ˆ200GaisY$NNjxQ6XÈŠ
4
0C
852134 20-F_2.CTL
200GaisY$NNjxQ6X¨
25-Mar-2015 19:51 EST
Page 1 of 2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ncrdoc1
NCR
HKG
Edgar Submission
Flags>
Submission Type>20-F
Contact>
Name>R.R. Donnelley Financial
Phone Number>852-2522-3803
Filer>
Filer Id>0001296774
Filer Ccc>xxxxxxxx
Sros>
Sro Id>NASD
Period Of Report>12-31-2014
Shell Company Flag>false
Voluntary Filer Flag>false
Well Known Seasoned Issuer Flag>false
Accelerated Filer Status>Accelerated Filer
Notifications>
Internet Notification Address>Hongkong@rrdfsg.com
Documents>
Document>
Conformed Document Type>20-F
Description>Form 20-F
Document>
Conformed Document Type>EX-4.21
Description>EX-4.21
Document>
Conformed Document Type>EX-4.22
Description>EX-4.22
Document>
Conformed Document Type>EX-4.23
Description>EX-4.23
Document>
Conformed Document Type>EX-4.24
Description>EX-4.24
Document>
Conformed Document Type>EX-4.25
Description>EX-4.25
Document>
Conformed Document Type>EX-4.26
Description>EX-4.26
Document>
Conformed Document Type>EX-8.1
Description>EX-8.1
Document>
Conformed Document Type>EX-12.1
Description>EX-12.1
Document>
Conformed Document Type>EX-12.2
Description>EX-12.2
Document>
Conformed Document Type>EX-13.1
ˆ200GaisY$NNjxQ6XÈŠ
4
0C
852134 20-F_2.CTL
200GaisY$NNjxQ6X¨
25-Mar-2015 19:51 EST
Page 2 of 2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ncrdoc1
NCR
HKG
Description>EX-13.1
Document>
Conformed Document Type>EX-13.2
Description>EX-13.2
Document>
Conformed Document Type>EX-15.1
Description>EX-15.1
Document>
Conformed Document Type>EX-15.2
Description>EX-15.2
Document>
Conformed Document Type>EX-15.3
Description>EX-15.3
Document>
Conformed Document Type>EX-101
Description>Financials in XBRL
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS14
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL%zxp%rŠ
5*
0C
200GaisY$NL%zxp%r
25-Mar-2015 17:45 EST
852134 FS 1
HTM
ESS
Page 1 of 3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
(cid:0)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
⌧
(cid:0)
(cid:0)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
OR
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number: 001-34238
THE9 LIMITED
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Building No. 3, 690 Bibo Road
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS14
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL%zxp%rŠ
5*
0C
200GaisY$NL%zxp%r
25-Mar-2015 17:45 EST
852134 FS 1
HTM
ESS
Page 2 of 3
Shanghai 201203
People’s Republic of China
(Address of principal executive offices)
George Lai, Chief Financial Officer
Tel: +86-21-5172-9999
Facsimile number: +86-21-5172-9903
Building No. 3, 690 Bibo Road
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
Shanghai 201203
People’s Republic of China
(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:
Title of each class
American Depositary Shares, each representing
one ordinary shares, par value US$0.01 per share
Name of each exchange on which registered
Nasdaq Global Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
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.
28,783,929 ordinary shares, par value US$0.01 per share, as of December 31, 2014.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
(cid:0)
⌧
Act. Yes
No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
(cid:0)
⌧
Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
⌧
(cid:0)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
No
⌧
(cid:0)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
(cid:0)
Accelerated filer
(cid:0)
Non-accelerated filer
⌧
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this
filing:
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS14
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL%zxp%rŠ
5*
0C
200GaisY$NL%zxp%r
25-Mar-2015 17:45 EST
852134 FS 1
HTM
ESS
Page 3 of 3
⌧
US GAAP
International Financial Reporting Standards as issued
by the International Accounting Standards Board
(cid:0)
(cid:0)
Other
* If “Other” has been checked in response to the previous question, indicate by check mark which financial statement Item the
registrant has elected to follow.
(cid:0)
Item 17
(cid:0)
Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
(cid:0)
⌧
Exchange Act). Yes
No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes
No
(cid:0)
(cid:0)
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
START PAGE
NCRP64RS09
11.6.14
NCR pf_rend
HKG
TABLE OF CONTENTS
25-Mar-2015 17:45 EST
ˆ200GaisY$NL%#cjZAŠ
3*
0C
200GaisY$NL%#cjZA
852134 TOC 1
HTM
ESS
Page 1 of 1
INTRODUCTION
PART I
Item 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Item 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Item 3.
KEY INFORMATION
Item 4.
INFORMATION ON THE COMPANY
Item 4A. UNRESOLVED STAFF COMMENTS
Item 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Item 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Item 8.
FINANCIAL INFORMATION
Item 9.
THE OFFER AND LISTING
Item 10. ADDITIONAL INFORMATION
Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Item 15. CONTROLS AND PROCEDURES
Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Item 16B. CODE OF ETHICS
Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Item 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Item 16G. CORPORATE GOVERNANCE
Item 16H. MINE SAFETY DISCLOSURE
PART III
Item 17.
FINANCIAL STATEMENTS
Item 18.
FINANCIAL STATEMENTS
Item 19. EXHIBITS
1
2
2
2
2
31
44
44
63
70
73
74
75
87
88
89
89
89
89
90
90
91
91
91
91
91
91
92
92
92
92
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
START PAGE
NCRP64RS13
11.6.14
NCR pf_rend
HKG
INTRODUCTION
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&JSCZTŠ
5*
0C
200GaisY$NL&JSCZT
852134 TX 1
HTM
ESS
Page 1 of 1
In this annual report, unless otherwise indicated, (1) the terms “we,” “us,” “our company,” “our” and “The9” refer to The9
Limited and, as the context may require, its subsidiaries and our affiliated entities, (2) the terms “affiliated entities” refer to our
affiliated PRC entities, namely Shanghai The9 Information Technology Co., Ltd., or Shanghai IT, Shanghai Jiucheng Advertisement
Co., Ltd., or Shanghai Jiucheng Advertisement, Shanghai Jiushi Interactive Network Technology Co., Ltd., or Jiushi, Shanghai The9
Education Software Technology Co., Ltd. or Shanghai Fire Wing Information Technology Co., Ltd., or Fire Wing, (3) the terms
“shares” and “ordinary shares” refer to our ordinary shares, and “ADSs” refers to our American Depositary Shares, each of which
represents one ordinary share, and “ADRs” refers to the American Depositary Receipts, which evidence our ADSs, (4) “China” and
“PRC” refer to the People’s Republic of China, and solely for the purpose of this annual report, excluding Taiwan, Hong Kong and
Macau, (5) all references to “RMB” and “Renminbi” are to the legal currency of China and all references to “U.S. dollars,” “dollars,”
“US$” and “$” are to the legal currency of the United States, (6) all discrepancies in any table between the amounts identified as total
amounts and the sum of the amounts listed therein are due to rounding, and (7) 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 RMB6.2046 to US$1.00, based on the H.10 weekly statistical release
of the Federal Reserve Bank of New York as of December 31, 2014. Such translations have been provided for the convenience of the
reader only and should not be construed as representations that the RMB amounts represent, or have been or could be converted into,
United States dollars at that or any other rate.
We and certain selling shareholders of our company completed the initial public offering of 6,075,000 ADSs, each
representing one ordinary share, par value US$0.01 per share, on December 20, 2004. On December 15, 2004, we listed our ADSs on
the Nasdaq Global Market, or Nasdaq, under the ticker symbol “NCTY.”
1
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
START PAGE
NCRP64RS13
11.6.14
NCR pf_rend
HKG
PART I
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&M34%,Š
5*
0C
200GaisY$NL&M34%,
852134 TX 2
HTM
ESS
Page 1 of 1
Item 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
Item 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
Item 3.
KEY INFORMATION
A.
Selected Financial Information
The following table presents selected consolidated financial information for our company. You should read the following
information in conjunction with “Item 5. Operating and Financial Review and Prospects” below. The selected consolidated statement
of operations data for the years ended December 31, 2012, 2013 and 2014 and the selected consolidated balance sheet data as of
December 31, 2013 and 2014 have been derived from our audited consolidated financial statements and should be read in conjunction
with those statements, which are included in this annual report beginning on page F-1. The selected consolidated statement of
operations data for the years ended December 31, 2010 and 2011 and the selected consolidated balance sheet data as of December 31,
2010, 2011 and 2012 have been derived from our audited consolidated financial statements, which are not included in this annual
report. The consolidated financial statements were prepared and presented in accordance with United States generally accepted
accounting principles, or U.S. GAAP.
