Live streaming
|
|
|
187,930
|
|
|
|
308,545
|
|
Online games
|
|
|
81,054
|
|
|
|
61,589
|
|
Membership
|
|
|
87,483
|
|
|
|
47,532
|
|
Others
|
|
|
28,833
|
|
|
|
13,017
|
|
Total current deferred revenue
|
|
|
385,300
|
|
|
|
430,683
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, non-current:
|
|
|
|
|
|
|
|
|
Live streaming
|
|
|
8,757
|
|
|
|
12,002
|
|
Membership
|
|
|
11,328
|
|
|
|
6,273
|
|
Others
|
|
|
667
|
|
|
|
7,184
|
|
Total non-current deferred revenue
|
|
|
20,752
|
|
|
|
25,459
|
|
|
16.
|
Accrued liabilities and other current liabilities
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Accrued revenue sharing fees
|
|
|
298,805
|
|
|
|
521,654
|
|
Accrued salaries and welfare
|
|
|
169,041
|
|
|
|
200,606
|
|
Accrued bandwidth costs
|
|
|
71,507
|
|
|
|
86,186
|
|
Market promotion expenses
|
|
|
29,358
|
|
|
|
68,243
|
|
Value added taxes payable
|
|
|
16,010
|
|
|
|
38,161
|
|
License fees
|
|
|
10,000
|
|
|
|
22,725
|
|
Deposits from content providers and suppliers
|
|
|
16,531
|
|
|
|
18,779
|
|
Other taxes payable
|
|
|
14,370
|
|
|
|
18,516
|
|
Interests payable
|
|
|
14,795
|
|
|
|
15,800
|
|
Others
|
|
|
41,472
|
|
|
|
75,368
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
681,889
|
|
|
|
1,066,038
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
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
|
|
|
2,597,403
|
|
|
|
-
|
|
Less: issuance cost
|
|
|
(25,284
|
)
|
|
|
-
|
|
|
|
|
2,572,119
|
|
|
|
-
|
|
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. Holders may convert their Notes at their option at any time prior to the close of business
on the second business day immediately preceding the maturity date.
Upon conversion, the Company will
deliver, for each US$1,000 dollars principal amount of converted Notes, a number of ADSs, each representing twenty Class A common
shares of YY Inc., par value of US$0.00001 per share, equal to the conversion rate.
The conversion rate will initially
be 9.0334 ADSs per US$1,000 dollars principal amount of Notes (equivalent to an initial conversion price of approximately US$110.70
per ADS).
The net proceeds to the Company from
the issuance of the Notes were US$390.8 million. Debt issuance costs were US$9.2 million which are being deferred and amortized
to interest expense from the issuance date (March 18, 2014) to the first put date of the Notes (April 1, 2017).
The Notes are general senior unsecured
obligations and rank (1) senior in right of payment to any of the Company’s future indebtedness that is expressly subordinated
in right of payment to the Notes, (2) equal in right of payment to any of the Company’s future unsecured indebtedness of
the Company that is not so subordinated, (3) junior in right of payment to any of the Company’s secured indebtedness to the
extent of the value of the assets securing such indebtedness and (4) structurally junior to all indebtedness and other liabilities
(including trade payables) of the Company’s subsidiaries and VIEs .
The value of the Notes is initially
measured by the cash received and is subsequently stated at amortized cost. As of December 31, 2015 and 2016, RMB2.6 billion (US$397
million) and RMB 2.8 billion (US$399 million) has been accounted for as the value of the Notes in non-current liabilities and current
liabilities respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
17.
|
Convertible bonds (continued)
|
The key terms of the Notes are as
follows:
Redemption
The Notes are not redeemable prior
to the maturity date of April 1, 2019, except as described below. 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. If a fundamental change (as defined in the Indenture of the 2019 Convertible Senior Notes) occurs prior to
the maturity date, the Holders may require the Company to purchase for cash all or any portion of the Notes at a purchase price
equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, if any, to, but excluding,
the fundamental change purchase date. The Holders have the option to require the Company to repurchase the Notes, in whole or in
part, in the event of a fundamental change for an amount equal to the 100% of the principal amount and any accrued and unpaid interest
in the event of fundamental changes. The Company believes that the likelihood of occurrence of events of a fundamental change is
remote.
The contingent redemption option is
assessed in accordance with ASC 815. The contingent redemption option is considered clearly and closely related to its debt host
and does not meet the requirement for bifurcation as the Notes were issued at par and the repurchase feature requires the issuer
to settle the option by delivering par plus accrued and unpaid interest, the Notes holder would recover all of their initial investment.
Additionally, since the Notes holder can only recover its initial investment upon exercise of its option, there are no interest
rate scenarios under which the embedded derivative would at least double the investor’s initial rate of return.
Conversion
The Holders may convert their
Notes in integral multiples of US$1,000 dollars principle amount at an initial conversion rate of 9.0334 ADS, at any time
prior to the maturity date of April 1, 2019. Upon conversion of the Notes, the Company will deliver shares of the
Company’s ADS. The conversion rate is subject to adjustment in certain events, including, but not limited to, the
issuance of certain share dividends on the Class A common shares, the issuance of certain rights or warrants, subdivisions,
combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange
offers (as defined in the Indenture of the 2019 Convertible Senior Notes). In addition, upon a make-whole fundamental change
(as defined in the Indenture of the 2019 Convertible Senior Notes), the Company will, under certain circumstances, increase
the applicable conversion rate for a holder that elects to convert its Notes in connection with such make-whole fundamental
change.
In accordance with ASC 815, the conversion
option meets the definition of a derivative. However, bifurcation of conversion option from the Notes is not required as the scope
exception prescribed in ASC 815 is met as the conversion option is considered indexed to the entity’s own stock and classified
in shareholders’ equity.
Assessment of Beneficial Conversion
Feature and Contingent Beneficial Conversion Feature:
As the conversion options are not
bifurcated, the Company has assessed the beneficial conversion feature (“BCF”), as of commitment date as defined in
ASC 470. There was no BCF attributed to the Notes as the set conversion price for the Notes was greater than the fair value of
the common share price on the date of issuance.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
17.
|
Convertible bonds (continued)
|
Assessment of Beneficial Conversion
Feature and Contingent Beneficial Conversion Feature: (Continued)
The Holders have the option to convert
upon a fundamental change, if Holders decide to convert in connection with a fundamental change, the number of shares issuable
upon conversion will be increased. Upon occurrence of such adjustment, the Company will have to assess the contingent BCF using
a measurement date upon issuance of the Notes. The settlement of the conversion is based on a make-whole provision resulting from
a fundamental change, this feature is consistent with ASC 815, and therefore the Company concludes that this feature is also considered
indexed to its own shares.