2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
11.6.14
NCR venkp1dc
HKG
26-Mar-2015 00:55 EST
ˆ200GaisY$NWjC7vZCŠ
5*
0C
200GaisY$NWjC7vZC
852134 TX 3
HTM
ESS
Page 1 of 1
Consolidated Statement of Operation Data
Revenues
Sales taxes
Net revenues
Cost of revenue
Gross profit (loss)
Operating expenses
Other operating income
Loss from operations
Impairment on available-for-sale investment
Investment income from cost method investment
Interest income, net
Other income (expenses), net
Loss before income tax benefit (expense), gain on investment
disposal, impairment loss on investments and share of loss
in equity investments
Income tax expense
Loss before gain on investment disposal, gain on disposal of
subsidiaries, impairment loss on investments and share of
loss in equity investments
Gain on disposal of equity investee and available-for-sale
investment
Impairment loss on investments
Share of loss in equity investments
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to redeemable noncontrolling interest
Net loss attributable to The9 Limited
Accretion on redeemable noncontrolling interest
Net loss attributable to holders of ordinary shares
Net loss attributable to holders of ordinary shares per share
Basic
Diluted
Net loss attributable to holders of ordinary shares per ADS(2)
Basic
Diluted
For the Year Ended December 31,
2010
RMB
2011
RMB
2012
RMB
2013
RMB
2014
RMB
US$(1)
(in thousands, except for share and per ADS)
108,514
(5,676)
102,838
(103,257)
(419)
112,466
(6,089)
106,377
(39,118)
67,259
(353,365) (477,284)
25,993
(353,784) (384,032)
—
—
30,416
(653)
—
—
23,183
19,259
—
(311,342) (354,269)
—
(7,368)
163,581
(9,147)
(1,851)
106,627 64,840
(563)
154,434
104,776 64,277
(69,416) (107,803) (85,783)
(3,027) (21,506)
85,018
(677,529) (527,341) (139,404)
75
(592,391) (530,248) (160,835)
—
1,142
3,415
(2,105)
(6,269)
—
8,376
9,302
—
—
21,786
4,644
120
120
(565,961) (518,839) (158,383)
—
—
—
10,450
(90)
10,360
(13,826)
(3,466)
(22,468)
12
(25,922)
—
184
550
(339)
(25,527)
—
(318,710) (354,269)
(565,961) (518,839) (158,383)
(25,527)
6,828
(196,116)
(10,713)
44,435
—
(3,342)
(518,711) (313,176)
(28,846)
—
—
—
(499,612) (284,330)
(19,099)
—
—
—
15,726
(3,244) (41,702)
(2,376)
(6,347)
— 33,154
—
(3,713)
(559,826) (562,917) (128,942)
(45,824) (36,655) (21,443)
— (20,877)
— (86,622)
— 21,077
(514,002) (526,262) (107,699)
—
—
—
(19.89)
(19.89)
(11.39)
(11.39)
(20.98)
(20.98)
(22.71)
(22.71)
(4.65)
(4.65)
(19.89)
(19.89)
(11.39)
(11.39)
(20.98)
(20.98)
(22.71)
(22.71)
(4.65)
(4.65)
3
5,343
—
(598)
(20,782)
(3,456)
(3,365)
(13,961)
3,397
(17,358)
(0.75)
(0.75)
(0.75)
(0.75)
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&QxF%Š
5*
0C
200GaisY$NL&QxF%´
852134 TX 4
HTM
ESS
Page 1 of 1
As of December 31,
2010
RMB
2011
RMB
2013
2012
RMB
(in thousands)
RMB RMB
2014
US$(1)
Consolidated Balance Sheet Data
Cash and cash equivalents
Non-current assets
Total assets
Total current liabilities
Total equity
554,279 156,987 181,482 29,250
1,416,189 1,071,726
295,886 460,228
447,730 328,617 261,477 42,142
1,857,339 1,628,894 1,112,345 546,679 517,331 83,379
317,713 330,092 296,591 47,802
316,319 311,525
1,535,217 1,251,831
749,212 190,133 64,888 10,458
Redeemable noncontrolling interest
— — 131,497 21,193
Total liabilities, redeemable noncontrolling interest and equity 1,857,339 1,628,894 1,112,345 546,679 517,331 83,379
—
—
(1) Translation from RMB amounts into U.S. dollars was made at a rate of RMB6.2046 to US$1.00 for the convenience of the
reader only. See “Item 3. Key Information—A. Selected Financial Information— Exchange Rate Information.”
(2) Each ADS represents one ordinary share.
Exchange Rate Information
Our business is primarily conducted in China and a significant portion of our revenues are denominated in RMB. This
annual report contains translations of RMB amounts into U.S. dollars based on the exchange rate set forth in the H.10 statistical
release of the Federal Reserve Bank of New York. For the convenience of the readers only, this annual report contains translations of
some RMB or U.S. dollar amounts for 2014 at US$1.00 to RMB6.2046, which was the noon buying rate in effect as of December 31,
2014. The prevailing rate on March 20, 2015 was US$1.00 to RMB6.2037. We make no representation that any RMB or U.S. dollar
amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, the rates stated
below, or at all. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Future movements in
exchange rates between the U.S. dollar and the RMB may adversely affect the value of our ADSs.”
The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods
indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual
report or will use in the preparation of our other periodic reports or any other information to be provided to you.
Period
2010
2011
2012
2013
2014
September
October
November
December
2015
January
February
March (through March 20, 2015)
Noon Buying Rate
Period end Average(1)
6.7603
6.4475
6.2990
6.1412
6.1704
6.1382
6.1251
6.1249
6.1886
6.6000
6.2939
6.2301
6.0537
6.2046
6.1380
6.1124
6.1429
6.2046
Low
6.8330
6.6364
6.3879
6.2438
6.2591
6.1495
6.1385
6.1429
6.2256
High
6.6000
6.2939
6.2221
6.0537
6.0402
6.1266
6.1107
6.1117
6.1490
6.2495
6.2695
6.2037
6.2181
6.2518
6.2526
6.2535
6.2399
6.1955
6.1870
6.2695
6.2741
(1) Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates
during the relevant period.
4
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&SrLZ1Š
4*
0C
200GaisY$NL&SrLZ1
852134 TX 5
HTM
ESS
Page 1 of 1
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
B.
Capitalization and Indebtedness
Not Applicable.
C.
Reasons for the Offer and Use of Proceeds
Not Applicable.
D.
Risk Factors
Risks Related to Our Company and Our Industry
We may continue to incur losses, negative cash flows from operating activities and net current liabilities in the future and may not
return to profitability.
We incurred a net loss of RMB559.8 million, RMB562.9 million and RMB128.9 million (US$20.8 million) in the years
ended December 31, 2012, 2013 and 2014, respectively, as we continue to incur product development and sales and marketing
expenses for our new products and general and administrative expenses while we have not generated material revenue from the new
games we are currently developing or about to launch. Our operating expenses may increase in the future as we continue to explore
various opportunities of new product development and business expansion. In addition, in 2013 and 2014, we recorded gross loss of
RMB3.0 million and RMB21.5 million (US$3.5 million), respectively, reflecting lower revenues generated coupled with the
continued incurrence of a relatively fixed portion of our costs, such as overhead, depreciation and rental charges. Our ability to
achieve profitability depends on the competitiveness of our products and services as well as our ability to control costs and to provide
new products and services to meet the market demands and attract new customers. Due to the numerous risks and uncertainties
associated with our business, we may not be able to achieve profitability in the short-term or long-term.
In addition, our cash and cash equivalents decreased from RMB554.3 million as of December 31, 2012 to RMB157.0
million as of December 31, 2013, primarily due to the cash outflows from operating activities associated with the product
development and sales and marketing efforts for our new games. Our cash and cash equivalents increased to RMB181.5 million
(US$29.2 million) as of December 31, 2014, primarily due to the net proceeds of RMB151.0 million (US$24.3 million) from the
disposal of Huopu Cloud Computing Terminal Technology Co., Ltd., or Huopu Cloud, and the proceeds of RMB118.3 million
(US$19.1 million) from the investment made by Shanghai Oriental Pearl Culture Development Co., Ltd. in Red 5, partially offset by
the continued net cash outflows from operating activities associated with the product development and sales and marketing efforts. As
of December 31, 2013 and 2014, we recorded net current liabilities of RMB112.0 million and RMB40.7 million (US$6.6 million),
respectively. Our net current liabilities positions as of December 31, 2013 and 2014 were primarily due to the continuous cash
outflow in connection with our product development and sales and marketing activities. See “Item 5—Operating and Financial
Review and Prospects—A. Operating Results—Results of Operations.” We cannot assure you that our liquidity position will improve
in the future. We may continue to incur losses, negative cash flows from operating activities and net current liabilities, and our
business, prospects, liquidity, financial condition and results of operations may be materially and adversely affected.