Accounting for Debt Issuance Costs:
The debt issuance costs were recorded
as reduction to the convertible bonds and are amortized as interest expense, using the effective interest method, over the term
of the Notes pursuant to ASC 835.
Interest expense recognized during
the years ended December 31, 2015 and 2016 was RMB74,786 and RMB81,085.
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Revenue sharing fees and content costs
|
|
|
1,133,984
|
|
|
|
2,343,224
|
|
|
|
3,790,624
|
|
Bandwidth costs
|
|
|
345,913
|
|
|
|
570,169
|
|
|
|
651,652
|
|
Salary and welfare
|
|
|
131,773
|
|
|
|
198,153
|
|
|
|
232,497
|
|
Depreciation and amortization
|
|
|
59,817
|
|
|
|
145,135
|
|
|
|
173,048
|
|
Payment handling costs
|
|
|
55,101
|
|
|
|
104,849
|
|
|
|
67,474
|
|
Business tax and surcharges
|
|
|
49,233
|
|
|
|
27,794
|
|
|
|
44,659
|
|
Share based compensation
|
|
|
18,037
|
|
|
|
23,963
|
|
|
|
15,894
|
|
Other costs
|
|
|
55,291
|
|
|
|
166,457
|
|
|
|
127,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,849,149
|
|
|
|
3,579,744
|
|
|
|
5,103,430
|
|
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Government grants
|
|
|
5,570
|
|
|
|
79,541
|
|
|
|
128,550
|
|
Others
|
|
|
749
|
|
|
|
2,759
|
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,319
|
|
|
|
82,300
|
|
|
|
129,504
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and
per share data, unless otherwise stated)
(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 the years ended December 31,
2014, 2015 and 2016.
(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:
|
·
|
From 2014 to 2016, Guangzhou Huaduo accrued
the EIT at a tax rate of 15% as a result of HNTE status.
|
|
·
|
Guangzhou Huanju Shidai reported tax loss
from 2010 to 2013. 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 New
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.
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, 2015
and 2016 are approximately RMB3,090,721 and RMB4,784,432, 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, 2015 and 2016.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
20.
|
Income tax (continued)
|
Composition of income tax expense
The current and deferred portions
of income tax expense included in the consolidated statements of operations are as follows:
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expenses
|
|
|
(200,034
|
)
|
|
|
(203,366
|
)
|
|
|
(288,282
|
)
|
Deferred income tax benefits
|
|
|
45,751
|
|
|
|
25,039
|
|
|
|
7,768
|
|
Income tax expense for the year
|
|
|
(154,283
|
)
|
|
|
(178,327
|
)
|
|
|
(280,514
|
)
|
Reconciliation of the differences
between statutory tax rate and the effective tax rate
The reconciliation of total tax expense
computed by applying the respective statutory income tax rate to pre-tax income is as follows:
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC Statutory income tax rate
|
|
|
(25.0
|
)%
|
|
|
(25.0
|
)%
|
|
|
(25.0
|
)%
|
Effect of preferential tax rate
|
|
|
13.1
|
%
|
|
|
14.0
|
%
|
|
|
11.6
|
%
|
Effect of tax-exempt entities
|
|
|
1.1
|
%
|
|
|
(1.6
|
)%
|
|
|
(1.7
|
)%
|
Effect of change in tax rate
|
|
|
-
|
|
|
|
0.5
|
%
|
|
|
-
|
|
Permanent differences (i)
|
|
|
(3.5
|
)%
|
|
|
(3.8
|
)%
|
|
|
(1.1
|
)%
|
Change in valuation allowance
|
|
|
(0.4
|
)%
|
|
|
(1.7
|
)%
|
|
|
(1.5
|
)%
|
Effect of Super Deduction available to the Group
|
|
|
2.0
|
%
|
|
|
2.3
|
%
|
|
|
2.0
|
%
|
Effective income tax rate
|
|
|
(12.7
|
)%
|
|
|
(15.3
|
)%
|
|
|
(15.7
|
)%
|
(i) Permanent differences mainly arise from
expenses not deductible for tax purposes including primarily share based compensation costs and expenses incurred by subsidiaries
and VIEs.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
20.
|
Income tax (continued)
|
Deferred tax assets and liabilities
Deferred taxes are measured using
the enacted tax rates for the periods in which they are expected to be reversed. The tax effects of temporary differences that
give rise to the deferred tax asset balances as of December 31, 2015 and 2016 are as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Deferred tax assets, current:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
46,830
|
|
|
|
55,484
|
|
Allowance for doubtful accounts receivable, accrued expense and others not currently deductible for tax purposes
|
|
|
83,503
|
|
|
|
65,721
|
|
Valuation allowance
|
|
|
(13,412
|
)
|
|
|
(13,896
|
)
|
Total current deferred tax assets, net
|
|
|
116,921
|
|
|
|
107,309
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, non-current:
|
|
|
|
|
|
|
|
|
Tax loss carried forward
|
|
|
39,904
|
|
|
|
66,816
|
|
Deferred revenue
|
|
|
1,414
|
|
|
|
1,800
|
|
Impairment of investment
|
|
|
1,698
|
|
|
|
7,949
|
|
Others
|
|
|
251
|
|
|
|
753
|
|
Valuation allowance (i)
|
|
|
(39,904
|
)
|
|
|
(66,816
|
)
|
Total non-current deferred tax assets, net
|
|
|
3,363
|
|
|
|
10,502
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, non-current:
|
|
|
|
|
|
|
|
|
Related to acquired intangible assets
|
|
|
16,817
|
|
|
|
3,281
|
|
Others
|
|
|
-
|
|
|
|
4,777
|
|
Total non-current deferred tax liabilities, net
|
|
|
16,817
|
|
|
|
8,058
|
|
|
(i)
|
Valuation allowance is provided against deferred tax assets when the Group determines that it is more likely than not that
the deferred tax assets will not be utilized in the future. In making such determination, the Group considered factors including
future taxable income exclusive of reversing temporary differences and tax loss carry forwards. Valuation allowance was provided
for net operating loss carry forward because it was more likely than not that such deferred tax assets would not be realized based
on the Group’s estimate of its future taxable income. If events occur in the future that allow the Group to realize more
of its deferred income tax than the presently recorded amounts, an adjustment to the valuation allowances will result in a decrease
in tax expense when those events occur.
|
Tax loss carry forwards
As of December 31, 2016, the Group had tax loss carry forwards of approximately RMB295,238, which can be carried forward to
offset future taxable income. The net operating tax loss carry forwards will begin to expire as follows:
|
|
Amount
|
|
|
|
RMB
|
|
|
|
|
|
2017
|
|
|
-
|
|
2018
|
|
|
9,428
|
|
2019
|
|
|
28,373
|
|
2020
|
|
|
78,713
|
|
2021
|
|
|
178,724
|
|
Total
|
|
|
295,238
|
|
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 2010 to
2016 remain subject to examination by the tax authorities. There were no ongoing examinations by tax authorities as of December 31,
2016.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
During the year ended December 31,
2014, 25,036,140 Class A common shares were issued for the exercised share options, vested restricted shares and restricted share
units and 58,478,690 Class B common shares were converted to Class A common shares.
As of December 31, 2014, 10,000,000,000
Class A common shares and 1,000,000,000 Class B common shares had been authorized, 706,173,568 Class A common shares
and 427,352,696 Class B common shares had been issued and outstanding, respectively.
On May 4, 2014 and March 5, 2015,
the Company’s board of directors approved two share repurchase programs (the “Share Repurchase Program”) respectively,
pursuant to which the Company may repurchase from time to time at management’s discretion, at prevailing market prices in
the open market in accordance with Rule 10b-18 under the Securities Exchange Act of 1934, up to US$200 million in total of the
Company’s outstanding ADSs for a period not to exceed twelve (12) months from the date of approval by board of directors.
For the year ended December 31, 2015, the Company had repurchased under the Share Repurchase Program an aggregate of 3,092,556
ADSs, representing 61,851,120 Class A common shares at an average price of US$54.82 per ADS, or US$2.74 per Class A common share,
for aggregate consideration of US$169.5 million. Pursuant to ASC 505, since the shares were repurchased for constructive retirement,
the excess of repurchase price over par value was recorded as deduction of additional paid-in capital upon the repurchase date.
During the year ended December 31,
2015, 26,110,680 Class A common shares were issued for the exercised share options, vested restricted shares and restricted share
units and 57,794,720 Class B common shares were converted to Class A common shares.
As of December 31, 2015, 10,000,000,000
Class A common shares and 1,000,000,000 Class B common shares had been authorized, 728,227,848 Class A common shares
and 369,557,976 Class B common shares had been issued and outstanding, respectively.
During the year ended December 31,
2016, 11,887,180 Class A common shares were issued for the exercised share options, vested restricted shares and restricted share
units and 10,000,000 Class B common shares were converted to Class A common shares.
As of December 31, 2016, 10,000,000,000
Class A common shares and 1,000,000,000 Class B common shares had been authorized, 750,115,028 Class A common shares
and 359,557,976 Class B common shares had been issued and outstanding, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
22.
|
Share based compensation
|
Pre-2009 Scheme Options
Grant of options
Before the adoption of the Employee
Equity Incentive Scheme (the “2009 Incentive Scheme”), 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 years ended December 31, 2014, 2015 and 2016:
|
|
Number of
options
|
|
|
Weighted
average
exercise
price (US$)
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
|
Aggregate
intrinsic
value
(US$)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, vested and exercisable, December 31, 2013
|
|
|
13,222,005
|
|
|
|
0.0059
|
|
|
|
4.40
|
|
|
|
33,162
|
|
Exercised
|
|
|
(5,841,660
|
)
|
|
|
0.0057
|
|
|
|
3.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, vested and exercisable, December 31, 2014
|
|
|
7,380,345
|
|
|
|
0.0061
|
|
|
|
3.52
|
|
|
|
22,959
|
|
Exercised
|
|
|
(6,611,970
|
)
|
|
|
0.0061
|
|
|
|
2.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, vested and exercisable, December 31, 2015
|
|
|
768,375
|
|
|
|
0.0067
|
|
|
|
2.99
|
|
|
|
2,395
|
|
Exercised
|
|
|
(234,720
|
)
|
|
|
0.0067
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, vested and exercisable, December 31, 2016
|
|
|
533,655
|
|
|
|
0.0067
|
|
|
|
1.98
|
|
|
|
1,048
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
22.
|
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 Company’s common shares as of December 31, 2014, 2015 and 2016 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 December 31, 2015 and 2016.
The total intrinsic value of options
exercised during the year ended December 31, 2014, 2015 and 2016 amounted to RMB134,844, RMB122,956 and RMB3,270, respectively.
Since all the share options have been vested, no share based compensation expense related to share options were incurred for the
years ended December 31, 2014, 2015 and 2016.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
22.
|
Share based compensation
(continued)
|
Since January 1, 2010, Duowan BVI
granted 61,250,677 restricted shares to employees and 100,000 restricted shares to a non-employee pursuant to the 2009 Incentive
Scheme. As of December 31, 2015, the restricted shares granted to employees and the non-employee were fully vested
.
Vesting of restricted shares
The restricted shares have vesting
conditions and will vest 50% after 24 months of the grant date and the remaining 50% will vest in two equal installments over the
next 24 months. Under the restricted shares agreement, no shares may be sold or transferred prior to the occurrence of an exit
event, as defined in the respective restricted share agreements as: i) a listing on any recognized stock exchange, ii) a sale by
Duowan BVI of all or substantially all of its assets, iii) a sale of all of the issued capital of Duowan BVI, or iv) passing for
court order of winding up of Duowan BVI.
If the employee terminates employment,
the service vested portion of the restricted shares may be subject to: (i) repurchase (subject to Company’s sole discretion)
by Duowan BVI at fair value of common shares of Duowan BVI which is assessed by the Company with the assistance of an independent
valuation firm; or (ii) be held by a person who is an existing employee of the Group and is designated by the leaving restricted
share holder according to a properly signed escrow agreement to hold such shares for and on his/her behalf. If the leaving employee
fails to deliver a properly signed agreement to Duowan BVI within 30 days from receipt of the notification from Duowan BVI, such
service vested shares shall automatically lapse and expire.