Our business is intensely competitive and “hit” driven. If we do not deliver new “hit” products to the market, or if consumers
prefer our competitors’ products or services over those we provide, our operating results will suffer.
We operate in a highly competitive and dynamic market, and our future success depends not only on the popularity of our
existing online games but also, in large part, on our ability to develop and introduce new games that are attractive to our customers.
To achieve this, we will need to anticipate and effectively adapt to rapidly changing consumer tastes and preferences and
technological advances. The development of new games can be very difficult and requires high levels of innovation. We do not have
a proven track record of developing proprietary massively multiplayer online role playing games, or MMORPGs, massively
multiplayer online first-person shooter game, or MMOFPSs, web games, social games or mobile games. While new products are
regularly introduced, only a small number of “hit” titles account for a significant portion of total revenue in our industry. There is no
assurance that any new game, proprietary, licensed or otherwise, to be introduced by us from time to time, including those named in
“Item 4. Information on the Company—B. Business Overview—Products and Services,” could become “hit” products and widely
accepted by the customers and the market. We may continue to incur loss, experience net cash outflow from operating activities and
decrease in cash and cash equivalents balance and current asset balance if we fail to introduce “hit” games or products which gains
substantial market acceptance. In addition, “hit” products offered by our competitors may take a larger share of the market than we
anticipate, which could cause revenues generated by our products to fall below expectations. Our competitors may develop more
successful products, or offer similar products at lower price points or pursuant to payment models viewed as offering a better value
than we do. Any such negative development may materially and adversely affect our business, financial condition and results of
operations.
5
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&W3rZbŠ
3*
0C
200GaisY$NL&W3rZb
852134 TX 6
HTM
ESS
Page 1 of 1
We need to continue to develop and release upgrades to our new online games. We cannot assure you that we will be able
to identify appropriate games or enter into arrangements with those game developers to offer these games in China on terms
acceptable to us or at all, or that we can maintain the expected life span of our new online games. If we are not able to license,
develop or acquire additional, attractive online games with lasting appeal to users, our business, financial condition and results of
operations may be materially and adversely affected.
We currently depend on a limited number of games, and we may not be able to successfully implement our growth strategies.
We currently depend on a limited number of games for substantially all of our revenues. We are also focusing on
developing a number of proprietary games and obtaining licenses to games to grow our business. For example, Red 5 Studios, Inc., or
Red 5, a subsidiary which we acquired in 2010, has developed Firefall, a MMOFPS game, which we launched in North America and
Europe in 2014 and expect to launch in China in the second half of 2015. However, there is no assurance that we may successfully
launch Firefall as expected on a timely basis, or at all, or if such game would be widely accepted by game players as expected. We
have also invested in developing our proprietary online games, web games and mobile games in China, including ShenXianZhuan and
QiJiGuiLai. Our business strategies may also involve the development and marketing of new services and products for which there
are no established markets in China or in which we lack experience and expertise. If any of our games encounters any adverse
development or if we are unable to develop, purchase or license additional games that are attractive to users, our business, financial
condition and results of operations may be materially and adversely affected. We cannot assure you that we will be able to launch
new games or or continue operating existing games on a commercially viable basis or in a timely manner, or at all, or that we will be
able to implement our other growth strategies. If any of these occur, our competitiveness may be harmed and our business, financial
condition and results of operations may be materially and adversely affected.
We may not be able to obtain additional financing to support our business and operations, and our equity or debt financings may
have an adverse effect on our business operations and share price.
We may continue to experience material decrease in cash and cash equivalents balance and we may require additional cash
resources to fund our working capital and expenditure needs, such as product developments expenses, sales and marketing activities,
investment or acquisition transactions. We expect to incur product development costs to develop our proprietary online games, mobile
games and web and social games. If our internal financial resources are insufficient to satisfy our cash requirements, we may seek
additional financing through the issuance of equity securities or through debt financing, such as borrowings from commercial banks
or other financial institutions or lenders. In February 2015, Shanghai IT, our affiliated PRC entity, obtained a commitment letter from
China Merchants Bank for a credit facility of RMB200 million with a term of one year which may be used for our proprietary game
Firefall. Future equity or debt financing may result in dilution to our existing shareholders’ interests or an increase in our debt service
obligations. Incurrence of additional indebtedness could also result in operating and financing covenants restricting our business
operations. In addition, we cannot assure you that any such future financing will be available to us in amounts or on terms acceptable
to us, if at all. If we fail to obtain sufficient financing to fund our capital needs, our business, financial condition and results or
operations could be materially and adversely affected.
Illegal game servers, unauthorized character enhancements and other infringements of our intellectual property rights, as well as
theft of in-game goods, could harm our business and reputation and materially and adversely affect our results of operation.
With the increase in the number of online game players in China, we face the risks of illegal game servers, unauthorized
character enhancements and other infringements of our intellectual property rights as well as the risk of theft of in-game goods
purchased by our customers. Our historical results of operations were materially and adversely affected by illegal game servers.
Although we have adopted a number of measures to address illegal server usage, misappropriation of our game server installation
software and the establishment of illegal game servers could harm our business and reputation and materially and adversely affect our
results of operations.
6
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL&XF0%TŠ
3*
0C
200GaisY$NL&XF0%T
25-Mar-2015 17:46 EST
852134 TX 7
HTM
ESS
Page 1 of 1
From time to time, we have detected a number of players who have gained an unfair advantage by installing tools that
fraudulently facilitate character progression. We have installed software patches designed to prevent unauthorized modifications to
our execution files. However, we cannot assure you that we will be able to identify and eliminate new illegal game servers,
unauthorized character enhancements or other infringements of our intellectual property rights in a timely manner, or at all. The
deletion of unauthorized character enhancements requires the affected players to restart with a new character from the starting level,
and this may cause some of these players to cease playing the game altogether. If we are unable to eliminate illegal servers,
unauthorized character enhancements or suffer other infringement of our intellectual property rights, our players’ perception of the
reliability of our games may be negatively impacted, which may reduce the number of players using our games, shorten the lifespan
of our games and adversely affect our results of operations.
Our business, financial condition and results of operations may be adversely affected by the downturn in the global or Chinese
economy.
Our operations are primarily conducted in China and a significant majority of our revenues are sourced from China.
Accordingly, our results of operations, financial condition and prospects are influenced by economic, political and legal developments
in China. Although the Chinese economy has grown significantly in the past decade, that growth may not continue, as evidenced by
the slowing of the growth of the Chinese economy since 2012. Any adverse changes in economic conditions in China, in the policies
of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic
growth of China. Moreover, a slowdown in the global or Chinese economy or the recurrence of any financial disruptions in any
jurisdiction may have a material and adverse impact on available financing. The weakness in the economy could erode investors’
confidence, which constitutes the basis of the equity markets. The recent financial turmoil affecting the financial markets and banking
system may significantly restrict our ability to obtain financing in the capital markets or from financial institutions on commercially
reasonable terms, or at all. We are uncertain about the extent to which the recent global financial and economic crisis and slowdown
of the Chinese economy may impact our business in the long term. There is a risk that our business, results of operations and
prospects would be materially and adversely affected by the global economic downturn and the slowdown of the Chinese economy.
We face the risks of changing consumer preferences and uncertainty about market acceptance of our new products.
The online game industry is constantly evolving in China. Customer demand for and market acceptance of our online
games is subject to a high degree of uncertainty. Our future operating results will depend on numerous factors beyond our control.
These factors include:
•
•
•
•
•
•
•
the popularity of new online games that we operate;
the introduction of new online games competing with or replacing our existing online games;
general economic conditions, particularly economic conditions affecting discretionary consumer spending;
changes in customer tastes and preferences;
the availability of other forms of entertainment;
critical reviews and public tastes and preferences, all of which change rapidly and cannot be predicted; and
customer demand for our in-game items.
7
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL&Yok%rŠ
3*
0C
200GaisY$NL&Yok%r
25-Mar-2015 17:46 EST
852134 TX 8
HTM
ESS
Page 1 of 1
Our ability to plan for product development and distribution and promotional activities will be significantly affected by our
ability to anticipate and adapt to relatively rapid changes in consumer tastes and preferences. We offer online games including
MMORPGs, MMOFPSs, web games, social games, mobile games and TV games. A decline in the popularity of the types of games
we offer could adversely affect our business and prospects.