The following table summarizes the
restricted shares activity for the years ended December 31, 2014, 2015 and 2016:
|
|
Number of
restricted
shares
|
|
|
Weighted
average
grant-date
fair value (US$)
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
4,673,725
|
|
|
|
0.6144
|
|
Forfeited
|
|
|
(159,410
|
)
|
|
|
0.9362
|
|
Vested
|
|
|
(4,514,315
|
)
|
|
|
0.6030
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2014, 2015 and 2016
|
|
|
-
|
|
|
|
-
|
|
Forfeitures are estimated at the time
of grant. If necessary, forfeitures are revised in subsequent periods if actual forfeitures differ from those estimates.
For the years ended December 31,
2014, 2015 and 2016, the Company recorded share based compensation of RMB3,771 , nil and nil, respectively, using the graded-vesting
method for employees and non-employee.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
22.
|
Share based compensation
(continued)
|
|
(c)
|
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, 2013, 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 years ended December 31,
2014, 2015 and 2016, the Company granted restricted share units to employees of 9,912,595, 16,012,644 and 1,530,008 respectively
pursuant to the 2011 Share Incentive Plan.
No restricted share units were granted
to non-employees during the year ended December 31, 2014, 2015 and 2016.
The following table summarizes the
restricted share units activity for the years ended December 31, 2014, 2015 and 2016:
|
|
Number of
restricted
shares
|
|
|
Weighted
average
grant-date
fair value (US$)
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
44,302,600
|
|
|
|
0.9639
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
9,912,595
|
|
|
|
3.5805
|
|
Forfeited
|
|
|
(3,125,430
|
)
|
|
|
1.1859
|
|
Vested
|
|
|
(12,283,670
|
)
|
|
|
1.0144
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2014
|
|
|
38,806,095
|
|
|
|
1.5984
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
16,012,644
|
|
|
|
3.3358
|
|
Forfeited
|
|
|
(7,312,548
|
)
|
|
|
1.8920
|
|
Vested
|
|
|
(11,222,589
|
)
|
|
|
1.4374
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
36,283,602
|
|
|
|
2.3535
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,530,008
|
|
|
|
1.8618
|
|
Forfeited
|
|
|
(4,628,202
|
)
|
|
|
2.7386
|
|
Vested
|
|
|
(12,229,688
|
)
|
|
|
2.0151
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
20,955,720
|
|
|
|
2.4320
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at December 31, 2016
|
|
|
20,568,083
|
|
|
|
2.4312
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
22.
|
Share based compensation
(continued)
|
|
(c)
|
Restricted Share Units (continued)
|
For the years ended December 31,
2014, 2015 and 2016, the Company recorded share based compensation of RMB130,718 , RMB152,205 and RMB143,350, using the graded-vesting
attribution method.
As of December 31, 2016, total
unrecognized compensation expense relating to the restricted share units was RMB127,905. The expense is expected to be recognized
over a weighted average period of 0.96 years using the graded-vesting attribution method.
|
(d)
|
Share based awards granted to an employee of a subsidiary
|
The Company completed a business combination
in 2014 by acquiring 100% of equity interests in two vocational training companies, namely Xingxue and Beijing Huanqiu Chuangzhi
Software Co., Ltd.. In 2015, the Company granted share based awards of Xingxue to one of Xingxue's key employee (the “Employee”).
Under the arrangements entered into by the Company and the Employee,
the Employee was granted 20% of Xingxue’s equity interests with immediate effect and entitled to purchase additional equity
interests of Xingxue subject to the achievement of certain financial performance metrics of Xingxue (“call option”).
These awards were regarded as share based awards with performance conditions. The Company would recognize compensation cost for
awards with performance conditions if and when the Company concluded that it was probable that the performance condition would
be achieved.
In 2015 and 2016, the Company recorded share based compensation
of RMB32,593 and RMB13,364 respectively for the share based awards granted to the Employee.
|
(e)
|
Other share based compensation
|
For the years ended December 31, 2014, 2015
and 2016, the Company recorded share based compensation of RMB143, RMB574 and RMB572 for restricted shares to the founder of a
subsidiary of a variable interest entity.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
23.
|
Basic and diluted net
income per share
|
Basic and diluted net income per share
for the years ended December 31, 2014, 2015 and 2016 are calculated as follows:
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company
|
|
|
1,064,472
|
|
|
|
1,033,243
|
|
|
|
1,523,918
|
|
Interest expenses of convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
81,085
|
|
Numerator for diluted income per share
|
|
|
1,064,472
|
|
|
|
1,033,243
|
|
|
|
1,605,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic calculation—weighted average number of Class A and Class B common shares outstanding
|
|
|
1,153,140,699
|
|
|
|
1,125,189,978
|
|
|
|
1,127,343,312
|
|
Dilutive effect of share options
|
|
|
10,372,442
|
|
|
|
2,711,486
|
|
|
|
684,455
|
|
Dilutive effect of restricted shares
|
|
|
2,604,789
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive effect of restricted share units
|
|
|
32,425,543
|
|
|
|
22,929,699
|
|
|
|
15,816,362
|
|
Dilutive effect of convertible bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
72,267,200
|
|
Denominator for diluted calculation
|
|
|
1,198,543,473
|
|
|
|
1,150,831,163
|
|
|
|
1,216,111,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per Class A and Class B common share
|
|
|
0.92
|
|
|
|
0.92
|
|
|
|
1.35
|
|
Diluted net income per Class A and Class B common share
|
|
|
0.89
|
|
|
|
0.90
|
|
|
|
1.32
|
|
Basic net income per ADS*
|
|
|
18.46
|
|
|
|
18.37
|
|
|
|
27.04
|
|
Diluted net income per ADS*
|
|
|
17.76
|
|
|
|
17.96
|
|
|
|
26.40
|
|
|
*
|
Each
ADS represents 20 Class A common shares.
|
The weighted average
number of common shares outstanding which could potentially dilute basic earnings per share in the future related to the 2019
Convertible Senior Notes was 72,267,200 and 72,267,200 for the years ended December 31, 2015 and 2016 respectively. The 2019 Convertible
Senior Notes were included in the computation of diluted earnings per share in 2016 because the inclusion of such instrument would
be dilutive, while it was excluded in 2015 and 2014 because the inclusion of such instrument would be anti-dilutive.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
24.
|
Related party transactions
|
The table below sets forth the major
related parties and their relationships with the Group:
Major related parties
|
|
Relationship with the Group
|
|
|
Guangzhou Shanghang
Information Technology Co., Ltd. (“Guangzhou Shanghang”)
|
|
Controlled by a principal shareholder of the Company
|
Guangzhou Chenjun Equity Investment Limited Partnership
(“Guangzhou Chenjun”)
|
|
Equity investment
|
Bigo Inc. (“Bigo”)
|
|
Significant influence exercised by Mr. David Xueling Li (the “Chairman”)
|
Shanghai Yaoyu Culture Media Co., Ltd.(“Shanghai Yaoyu”)
|
|
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
|
Xingxue
(1)
|
|
Equity investment
|
(1) Xingxue became the Group’s equity investment in December 2016.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
24.
|
Related party transactions (continued)
|
During the years ended December 31,
2014, 2015 and 2016, significant related party transactions are as follows:
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
Online games revenue shared from related parties
|
|
|
65,247
|
|
|
|
163,912
|
|
|
|
100,078
|
|
Bandwidth service provided by Guangzhou Shanghang
|
|
|
42,470
|
|
|
|
74,661
|
|
|
|
96,224
|
|
Loan to related parties
|
|
|
1,500
|
|
|
|
159,000
|
|
|
|
44,500
|
|
Partial disposal of an equity investment to Guangzhou Chenjun
|
|
|
-
|
|
|
|
-
|
|
|
|
33,750
|
|
Partial disposal of a subsidiary to Guangzhou Chenjun
|
|
|
-
|
|
|
|
-
|
|
|
|
24,394
|
|
Payment on behalf of related parties, net of repayments
|
|
|
61,000
|
|
|
|
(60,870
|
)
|
|
|
10,699
|
|
Repayment of loans from related parties
|
|
|
1,500
|
|
|
|
160,000
|
|
|
|
-
|
|
Sales of equipment to Bigo
|
|
|
-
|
|
|
|
12,058
|
|
|
|
-
|
|
Purchase of operating rights for game broadcasting from Shanghai Yaoyu
|
|
|
-
|
|
|
|
11,486
|
|
|
|
-
|
|
Purchase of operating rights for licensed games from related parties
|
|
|
6,836
|
|
|
|
10,022
|
|
|
|
-
|
|
Others
|
|
|
1,563
|
|
|
|
9,095
|
|
|
|
13,573
|
|
As of December 31, 2015 and 2016, the amounts due
from/to related parties are as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
Amounts due from related parties
|
|
|
|
|
|
|
|
|
Due from Guangzhou Chenjun
|
|
|
-
|
|
|
|
58,144
|
|
Due from Bigo
|
|
|
-
|
|
|
|
31,528
|
|
Due from Xingxue
|
|
|
-
|
|
|
|
20,000
|
|
Due from Shanghai Rongyi
|
|
|
-
|
|
|
|
13,000
|
|
Others
|
|
|
5,297
|
|
|
|
12,573
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,297
|
|
|
|
135,245
|
|
|
|
|
|
|
|
|
|
|
Amounts due to related parties
|
|
|
|
|
|
|
|
|
Due to Xingxue
|
|
|
-
|
|
|
|
42,128
|
|
Due to Guangzhou Kuyou
|
|
|
9,017
|
|
|
|
30,996
|
|
Due to Shanghang
|
|
|
10,167
|
|
|
|
10,925
|
|
Others
|
|
|
5,733
|
|
|
|
7,196
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,917
|
|
|
|
91,245
|
|
The other receivables/payables from/to
related parties are unsecured and payable on demand.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
25.
|
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 December 31, 2016 except for two available-for-sale investments and contingent consideration.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
25.
|
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, 2015 and December 31, 2016:
|
|
As of December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
-
|
|
|
|
-
|
|
|
|
6,117
|
|
|
|
6,117
|
|
|
|
As of December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
182,480
|
|
|
|
-
|
|
|
|
6,117
|
|
|
|
188,597
|
|
The available-for-sale security
classified in level 3 represented investment in the redeemable preferred shares of a private company. There was no significant
changes in fair value of the investment from the investment date to December 31, 2016.
The following table presents the
changes in level 3 instruments (except for the available-for-sale security classified in level 3, which had no significant changes
in fair value) for the years ended 31 December, 2015 and 2016.
|
|
Contingent consideration in
relation to business
acquisitions
|
|
|
|
RMB
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
|
183,000
|
|
Acquisition of Beifu in 2015 (Note 4)
|
|
|
107,306
|
|
Fair value change of contingent consideration in 2015
|
|
|
(290,306
|
)
|
Balance as of December 31, 2015 and 2016
|
|
|
-
|
|
As for contingent consideration
in relation to business acquisitions, the Company used the Trinomial Tree model in determining the fair value of the contingent
consideration. In applying this model, the Company performed scenario analysis and the fair value of the contingent consideration
was determined based on present value of the total contingent consideration under different scenarios and the probability of each
scenario. The following table summarizes the factors that the Company used to discount the contingent consideration in relation
to acquisition in future years to its present value upon the acquisition date,
Initial recognition of contingent consideration in relation to
business acquisitions
|
|
Risk free interest rate
|
|
|
Discount rate
|
|
Acquisition of Beifu
|
|
|
3.81
|
%
|
|
|
18
|
%
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
25.
|
Fair value measurements (continued)
|
Pursuant to ASC 805, subsequent
measurement for changes in the fair value of contingent consideration after the acquisition date can be divided into two categories.
|
i.
|
Additional information about facts and circumstances that existed at the acquisition date that
the acquirer obtained after that date;
|
|
ii.
|
Changes resulting from events after the acquisition date.
|
According to the relevant acquisition
agreements, actual financial performance in specific years may result in subsequent changes to the contingent consideration. Unless
the change is due to additional information about facts already existed at the acquisition date, these changes should be regarded
as resulting from events after the acquisition date and do not constitute measurement period adjustments. Therefore, the second
category will be applied to the Company. The Company will re-measure the fair value of the liability recognized for the contingent
consideration at each reporting date until the contingency is resolved. For the year ended December 31, 2015 and 2016, the Company
recorded a change in fair value of the contingent consideration of RMB290,306 and nil in other expense pursuant to ASC 805.
Apart from the contingent consideration
in relation to business acquisitions and available-for-sale investment, the Company’s other financial instruments consist
principally of cash, short-term deposits, accounts receivable, amounts due to/from related parties, accounts payable, certain accrued
expenses and convertible bonds. The recorded values of cash, accounts receivable, amounts due to/from related parties, accounts
payable, certain accrued expenses and convertible bonds are recorded at cost which approximates fair value. The fair value of convertible
bonds is within level 2 of the fair value hierarchy.
|
26.
|
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 RMB28,144, RMB53,674 and RMB76,753 for the years ended December 31, 2014, 2015 and 2016, respectively.