In addition, if we introduce new games, a certain portion of our existing customers may switch to the new games. If this
transfer of players from our existing games exceeds our expectations, we may have to adjust our marketing, pricing and other
business plans and, as a result, our business, financial condition and results of operations could be materially and adversely affected.
We may not be able to recover our market share and profitability as we operate in a highly competitive industry and compete
against many companies.
There are a large number of online game operators in China. We expect that, given the relatively low barriers to entry,
more companies will enter the online game industry in China and a wider range of online games will be introduced to the Chinese
market. Our competitors vary in size and include large companies, many of which have significantly greater financial, marketing and
game development resources and name recognition than we have, such as Tencent Inc., Shanda Games Limited, Netease.com, Inc.,
Perfect World Co., Ltd., Changyou.com Limited, Youzu Interactive CO., LTD., Shanghai 37wan Network Technology Co., Ltd. and
Jiuyou Times (Beijing) Technology Limited. As a result, we may not be able to devote adequate resources to designing, developing or
acquiring new games, undertaking extensive marketing campaigns, adopting aggressive pricing policies, paying high compensation to
game developers or compensating independent game developers to the same degree as certain of our competitors do. Our competitors
may introduce new business methods from time to time. If these new business methods are more attractive to customers than the
business methods we currently use, our customers may switch to our competitors’ games, and we may lose market share. We cannot
assure you that we will be able to compete successfully against new or existing competitors, or against new business methods
implemented by them. In addition, the increasing competition we anticipate in the online game industry may also reduce the number
of our users or the growth rate of our user base or reduce the game points spending for in-game premiums. All of these competitive
factors could materially and adversely affect our business, financial condition and results of operations and prevent us from
recovering market share and profitability.
If we are unable to maintain a satisfactory relationship with the online game developers that have licensed games to us or
establish new relationships with online game developers, our future results of operations and profitability may be materially
impacted.
Despite our effort to develop and offer our own proprietary games, we also offer games licensed from game licensors, such
as Planetside 2, a game we operate in China which was licensed from Sony Online Entertainment LLC. The licenses of the games we
operate generally have terms ranging from three to five years, and may or may not be renewed upon expiration. For example, our
exclusive licenses from Sony Online Entertainment LLC to operate certain MMORPGs, including Free Realms, Planetside 2 and
PoxNora, in Korea were terminated in October 2012, and our exclusive license from Sony Online Entertainment LLC to operate Free
Realms in China was terminated in May 2014.
We will need to renew existing licenses and may need to obtain new online game licenses. Therefore, our business,
financial condition and results of operations may be materially and adversely impacted if we are unable to obtain new online game
licenses in the future. In addition, if we are unable to maintain a satisfactory relationship with the online game developers that have
licensed games to us, resulting in licenses not being renewed or licenses being prematurely terminated, or should any of these game
developers either establish similar or more favorable relationships with our competitors in violation of their contractual arrangements
with us, or otherwise, our operating results and our business would be harmed. We cannot assure you that online game developers
will renew their license agreements with us, or grant us a license for any new online games that they will develop or make available to
us expansion packs for existing games. Any deterioration in our relationships with online game developers could harm our future
results of operations or the growth of our business.
8
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&Zx!Z^Š
4*
0C
200GaisY$NL&Zx!Z^
852134 TX 9
HTM
ESS
Page 1 of 1
Future acquisitions may have an adverse effect on our ability to manage our business and our results of operations.
Selective acquisitions have been a part of our strategy to further expand our business in the past. However, the diversion of
our management’s attention away from our business and any difficulties encountered in the integration process could have an adverse
effect on our ability to manage our business. In addition, we have increasingly relied on our acquired subsidiaries to develop our own
proprietary games. For example, Red 5, a subsidiary acquired in 2010, has developed Firefall, which we launched in North America
and Europe in 2014. If our acquired subsidiaries are unable to develop, launch and operate games that are commercially successful
and appeal to game players, our business, financial condition and results of operations may be materially and adversely affected.
There is no assurance that we will continue to have the necessary capital to conduct future acquisitions given the
significant net loss and negative operating cash flow we have been experiencing. In addition, our ability to grow through future
acquisitions, investments or organic means will also depend on the availability of suitable acquisitions and investment targets at an
acceptable cost as well as our ability to compete effectively to attract these candidates. We may face significant competition in
acquiring new businesses or companies, which may hinder the execution of our growth strategy. Future acquisitions or investments
could result in a potential dilutive issuance of equity securities or the incurrence of debt, contingent liabilities, impairment losses or
amortization expenses related to goodwill and other intangible assets, each of which could adversely affect our financial condition
and results of operations. The benefits of an acquisition or investment may also take considerable time to develop and we cannot be
certain that any particular acquisition or investment will produce its intended benefits. Future acquisitions would also expose us to
potential risks, including risks associated with the assimilation of new operations, technologies and personnel, unforeseen or hidden
liabilities, the diversion of resources from our existing businesses, sites and technologies, the inability to generate sufficient revenue
to offset the costs and expenses of acquisitions, and potential loss of, or harm to, our relationships with employees, customers,
licensors and other suppliers as a result of the integration of new businesses.
Future equity investments or establishment of joint ventures may have an adverse effect on our ability to manage our business.
From time to time, subject to the availability of the necessary financial resources, we make equity investments into selected
targets, such as online game developers, operators or application platforms, or establish joint venture with business partner, to seek
business growth opportunities. We may have limited power to direct or otherwise participate in the management of operations and
strategies of the companies in which we invest or the joint venture we establish. The diversion of our management’s attention away
from our business and any difficulties encountered in managing our interests in the respective investees or joint ventures could have
an adverse effect on our ability to manage our business. Any material disputes with our investment or joint venture partners and
existing shareholders may also require us to allocate significant corporate and other resources. In addition, we may not recover our
equity investments if the companies in which we invest do not perform well and equity investments could result in the incurrence of
impairment losses, which could materially and adversely affect our results of operations.
Undetected programming errors or flaws in our games could harm our reputation or decrease market acceptance of our games,
which would materially and adversely affect our results of operations.
Our games may contain errors or flaws, which may only be discovered after their release, particularly as we launch new
games or introduce new features to existing games under tight time constraints. If our games contain programming errors or other
flaws, our customers may be less inclined to continue playing our games or to recommend our games to other potential customers,
and may switch to our competitors’ games. Undetected programming errors and game defects can disrupt our operations, adversely
affect the gaming experience of our users, harm our reputation, cause our customers to stop playing our games, divert our resources
and delay market acceptance of our games, any of which could materially and adversely affect our results of operations.
We may not be able to prevent others from infringing upon our intellectual property rights, which may harm our business and
expose us to litigation.
We regard our proprietary software, domain names, trade names, trademarks and similar intellectual properties as critical
to our business. Intellectual property rights and confidentiality protection in China may not be as effective as in the United States or
other countries. Monitoring and preventing the unauthorized use of proprietary technology is difficult and expensive. The steps we
have taken may be inadequate to prevent the misappropriation of our proprietary technology. Any misappropriation could have a
negative effect on our business and operating results. We may need to resort to court proceedings to enforce our intellectual property
rights in the future. Litigation relating to our intellectual property might result in substantial costs and diversion of resources and
management attention away from our business. See “—Risks Related to Doing Business in China—Uncertainties with respect to the
PRC legal system could adversely affect us.”
9
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&ar%%"Š
3*
0C
200GaisY$NL&ar%%"
852134 TX 10
HTM
ESS
Page 1 of 1
Any failure to maintain a stable and effective online payment system could adversely affect our business and results of operations.
Online payment systems in China are developing fast and a growing number of consumers are using such systems than in
previous years. We rely on our internally-developed online payment system, Pass9, for sales of our online game services to
consumers. Although our online payment systems are designed to support various third-party Internet payment channels in China, our
online payment systems may be disrupted by system failure, programming errors, computer hackers or any failure or disruption from
the Internet payment channels. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our Industry —
Our business may be harmed if our technology becomes obsolete or if our system infrastructure fails to operate effectively.” In
addition, we cannot assure you that we will maintain favorable relationships with third-party Internet payment channels. If we fail to
maintain a stable and favorable relationship with these channels, or otherwise fail to effectively maintain our online payment systems,
our business, financial condition and results of operations could be materially and adversely affected.
Any deterioration of our relationship with the game platforms that distribute our games or any failure to maintain a stable and
efficient distribution network could adversely affect our business and results of operations.
We primarily rely on game platforms and distributors to distribute, promote, market and sell our games in China and
overseas markets, such as North America and Europe. End users can purchase our virtual currencies and prepaid cards through such
game platforms and distributors. A substantial portion of our sales are carried out via such game platforms and distributors. We do not
have long-term agreements with any online game platforms or distributors. A delay or failure by the online game platforms or
distributors to successfully market or sell our prepaid cards or products may adversely affect our business and results of operations.