As of December 31, 2016, future
minimum payments under non-cancellable operating leases consist of the following:
|
|
Office rental
|
|
|
|
RMB
|
|
|
|
|
|
2017
|
|
|
41,848
|
|
2018
|
|
|
28,335
|
|
2019
|
|
|
1,876
|
|
2020 and after
|
|
|
444
|
|
|
|
|
72,503
|
|
As of December 31, 2016, the Group
had outstanding capital commitments totaling RMB144,301, which consisted of capital expenditures.
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, 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
(a)Repurchase of the Notes
The Notes were redeemable at
the holders’ option on April 1, 2017 (Note 17). US$399 million aggregate principal amount of the Notes are redeemed on April
1, 2017. The Company has accepted the repurchase and forwarded cash in payment of the repurchase price to the paying agent for
distribution to the holders who had exercised the option. Following the repurchase, US$1 million aggregate principal amount of
the Notes remains outstanding and will be due in 2019.
(b)Change in segment reporting
Considering that the online education business is becoming insignificant to the Group, the Company decided that the financial
performance of 100 Education will no longer be presented for CODM's review separately in the Group's internal reporting from
the first quarter of 2017. As a result, 100 Education will cease to be a separate operating segment starting from the first
quarter of 2017.
(c)Loan agreements
On January 19, 2017, the Group entered into a loan agreement with a bank, pursuant to which the Group borrowed a loan with
a principal amount of US$30 million within a credit facility of US$80 million. The annualized interest rate of the loan is
3-month LIBOR plus 1.5%, accruing from draw-down. The draw-down of US$30 million took place on March 8, 2017 and shall be
repaid before March 1, 2018. Term deposit of RMB500 million was pledged as collateral for the loan until March 13, 2018.
On February 17, 2017, the Group entered into a loan agreement with a bank, pursuant to which the Group borrowed a loan with
a total principal amount of US$60 million within a credit facility of US$80 million. The annualized interest rate of the loan
is 3-month LIBOR plus 0.85%, accruing from draw-down. The first draw-down of US$45 million took place on March 21, 2017 and
the second draw-down of US$15 million took place on March 30, 2017. The loan shall be repaid before February 9, 2018. Term
deposit of RMB500 million was pledged as collateral for the loan until February 23, 2018.
|
28.
|
Restricted net assets
|
Relevant PRC laws and regulations
permit payments of dividends by the Group’s subsidiaries and VIEs incorporated in the PRC only out of their retained earnings,
if any, as determined in accordance with PRC accounting standards and regulations. In addition, the Company’s subsidiaries
and VIEs in the PRC are required to annually appropriate 10% of their net after-tax income to the statutory general reserve fund
prior to payment of any dividends, unless such reserve funds have reached 50% of their respective registered capital. As a result
of these and other restrictions under PRC laws and regulations, the Group’s subsidiaries and VIEs incorporated in the PRC
are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans
or advances, which restricted portion as calculated under U.S. GAAP amounted to approximately RMB2,685,373 and RMB2,678,921
as of December 31, 2015 and 2016, respectively. There are no differences between U.S. GAAP and PRC accounting standards
in connection with the reported net assets of the legally owned subsidiaries in the PRC and the VIEs. Even though the Company currently
does not require any such dividends, loans or advances from the PRC entities for working capital and other funding purposes, the
Company may in the future require additional cash resources from them due to changes in business conditions, to fund future acquisitions
and development, or merely to declare and pay dividends or distributions to our shareholders. Except for the above, there is no
other restriction on use of proceeds generated by the Group’s subsidiaries and VIEs to satisfy any obligations of the Company.
The Company performed a test on the
restricted net assets of subsidiaries and VIEs in accordance with Securities and Exchange Commission Regulation S-X Rule 4-08 (e)
(3), “General Notes to Financial Statements” and concluded that the restricted net assets exceeded 25% of the consolidated
net assets of the Company as of December 31, 2016 and the condensed financial information of the Company are required to be presented
(Note 30).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
Prior to 2015, the Group’s
internal reporting to the CODM had not distinguish cost and expenses among segments. Hence, the Group had only one operating segment
prior to 2015.
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 YY IVAS
and others, Huya broadcasting, and 100 Education separately.
In June 2016, the Group revamped
the branding from YY IVAS to YY Live. Therefore, the segment of “YY IVAS and others” was renamed as “YY Live”.
For the year ended December 31, 2015 and 2014, net revenues of “YY IVAS” and “others” were presented to
the CODM’s review separately. Following the revamp of the branding, net revenues of “YY Live” as a whole are
presented to the CODM’s review. Segment presentation for the year ended December 31, 2015 and 2014 have been updated to be
consistent with the segment presentation for the year ended December 31, 2016.
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 broadcasting and 100 education are presented for the CODM’s
review separately. Segmental information for prior periods was prepared and presented on the same basis as 2016 for comparative
information purpose.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
29.
|
Segment Reporting (continued)
|
The following table presents summary
information by segment:
For the year ended December 31,
2016:
|
|
YY Live
|
|
|
Huya broadcasting
|
|
|
100 Education
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Live streaming
|
|
|
6,235,249
|
|
|
|
791,978
|
|
|
|
-
|
|
|
|
7,027,227
|
|
Online games
|
|
|
634,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
634,325
|
|
Membership
|
|
|
284,860
|
|
|
|
-
|
|
|
|
-
|
|
|
|
284,860
|
|
Others
|
|
|
91,985
|
|
|
|
4,926
|
|
|
|
160,727
|
|
|
|
257,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
7,246,419
|
|
|
|
796,904
|
|
|
|
160,727
|
|
|
|
8,204,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
(1)
|
|
|
(3,942,201
|
)
|
|
|
(1,053,257
|
)
|
|
|
(107,972
|
)
|
|
|
(5,103,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit / (loss)
|
|
|
3,304,218
|
|
|
|
(256,353
|
)
|
|
|
52,755
|
|
|
|
3,100,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(519,401
|
)
|
|
|
(125,308
|
)
|
|
|
(30,521
|
)
|
|
|
(675,230
|
)
|
Sales and marketing expenses
|
|
|
(278,296
|
)
|
|
|
(49,490
|
)
|
|
|
(59,482
|
)
|
|
|
(387,268
|
)
|
General and administrative expenses
|
|
|
(402,072
|
)
|
|
|
(45,211
|
)
|
|
|
(35,154
|
)
|
|
|
(482,437
|
)
|
Goodwill impairment
|
|
|
(3,861
|
)
|
|
|
-
|
|
|
|
(13,804
|
)
|
|
|
(17,665
|
)
|
Fair value change of contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(1,203,630
|
)
|
|
|
(220,009
|
)
|
|
|
(138,961
|
)
|
|
|
(1,562,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on deconsolidation and disposal of subsidiaries
|
|
|
103,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103,960
|
|
Other income
|
|
|
129,504
|
|
|
|
-
|
|
|
|
-
|
|
|
|
129,504
|
|
Operating income / (loss)
|
|
|
2,334,052
|
|
|
|
(476,362
|
)
|
|
|
(86,206
|
)
|
|
|
1,771,484
|
|
(1) Share based compensation was allocated
in cost of revenues and operating expenses as follows:
|
|
YY Live
|
|
|
Huya broadcasting
|
|
|
100 Education
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
11,367
|
|
|
|
4,203
|
|
|
|
324
|
|
|
|
15,894
|
|
Research and development expenses
|
|
|
58,271
|
|
|
|
14,352
|
|
|
|
6,193
|
|
|
|
78,816
|
|
Sales and marketing expenses
|
|
|
2,826
|
|
|
|
281
|
|
|
|
-
|
|
|
|
3,107
|
|
General and administrative expenses
|
|
|
32,888
|
|
|
|
13,192
|
|
|
|
13,389
|
|
|
|
59,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation expenses
|
|
|
105,352
|
|
|
|
32,028
|
|
|
|
19,906
|
|
|
|
157,286
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
29.
|
Segment Reporting (continued)
|
For the year ended December 31,
2015:
|
|
YY Live
|
|
|
Huya broadcasting
|
|
|
100 Education
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Live streaming
|
|
|
4,183,533
|
|
|
|
356,324
|
|
|
|
-
|
|
|
|
4,539,857
|
|
Online games
|
|
|
771,882
|
|
|
|
-
|
|
|
|
-
|
|
|
|
771,882
|
|
Membership
|
|
|
291,310
|
|
|
|
-
|
|
|
|
-
|
|
|
|
291,310
|
|
Others
|
|
|
170,426
|
|
|
|
-
|
|
|
|
123,774
|
|
|
|
294,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
5,417,151
|
|
|
|
356,324
|
|
|
|
123,774
|
|
|
|
5,897,249
|
|
Cost of revenues
(1)
|
|
|
(2,798,064
|
)
|
|
|
(655,066
|
)
|
|
|
(126,614
|
)
|
|
|
(3,579,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit / (loss)
|
|
|
2,619,087
|
|
|
|
(298,742
|
)
|
|
|
(2,840
|
)
|
|
|
2,317,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(445,411
|
)
|
|
|
(66,538
|
)
|
|
|
(36,850
|
)
|
|
|
(548,799
|
)
|
Sales and marketing expenses
|
|
|
(253,129
|
)
|
|
|
(24,469
|
)
|
|
|
(35,272
|
)
|
|
|
(312,870
|
)
|
General and administrative expenses
|
|
|
(240,536
|
)
|
|
|
(25,869
|
)
|
|
|
(92,069
|
)
|
|
|
(358,474
|
)
|
Goodwill impairment
|
|
|
(128,034
|
)
|
|
|
-
|
|
|
|
(182,090
|
)
|
|
|
(310,124
|
)
|
Fair value change of contingent consideration
|
|
|
107,306
|
|
|
|
-
|
|
|
|
185,165
|
|
|
|
292,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(959,804
|
)
|
|
|
(116,876
|
)
|
|
|
(161,116
|
)
|
|
|
(1,237,796
|
)
|
Other income
|
|
|
82,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82,300
|
|
Operating income / (loss)
|
|
|
1,741,583
|
|
|
|
(415,618
|
)
|
|
|
(163,956
|
)
|
|
|
1,162,009
|
|
(1) Share based compensation was allocated
in cost of revenues and operating expenses as follows:
|
|
YY Live
|
|
|
Huya broadcasting
|
|
|
100 Education
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
22,077
|
|
|
|
1,497
|
|
|
|
389
|
|
|
|
23,963
|
|
Research and development expenses
|
|
|
59,400
|
|
|
|
4,754
|
|
|
|
6,797
|
|
|
|
70,951
|
|
Sales and marketing expenses
|
|
|
3,119
|
|
|
|
164
|
|
|
|
-
|
|
|
|
3,283
|
|
General and administrative expenses
|
|
|
51,260
|
|
|
|
3,302
|
|
|
|
32,613
|
|
|
|
87,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation expenses
|
|
|
135,856
|
|
|
|
9,717
|
|
|
|
39,799
|
|
|
|
185,372
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
29.
|
Segment Reporting (continued)
|
For the year ended December 31,
2014:
|
|
YY Live
|
|
|
Huya broadcasting
|
|
|
100 Education
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Live streaming
|
|
|
2,322,008
|
|
|
|
153,371
|
|
|
|
-
|
|
|
|
2,475,379
|
|
Online games
|
|
|
811,699
|
|
|
|
-
|
|
|
|
-
|
|
|
|
811,699
|
|
Membership
|
|
|
205,199
|
|
|
|
-
|
|
|
|
-
|
|
|
|
205,199
|
|
Others
|
|
|
185,141
|
|
|
|
-
|
|
|
|
950
|
|
|
|
186,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
3,524,047
|
|
|
|
153,371
|
|
|
|
950
|
|
|
|
3,678,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
(1)
|
|
|
(1,586,933
|
)
|
|
|
(248,154
|
)
|
|
|
(14,062
|
)
|
|
|
(1,849,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit / (loss)
|
|
|
1,937,114
|
|
|
|
(94,783
|
)
|
|
|
(13,112
|
)
|
|
|
1,829,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
(362,352
|
)
|
|
|
(47,765
|
)
|
|
|
(21,071
|
)
|
|
|
(431,188
|
)
|
Sales and marketing expenses
|
|
|
(97,983
|
)
|
|
|
(4,399
|
)
|
|
|
(145
|
)
|
|
|
(102,527
|
)
|
General and administrative expenses
|
|
|
(200,535
|
)
|
|
|
(20,954
|
)
|
|
|
(1,530
|
)
|
|
|
(223,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(660,870
|
)
|
|
|
(73,118
|
)
|
|
|
(22,746
|
)
|
|
|
(756,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
6,319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income / (loss)
|
|
|
1,282,563
|
|
|
|
(167,901
|
)
|
|
|
(35,858
|
)
|
|
|
1,078,804
|
|
(1) Share based compensation was
allocated in cost of revenues and operating expenses as follows:
|
|
YY Live
|
|
|
Huya broadcasting
|
|
|
100 Education
|
|
|
Total
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
16,552
|
|
|
|
1,185
|
|
|
|
300
|
|
|
|
18,037
|
|
Research and development expenses
|
|
|
47,315
|
|
|
|
1,895
|
|
|
|
4,931
|
|
|
|
54,141
|
|
Sales and marketing expenses
|
|
|
2,803
|
|
|
|
4
|
|
|
|
-
|
|
|
|
2,807
|
|
General and administrative expenses
|
|
|
57,938
|
|
|
|
1,660
|
|
|
|
49
|
|
|
|
59,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation expenses
|
|
|
124,608
|
|
|
|
4,744
|
|
|
|
5,280
|
|
|
|
134,632
|
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
30.