We cannot assure you that we will continue to maintain favorable relationships with the online game platforms and distributors. If we
fail to maintain our relationship with online game platforms and distributors, our business and results of operations could be
materially and adversely affected.
We rely on services and licenses from third parties to carry out our businesses, and if there is any negative development in these
services or licenses, our end users may cease to use our products and services.
In addition to our online payment systems and distribution systems for which we significantly rely on third party services,
we also rely on third-party services and licenses for our operations. For example, we rely on third party licenses for some of the
software underlying our technology platform, and we rely on China Telecom’s Internet data centers to host our servers. See “Item 4.
Information on the Company—B. Business Overview—Pricing, Distribution and Marketing.” In addition, we expect to continue to
derive a considerable amount of our revenues from our licensed online games in the near term.
Any interruption or any other negative development in our ability to rely on these services and licenses, such as material
deterioration of quality of the third party services or the loss of intellectual property relating to the license held by our licensors, could
have a material and adverse impact on our business operations. In particular, our game licensors may be subject to intellectual
property rights claims with respect to the games or software licensed to us. If such licensors cannot prevail on the legal proceedings
brought against them, we could lose the right to use the licensed games or software. Furthermore, if our arrangements with any of
these third parties are terminated or modified against our interest, we may not be able to find alternative solutions on a timely basis or
on terms favorable to us. If any of these events occur, our end users may cease using our products and services, and our business,
financial condition and results of operations may be materially and adversely affected.
Unexpected network interruptions caused by system failures or other internal or external factors may lead to user attrition,
revenue reductions and may harm our reputation.
Any failure to maintain satisfactory performances, reliability, security and availability of our network infrastructure may
cause significant harm to our reputation and our ability to attract and maintain users. The system hardware for our operations is
located in several cities in China. We maintain our backup system hardware and operate our back-end infrastructure in Shanghai,
Beijing, Nanjing, Qingdao, Nantong, and Taicang. Server interruptions, breakdowns or system failures in the cities where we
maintain our servers and system hardware, including failures that may be attributable to sustained power shutdowns, or other events
within or outside our control that could result in a sustained shutdown of all or a material portion of our services, could adversely
impact our ability to service our users.
10
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&cMi%/Š
3*
0C
200GaisY$NL&cMi%/
852134 TX 11
HTM
ESS
Page 1 of 1
Our network systems are also vulnerable to damage from computer viruses, fire, flood, earthquake, power loss,
telecommunications failures, computer hacking and similar events. We maintain property insurance policies covering our servers, but
do not have business interruption insurance.
Our business may be harmed if our technology becomes obsolete or if our system infrastructure fails to operate effectively.
The online game industry is subject to rapid technological change. We need to anticipate the emergence of new
technologies and games, assess their acceptance and make appropriate investments. If we are unable to do so, new technologies in
online game programming or operations could render our games obsolete or unattractive.
We use our internally developed Pass9 system and other software systems that support nearly all aspects of our billing and
payment transactions. Our business may be harmed if we are unable to upgrade our systems fast enough to accommodate future
traffic levels, avoid obsolescence or successfully integrate any newly developed or acquired technology with our existing systems.
Capacity constraints could cause unanticipated system disruptions and slower response times, affecting data transmission and game
play. These factors could, among other things, cause us to lose existing or potential customers and existing or potential game
development partners.
We have been and may be subject to future intellectual property rights claims or other claims, which could result in substantial
costs and diversion of our financial and management resources away from our business.
There is no assurance that our online games or other content posted on our websites or our mobile games do not or will not
infringe upon patents, valid copyrights or other intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time relating to the intellectual property of others. For example, in May 2012, the People’s
Supreme Court of China affirmed a judgment against us and other defendants in a lawsuit filed by Beijing Founder Electronics Co.,
Ltd., which ruled that WoW client installation packages sold by us in 2007 contained fonts that infringed Beijing Founder Electronics
Co., Ltd.’s intellectual property rights. Based on the People’s Supreme Court’s judgment, we are required to compensate Beijing
Founder Electronics Co., Ltd. an aggregate amount of RMB2.2 million. In June 2013, Beijing No.1 People’s Intermediate Court
issued a judgment against us in a lawsuit filed by Diego Maradona, a former Argentina soccer player, which ruled that we infringed
Maradona’s personal right by using his name and photos on our game “Winning Goal,” a web and social game we previously
operated, without proper authorization. We were required to compensate Maradona an aggregate amount of RMB3 million (US$0.5
million) and any accrued interests thereof for late payment. In February 2015, we entered into a settlement agreement with the
plaintiff for a total payment of RMB3.3 million (US$0.5 million) to settle the matter. See “Item 8. Financial Information—A.
Consolidated Statements and Other Financial Information—Legal Proceedings.”
Some of our employees were previously employed at other companies, including our current and potential competitors. We
also intend to hire additional personnel to expand our product development and technical support teams. To the extent these
employees have been involved in research at our company similar to research in which they had been involved at their former
employers, we may become subject to claims that such employees have used or disclosed trade secrets or other proprietary
information of their former employers. In addition, our competitors may file lawsuits against us in order to gain an unfair competitive
advantage over us.
If any such claim arises in the future, litigation or other dispute resolution proceedings may be necessary to retain our
ability to offer our current and future games, which could result in substantial costs and diversion of our financial and management
resources. Furthermore, if we are found to have violated the intellectual property rights of others, we may be enjoined from using
such intellectual property, incur additional costs to license or develop alternative games and be forced to pay fines and damages, each
of which may materially and adversely affect our business and results of operations.
11
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP136
11.6.14
NCR mohas3dc
HKG
25-Mar-2015 19:37 EST
ˆ200GaisY$NNX36MZ0Š
4*
0C
200GaisY$NNX36MZ0
852134 TX 12
HTM
ESS
Page 1 of 1
Our operating results may be subject to seasonal fluctuations.
Our operating results have experienced seasonal fluctuations from time to time and will likely continue to fluctuate in the
future. These fluctuations in operating results depend on a variety of factors, including the timing of new game launches, the
expiration of existing game licenses, and acquisition or disposal of subsidiaries. Other factors include the demand for our products
and the products of our competitors, the level of usage of illegal game servers, the level of usage of the Internet, the size and rate of
growth of the online game market and development and promotional expenses related to the introduction of new products. In
addition, because our game software is susceptible to unauthorized character enhancements, we may periodically delete characters
that are enhanced with unauthorized modifications. This has caused some affected customers to stop playing the respective game,
which, in the aggregate, may cause our operating results to fluctuate.
To a significant degree, our operating expenses are based on planned expenditures and our expectations regarding
prospective customer usage. Failure to meet our expectations could disproportionately and adversely affect our operating results in
any given period. As a result, we believe that our historical operating results may not necessarily be indicative of our future results.
Our business depends substantially on the continuing efforts of our senior executives, and our business may be severely disrupted
if we lose their services.
Our future success depends heavily upon the continued services of our senior executives. We rely on their expertise in
business operations, technology support and sales and marketing and on their relationships with our shareholders and distributors. We
do not maintain key-man life insurance for any of our key executives. If one or more of our key executives are unable or unwilling to
continue in their present positions, we may not be able to replace them easily or at all. As a result, our business may be severely
disrupted, our financial condition and results of operations may be materially and adversely affected, and we may incur additional
expense to recruit and train personnel.
Each of our executive officers has entered into an employment agreement with us, which contains confidentiality and non-
competition provisions. If any disputes arise between our executive officers and us, we cannot assure you the extent to which any of
these agreements could be enforced in China, where these executive officers reside and hold most of their assets, in light of
uncertainties with the PRC legal system. See “Item 3. Key Information—D. Risk Factors —Risks Related to Doing Business in
China—Uncertainties with respect to the PRC legal system could adversely affect us.”
If we are unable to attract, train and retain key individuals and highly skilled employees, our business may be adversely affected.
As our business expands, we need to hire and retain additional qualified employees, including skilled and experienced
online game developers. Since our industry is characterized by high demand and intense competition for talent, we may need to offer
higher compensation and other benefits in order to retain key personnel in the future. We cannot assure you that we will be able to
attract or retain the qualified game developers or other key personnel that we will need to achieve our business objectives.
PRC laws and regulations restrict foreign ownership of Internet content provision, Internet culture operation and Internet
publishing licenses, and substantial uncertainties exist with respect to the application and implementation of PRC laws and
regulations.