|
Additional information – condensed financial
statements
|
The condensed financial statements
of YY Inc. have been prepared in accordance with SEC Regulation S-X Rule 5-04 and Rule 12-04.
The Company records its investments
in subsidiaries under the equity method of accounting. Such investments to subsidiaries are presented on the balance sheet as “Interests
in subsidiaries and VIEs” and the profit of the subsidiaries is presented as “Share of profit of subsidiaries and VIEs”
in the statement of operations and comprehensive income.
For the VIEs, where the Company
is the primary beneficiary, the amount of the Company’s investment is included in the balance sheet as “Interests in
subsidiaries and VIEs” and the profit of the VIEs is included in “Share of profit of subsidiaries and VIEs” in
the statement of operations and comprehensive income.
The footnote disclosures contain
supplemental information relating to the operations of the Company and, as such, these financial statements should be read in conjunction
with the notes to the Consolidated Financial Statements of the Company. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
As of December 31, 2015 and 2016,
there were no material contingencies, significant provisions for long-term obligations, or guarantees of the Company, except for
those, if any, which have been separately disclosed in the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
30.
|
Additional information – condensed financial
statements (continued)
|
|
(a)
|
Condensed balance sheets of YY Inc. as of December 31,
2015 and 2016
|
|
|
As of December 31,
|
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 2(e))
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts due from a subsidiary
|
|
|
1,881,616
|
|
|
|
1,947,080
|
|
|
|
280,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests in subsidiaries and VIEs
|
|
|
3,944,457
|
|
|
|
5,883,684
|
|
|
|
847,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
3,944,457
|
|
|
|
5,883,684
|
|
|
|
847,426
|
|
Total assets
|
|
|
5,826,073
|
|
|
|
7,830,764
|
|
|
|
1,127,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests payable
|
|
|
14,795
|
|
|
|
15,800
|
|
|
|
2,276
|
|
Convertible bonds
(1)
|
|
|
-
|
|
|
|
2,768,469
|
|
|
|
398,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible bonds
(2)
|
|
|
2,572,119
|
|
|
|
-
|
|
|
|
-
|
|
Total liabilities
|
|
|
2,586,914
|
|
|
|
2,784,269
|
|
|
|
401,018
|
|
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)
|
|
|
43
|
|
|
|
44
|
|
|
|
6
|
|
Class B common shares (US$0.00001 par value; 1,000,000,000 shares authorized, 369,557,976 shares issued and outstanding as of December 31, 2015 and 359,557,976 shares issued and outstanding as of December 31, 2016)
|
|
|
27
|
|
|
|
26
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
2,011,799
|
|
|
|
2,165,766
|
|
|
|
311,935
|
|
Retained earnings
|
|
|
1,263,675
|
|
|
|
2,787,593
|
|
|
|
401,497
|
|
Accumulated other comprehensive (loss)/income
|
|
|
(36,385
|
)
|
|
|
93,066
|
|
|
|
13,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
3,239,159
|
|
|
|
5,046,495
|
|
|
|
726,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
|
5,826,073
|
|
|
|
7,830,764
|
|
|
|
1,127,864
|
|
(1) Convertible bonds classified in current liabilities represent
Convertible Senior Notes which may be redeemed within one year.
(2) Effectively January 2016, ASU 2015-3 issued by FASB requires
entities to present the issuance costs of bonds in the balance sheet as a direct deduction from the related bonds rather than assets.
Accordingly, the Company retrospectively reclassified RMB25.3 million of issuance cost of bonds from other non-current assets into
convertible bonds as of December 31, 2015.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amount in thousands, except share and per share data, unless
otherwise stated)
|
30.
|
Additional information – condensed financial
statements (continued)
|
(b)
Condensed statements of operations and comprehensive income of YY Inc. for the years ended December 31, 2014, 2015 and 2016
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note2(e))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of profit of subsidiaries and VIEs
|
|
|
1,121,079
|
|
|
|
1,108,029
|
|
|
|
1,605,003
|
|
|
|
231,170
|
|
Interest expense
|
|
|
(56,607
|
)
|
|
|
(74,786
|
)
|
|
|
(81,085
|
)
|
|
|
(11,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expenses
|
|
|
1,064,472
|
|
|
|
1,033,243
|
|
|
|
1,523,918
|
|
|
|
219,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,064,472
|
|
|
|
1,033,243
|
|
|
|
1,523,918
|
|
|
|
219,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain of available-for-sales securities
|
|
|
-
|
|
|
|
-
|
|
|
|
134,768
|
|
|
|
19,411
|
|
Foreign currency translation adjustments, net of nil tax
|
|
|
3,638
|
|
|
|
4,414
|
|
|
|
(5,317
|
)
|
|
|
(766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
1,068,110
|
|
|
|
1,037,657
|
|
|
|
1,653,369
|
|
|
|
238,136
|
|
|
(c)
|
Condensed statements of cash flows of YY Inc. for the years ended December 31, 2014, 2015 and 2016
|
|
|
For the year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2016
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note2(e))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to a subsidiary
|
|
|
(2,412,290
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,412,290
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible bonds
|
|
|
2,412,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,412,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash and cash equivalents at the beginning of the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|