We are a Cayman Islands company and, as such, we are classified as a foreign enterprise under PRC laws. Various
regulations in China currently restrict foreign or foreign-owned entities from holding certain licenses required in China to provide
online game operation services over the Internet, including Internet content provision, or ICP, Internet culture operation and Internet
publishing licenses. In light of such restrictions, we primarily rely on Shanghai IT, one of our affiliated PRC entities, to hold and
maintain the licenses necessary for the operation of our online games in China.
12
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL&gyg%CŠ
3*
0C
200GaisY$NL&gyg%C
25-Mar-2015 17:46 EST
852134 TX 13
HTM
ESS
Page 1 of 1
In July 2006, the Ministry of Information Industry (which has subsequently been reorganized as the Ministry of Industry
and Information Technology), or MIIT, issued a notice entitled “Notice on Strengthening Management of Foreign Investment in
Operating Value-Added Telecommunication Services,” or the New MII Notice, which prohibits ICP license holders from leasing,
transferring or selling a telecommunications business operating license to foreign investors in any form, or providing resources, sites
or facilities to any foreign investors for their illegal operation of a telecommunications business in China. The notice also requires that
ICP license holders and their shareholders directly own the domain names and trademarks used by such ICP license holders in their
daily operations. The notice further requires each ICP license holder to have the necessary facilities for its approved business
operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunication service
providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC
regulations. The local authorities in charge of telecommunications services are required to ensure that existing ICP license holders
conduct a self-assessment of their compliance with the New MII Notice and submit status reports to MIIT before November 1, 2006.
Since the New MII Notice was issued, we have transferred to Shanghai IT all of the domain names used in our daily operations and
certain trademarks used in our daily operations, as required under the New MII Notice. All relevant transfers have been completed
and relevant approvals have been obtained.
In September 2009, the General Administration of Press and Publication, Radio, Film and Television, or GAPPRFT
(formerly known as the General Administration of Press and Publication, or GAPP), promulgated the Circular Regarding the
Implementation of the Department Reorganization Regulation by State Council and Relevant Interpretation by State Commission
Office for Public Sector Reform to Further Strengthen the Administration of Pre-approval on Online Games and Approval on Import
Online Games, or the GAPP Circular, which provides that foreign investors shall not control or participate in PRC online game
operation businesses indirectly or in a disguised manner by establishing joint venture companies or entering into relevant agreements
with, or by providing technical supports to, such PRC online game operation companies, or by inputting the users’ registration,
account management or game card consumption directly into the interconnected gaming platform or fighting platform controlled or
owned by the foreign investor. It is not clear whether the regulatory authority of GAPPRFT applies to the regulation of ownership
structures of online game companies based in China and online game operation in China. Other government agencies that have
regulatory jurisdiction over the online game operations in China, such as the Ministry of Culture and MIIT, did not join GAPP in
issuing the GAPP Circular. To date, the GAPPRFT has not issued any interpretation of the GAPP Circular. It is not yet clear how this
GAPP Circular will be implemented.
Subject to the interpretation and implementation of the GAPP Circular, the ownership structure and the business operation
models of our PRC subsidiaries and affiliated PRC entities comply with all applicable PRC laws, rules and regulations, and no
consent, approval or license is required under any of the existing laws and regulations of China for their ownership structure and
business operation models except for those which we have already obtained or which would not have a material adverse effect on our
business or operations as a whole. There are, however, substantial uncertainties regarding the interpretation and application of current
or future PRC laws and regulations. Accordingly, we cannot assure you that PRC government authorities will ultimately take a view
that is consistent with the opinion of our PRC legal counsel.
For example, the Ministry of Commerce, or MOFCOM, promulgated the Rules of Ministry of Commerce on
Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors in August
2011, or the MOFCOM Security Review Rules, to implement the Notice of the General Office of the State Council on Establishing
the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3,
2011, or Circular No. 6. The MOFCOM Security Review Rules came into effect on September 1, 2011 and replaced the Interim
Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM in March 2011. According to these circulars
and rules, 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 having
“national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign
investors is subject to the security review, MOFCOM will look into the substance and actual impact of the transaction. The
MOFCOM Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring
transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore
transactions. There is no explicit provision or official interpretation stating that our online game operation services falls into the scope
subject to the security review, and there is no requirement for foreign investors in those merger and acquisition transactions already
completed prior to the promulgation of Circular No. 6 to submit such transactions to MOFCOM for security review. As we have
already obtained the “de facto control” over our affiliated PRC entities prior to the effectiveness of these circulars and rules, we do
not believe we are required to submit our existing contractual arrangement to MOFCOM for security review. However, we are
advised by our PRC legal counsel that, as these circulars and rules are relatively new and as there is a lack of clear statutory
interpretation on the implementation of the same, there is no assurance that MOFCOM will have the same view as we do when
applying these national security review-related circulars and rules.
13
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&jdaZ7Š
4*
0C
200GaisY$NL&jdaZ7
852134 TX 14
HTM
ESS
Page 1 of 1
We have been further advised by our PRC counsel that if we, any of our PRC subsidiaries or affiliated PRC entities are
found to be in violation of any existing or future PRC laws or regulations, including the New MII Notice and the GAPP Circular, or
fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities, would have broad
discretion in dealing with such violations, including:
•
•
•
•
•
•
•
revoking the business and operating licenses of Shanghai IT;
confiscating our income or the income of Shanghai IT;
discontinuing or restricting the operations of any related-party transactions among us and Shanghai IT;
limiting our business expansion in China by way of entering into contractual arrangements;
imposing fines or other requirements with which we may not be able to comply;
requiring Shanghai IT or us to restructure our corporate structure or operations; or
requiring Shanghai IT or us to discontinue any portion or all of our operations related to online games.
The imposition of any of these penalties could result in a material and adverse effect on our ability to conduct our business
and on our results of operations. If any of these penalties results in our inability to direct the activities of Shanghai IT that most
significantly impact its economic performance, and/or our failure to receive the economic benefits from Shanghai IT, we may not be
able to consolidate Shanghai IT in our consolidated financial statements in accordance with U.S. GAAP.
We rely on contractual arrangements for our operations in China, which may not be as effective in providing operational control
as direct ownership.
We have relied and expect to continue to rely on contractual arrangements with Shanghai IT to operate our online game
business and other ICP related businesses. These contractual arrangements may not be as effective in providing us with control over
Shanghai IT as direct ownership. From the legal perspective, if Shanghai IT fails to perform its obligations under the contractual
arrangements, we may have to incur substantial costs and spend other resources to enforce such arrangements, and rely on legal
remedies under PRC law, including seeking specific performance or injunctive relief and claiming damages. For example, if the
shareholders of Shanghai IT were to refuse to transfer their equity interests in Shanghai IT to us or our designee when we exercise the
call option pursuant to the Call Option Agreement, or if such shareholders otherwise act in bad faith toward us, we may have to take
legal action to compel it to fulfill their contractual obligations, which could be time consuming and costly.
These contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in
the PRC. The legal environment in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In particular, a recently
released draft version of the PRC Foreign Investment Law from the MOFCOM may have a substantial impact on our corporate
structure as well as our business operations. See “—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.” We have historically derived significant revenues from Shanghai
IT. In the years ended December 31, 2012, 2013 and 2014, Shanghai IT contributed 94.6%, 82.6% and 66.4%, respectively, of our
total revenues. In the event we are unable to enforce the contractual arrangements, we may not be able to have the power to direct the
activities that most significantly affect the economic performance of Shanghai IT, and our ability to conduct our business may be
negatively affected, and we may not be able to consolidate the financial results of Shanghai IT into our consolidated financial
statements in accordance with U.S. GAAP.
14
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL&kmp%VŠ
4*
0C
200GaisY$NL&kmp%V
25-Mar-2015 17:46 EST
852134 TX 15
HTM
ESS
Page 1 of 1
We believe that our option to purchase all or part of the equity interests in Shanghai IT, when and to the extent permitted
by PRC law, or request any existing shareholder of Shanghai IT to transfer all or part of the equity interest in Shanghai IT to another
PRC person or entity designated by us at any time in our discretion, and the rights under the Shareholder Voting Proxy Agreement
that the shareholders of Shanghai IT have granted to us, effectively enable us to have the ability to cause the related contractual
arrangements to be renewed when needed. However, if we are not able to effectively enforce these agreements or otherwise renew the
relevant agreements when they expire, our ability to receive the economic benefits of Shanghai IT may be adversely affected.
Our ability to enforce the Equity Pledge Agreements between us and the shareholders of Shanghai IT may be subject to limitations
based on PRC laws and regulations.
Pursuant to the Equity Pledge Agreements with the shareholders of Shanghai IT, such shareholders agreed to pledge their
equity interests in Shanghai IT to secure their performance under the relevant contractual arrangements. The equity pledges of
Shanghai IT under these Equity Pledge Agreements have been registered with the relevant local administration for industry and
commerce pursuant to the new PRC Property Rights Law. According to the PRC Property Rights Law and PRC Guarantee Law, the
pledgee and the pledgor are prohibited from making an agreement prior to the expiration of the debt performance period to transfer
the ownership of the pledged equity to the pledgee when the obligor fails to pay the debt due. However, under the PRC Property
Rights Law, when an obligor fails to pay its debt when due, the pledgee may choose to either conclude an agreement with the pledgor
to obtain the pledged equity or seek payments from the proceeds of the auction or sell-off of the pledged equity. If Shanghai IT or its
shareholders fail to perform their obligations secured by the pledges under the Equity Pledge Agreements, one remedy in the event of
default under the agreements is to require the pledgors to sell the equity interests of Shanghai IT in an auction or private sale and
remit the proceeds to our wholly owned subsidiaries in China, net of related taxes and expenses. Such an auction or private sale may
not result in our receipt of the full value of the equity interests in Shanghai IT. We consider it very unlikely that the public auction
process would be undertaken since, in an event of default, our preferred approach is to ask The9 Computer Technology Consulting
(Shanghai) Co., Ltd., or The9 Computer, our PRC wholly owned subsidiary and a party to the Call Option Agreement, to replace or
designate another PRC person or entity to replace the existing shareholders of Shanghai IT pursuant to the direct transfer option we
have under the option agreement.
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 Pledge Agreements, the amount of registered equity interests in Shanghai IT pledged to us
was stated as RMB23.0 million, which represent 100% of the registered capital of Shanghai IT. The Equity Pledge Agreements with
the shareholders of Shanghai IT provide that the pledged equity interest shall constitute continuing security for any and all of the
indebtedness, obligations and liabilities under all of the contractual arrangements and the scope of pledge shall not be limited by the
amount of the registered capital of Shanghai IT. 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 under the Equity 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 and
often does not have to be paid back at all. We do not have agreements that pledge the assets of Shanghai IT for the benefit of us.
Our contractual arrangements with our affiliated entities may result in adverse tax consequences to us.
We could face material and adverse tax consequences if the PRC tax authorities determine that our contractual
arrangements with Shanghai IT were not made on reasonable or arm’s length commercial terms or otherwise. If this were to occur,
they may adjust our income and expenses for PRC tax purposes in the form of a transfer pricing adjustment. A transfer pricing
adjustment could result in a reduction, for PRC tax purposes, of costs and expenses recorded by Shanghai IT, which could adversely
affect us by: (i) increasing the tax liability of Shanghai IT without reducing our other PRC subsidiaries’ tax liability, which could
further result in late payment fees and other penalties to Shanghai IT for underpaid taxes; or (ii) limiting the ability of Shanghai IT to
maintain preferential tax treatments and other financial incentives.
15
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&m&G%0Š
3*
0C
200GaisY$NL&m&G%0
852134 TX 16
HTM
ESS
Page 1 of 1
We may not be able to get approval for renewing our current foreign games, or for licensing new foreign games, if the PRC
regulatory authorities promote a policy of domestic online or mobile game development and tighten approval criteria for online or
mobile game imports.
We license and operate foreign games and may continue to do so in the near future. In the past, such foreign games mainly
included MMORPGs or casual games. With mobile social gaming being one of our new businesses, we also license foreign mobile
games. Since 2004, relevant government authorities have promulgated several circulars, according to which the development of
domestically developed online games, including mobile games, will be strategically supported by the PRC government. For example,
in July 2005, MIIT and the Ministry of Culture issued the Opinion on Development and Management of Online Games, or the
Opinion. The Opinion provided that domestic software development companies, network service providers and content providers will
be encouraged, guided and supported to develop and promote self-developed and self-owned online games so that such games can
take up a leading position in the domestic market and expand into the international market.
The government will also encourage the development of derivative products to domestic online games. In support of this
policy, GAPPRFT may tighten approval criteria for online game imports in an effort to protect the development of domestic online
game enterprises, as well as to limit the influence of foreign culture on Chinese youth. If GAPPRFT implements such rules and
policies, we may not be able to get approval for renewing our current foreign game licenses or for licensing new foreign games, and
our business, financial condition and results of operations may be materially and adversely affected.
Failure to obtain or renew approvals or filings for online games and mobile games we operate may adversely affect our operations
or subject us to penalties.
The Ministry of Culture has promulgated laws and regulations that require, among other things, (i) the review and prior
approval of all new online games licensed from foreign game developers and related license agreements, (ii) the review of patches
and updates with substantial changes of games which have already been approved, and (iii) the filing of domestically developed
online games. Furthermore, online games, regardless of whether imported or domestic, will be subject to content review and approval
by GAPPRFT prior to the commencement of games operations in China. Failure to obtain or renew approvals or complete filings for
online games or mobile games may materially delay or otherwise affect a game operator’s plan to launch new games, and the operator
may be subject to fines, the restriction or suspension of operations of the related games or revocation of licenses in the event that the
relevant governmental authority believes that the violation is severe.
We obtained all the necessary approvals from, and completed the necessary filings with, the Ministry of Culture and GAPP
for operations of applicable games. Consistent with the general practice of the mobile and TV game industry in China, we have not
yet completed filings with the Ministry of Culture and GAPPRFT for our mobile and TV games before we commenced our
operations. From time to time, we also rely on certain third party licensors of domestically developed online games to obtain
approvals and complete filings with the PRC regulatory authorities. If we or any such third party licensors fail to obtain the required
approvals or complete the filings, we may not be able to continue the operation of such games. If any such negative event occurs, our
business, financial condition and results of operations may be materially and adversely affected.
We depend on Shanghai IT to hold certain operating licenses. If Shanghai IT or its shareholders violate our contractual
arrangements, our business could be disrupted and our reputation may be harmed.
Because the PRC government restricts our ownership of ICP, Internet culture operation and Internet publishing businesses
in China, we primarily depend on Shanghai IT, one of our affiliated PRC entities in which we have no ownership interest, to hold and
maintain certain licenses necessary for our business operations. Our relationship with Shanghai IT is governed by a series of
contractual arrangements that are intended to provide us with effective control over these entities, but these contractual arrangements
may not be as effective in providing control as direct ownership of these businesses. For example, the shareholders of Shanghai IT
could violate their contractual arrangement with us, or otherwise become unable to perform its contracts with us. As a result, we may
lose the licenses required for our online game operations and our reputation and business could be harmed.
16
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&o8ZZxŠ
3*
0C
200GaisY$NL&o8ZZx
852134 TX 17
HTM
ESS
Page 1 of 1
The principal shareholders of our affiliated PRC entities have potential conflicts of interest with us, which may adversely affect
our business.
Zhimin Lin and Wei Ji, two of our employees, are the principal shareholders of Shanghai IT, one of our affiliated entities.
Thus, there may be conflicts of interest between their respective duties to our company as employees and their respective shareholder
interests in these affiliated PRC entities. We cannot assure you that when conflicts of interest arise, these persons will act in our best
interests or that conflicts of interests will be resolved in our favor. These persons could violate their legal duties, including duties
under their non-competition or employment agreements with us, by engaging in activities that are not in the best interest in our
company, such as diverting business opportunities from us. In any such event, we would have to rely on the PRC legal system to
enforce these agreements. Any legal proceeding could result in the disruption of our business, diversion of our resources and the
incurrence of substantial costs. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal
system could adversely affect us.”
Our subsidiaries in China are subject to restrictions on paying dividends or making other payments.
From time to time, we may rely on dividends paid by our subsidiaries in China to fund our operations, such as paying
dividends to our shareholders or meeting obligations under any indebtedness incurred by us or our overseas subsidiaries. Current PRC
regulations restrict our subsidiaries in China from paying dividends in the following two principal aspects: (i) our subsidiaries in
China are only permitted to pay dividends out of their respective after-tax profits, if any, determined in accordance with PRC
accounting standards and regulations, and (ii) these entities are required to allocate at least 10% of their respective after-tax profits
each year, if any, to fund statutory reserve funds until the cumulative total of the allocated reserves reaches 50% of registered capital,
and a portion of their respective after-tax profits to their staff welfare and bonus reserve funds as determined by their respective
boards of directors or shareholders. These reserves are not distributable as dividends. See “Item 4. Information on the Company—B.
Business Overview—Government Regulations.” Further, if these entities incur debt on their behalf in the future, the instruments
governing such debt may restrict their ability to pay dividends or make other payments. Our inability to receive dividends or other
payments from our PRC subsidiaries may adversely affect our ability to continue to grow our business and make cash or other
distributions to the holders of our ordinary shares and ADSs. In addition, failure to comply with relevant State Administration of
Foreign Exchange, or SAFE, regulations may restrict the ability of our subsidiaries to make dividend payments to us. See “—Risks
Related to Doing Business in China—PRC regulations relating to the establishment of offshore special purpose companies by PRC
residents may subject our PRC resident shareholders or us to penalties and fines, and limit our ability to inject capital into our PRC
subsidiaries, limit our subsidiaries’ ability to increase their registered capital, distribute profits to us, or otherwise adversely affect us.”
We could be liable for breaches of security on our websites and fraudulent transactions by users of our websites.
Currently, a portion of our transactions are conducted through our websites. In such transactions, secure transmission of
confidential information (such as customers’ credit card numbers and expiration dates, personal information and billing addresses)
over public networks is essential to maintain consumer confidence. Our current security measures may not be adequate to safeguard
against fraudulent transactions. Security breaches could expose us to litigation and possible liability for failing to secure confidential
customer information and could harm our reputation and ability to attract customers.
Existing major shareholders have substantial control over us and could delay or prevent a change in corporate control.
Incsight Limited, or Incsight, a company wholly-owned by Jun Zhu, our chairman and chief executive officer, and Bosma
Limited, or Bosma, the two largest shareholders of our company, collectively own a significant percentage of our outstanding
ordinary shares. Incsight and Bosma have entered into a voting agreement to vote together with respect to the election of our
directors. See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Voting Agreement.” As a result, these
shareholders will continue to exert significant control over all matters requiring shareholder approval, including but not limited to, the
election of directors and approval of significant corporate transactions. This voting power could delay or prevent an acquisition of our
company on terms that other shareholders may desire. In addition, the rights of minority shareholders and the fiduciary obligations of
directors in the Cayman Islands may not be as extensive as those in the United States or elsewhere, and the ability to assert
shareholder rights may be comparatively limited.
17
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL&pKn%9Š
3*
0C
200GaisY$NL&pKn%9
25-Mar-2015 17:46 EST
852134 TX 18
HTM
ESS
Page 1 of 1
The PRC income tax laws may increase our tax burden or the tax burden on the holders of our shares or ADSs, and tax benefits
available to us may be reduced or repealed, causing the value of your investment in us to suffer.
Our subsidiaries and affiliated entities in the PRC are subject to enterprise income tax, or EIT, on the taxable income as
reported in their respective statutory financial statements adjusted in accordance with the Enterprise Income Tax Law of the People’s
Republic of China, or EIT Law, which was approved by the National People’s Congress on March 16, 2007. The EIT Law went into
effect as of January 1, 2008, which unified the tax rate generally applicable to both domestic and foreign-invested enterprises in the
PRC. Our subsidiaries and affiliated entities in the PRC are generally subject to EIT at a statutory rate of 25%. Shanghai IT, our
affiliated entity which holds a High and New Technology Enterprise, or HNTE, qualification is entitled to enjoy a 15% preferential
EIT rate. However, we cannot assure you that Shanghai IT will meet these criteria and continue to be qualified as an HNTE if we
apply to the tax authorities in the future.
Moreover, unlike the tax regulations effective before 2008, which specifically exempted withholding taxes on dividends
payable to non-PRC investors from foreign-invested enterprises in the PRC, the EIT Law and its implementation rules provide that a
withholding income 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 the
governments of other countries or regions. While the Tax Agreement between the PRC and Hong Kong provides dividends paid by a
foreign-invested enterprise in the PRC to its corporate shareholder, which is considered a Hong Kong tax resident, will be subject to
withholding tax at the rate of 5% of total dividends, this is limited to instances where the corporate shareholder directly holds at least
25% of the shares of the company that is to pay dividends for at least twelve consecutive months immediately prior to receiving the
dividends and meets certain other criteria prescribed by the relevant regulations. Entitlement to a lower tax rate on dividends
according to tax treaties or arrangements between the PRC central government and governments of other countries or regions is
further subject to approval of the relevant tax authority.
Furthermore, the State Administration of Taxation, or SAT, promulgated the Notice on How to Understand and Determine
the Beneficial Owners in Tax Agreement in October 2009, or Circular 601, which provides guidance for determining whether a
resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and tax arrangements.
According to Circular 601, a beneficial owner generally must be engaged in substantive business activities. An agent or conduit
company will not be regarded as a beneficial owner and, therefore, will not be qualified for treaty benefits. A conduit company
normally refers to a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. In
June 2012, SAT further promulgated the Announcement on Determining the Beneficial Owners in Tax Agreement, or Circular 30,
which provides that the tax authorities shall make the decision based on a comprehensive consideration of all determining factors
provided in Circular 601 rather than the status of a single determining factor. We cannot assure you that any dividends to be
distributed by our subsidiaries to us or by us to our non-PRC shareholders and ADS holders, whose jurisdiction of incorporation has a
tax treaty with China providing a different withholding arrangement, will be entitled to the benefits under the relevant withholding
arrangement.
In addition, the EIT Law deems an enterprise established offshore but having its management organ in the PRC as a
“resident enterprise” that will be subject to PRC tax at the rate of 25% of its global income. Under the Implementation Rules of the
EIT Law, the term “management organ” is defined as “an organ which has substantial and overall management and control over the
manufacturing and business operation, personnel, accounting, properties and other factors.” On April 22, 2009, the SAT further
issued a notice regarding recognizing an offshore-established enterprise controlled by PRC shareholders as a resident enterprise
according to its management organ, or Circular 82. According to Circular 82, a foreign enterprise controlled by a PRC company or a
PRC company group shall be deemed a PRC resident enterprise, if (i) the senior management and the core management departments
in charge of its daily operations are mainly located and function in the PRC; (ii) its financial decisions and human resource decisions
are subject to the determination or approval of persons or institutions located in the PRC; (iii) its major assets, accounting books,
company seals, minutes and files of board meetings and shareholders’ meetings are located or kept in the PRC; and (iv) more than
half of the directors or senior management with voting rights reside in the PRC. On July 27, 2011, SAT issued the Administrative
Measures of Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45,
which further clarified the detailed procedures for determining resident status under Circular 82, competent tax authorities in charge
and post-determination administration of such resident enterprises. Although our offshore companies are not controlled by any PRC
company or PRC company group, we cannot assure you that we will not be deemed to be a “resident enterprise” under the EIT Law
and thus be subject to PRC EIT on our global income.
18
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL&qV$ZAŠ
3*
0C
200GaisY$NL&qV$ZA
25-Mar-2015 17:46 EST
852134 TX 19
HTM
ESS
Page 1 of 1
According to the EIT Law and its implementation rules, dividends are exempted from income tax if such dividends are
received by a resident enterprise on equity interests it directly owns in another resident enterprise. However, foreign corporate holders
of our shares or ADSs may be subject to taxation at a rate of 10% on any dividends received from us or any gains realized from the
transfer of our shares or ADSs if we are deemed to be a resident enterprise or if such income is otherwise regarded as income from
“sources within the PRC.” The EIT Law empowers the PRC State Council to enact appropriate implementing rules and measures and
there is no guarantee that we or our subsidiaries will be entitled to any of the preferential tax treatments. Nor can we assure you that
the tax authorities will not, in the future, discontinue any of our preferential tax treatments, potentially with retroactive effect. Any
significant increase in the EIT rate under the EIT Law applicable to our PRC subsidiaries and affiliated entities, or the imposition of
withholding taxes on dividends payable by our subsidiaries to us, or an EIT levy on us or any of our subsidiaries or affiliated entities
registered outside the PRC, or dividends or capital gains received by our shareholders due to shares or ADSs held in us will have a
material adverse impact on our results of operations and financial conditions and the value of investments in us.
We are required to pay value added tax as a result of recent tax reform in various regions in China and we may be subject to
similar tax treatments elsewhere in China.
On November 16, 2011, the Ministry of Finance and the SAT jointly issued the Circular on the Pilot Program for the
Collection of Value Added Tax Instead of Business Tax, or Circular 110, and the Circular on the Pilot Program for the Collection of
Value Added Tax Instead of Business Tax in the Transportation and Certain Modern Service Sectors in Shanghai, or Circular 111,
which became effective on January 1, 2012. Pursuant to Circular 110 and Circular 111, a tax reform pilot program came into effect in
Shanghai, which was chosen by the PRC government as the first pilot city for such reform. Starting from January 1, 2012, companies
which are designated by Shanghai local tax authorities as operating in certain modern service sectors are required to pay value added
tax, or VAT, in lieu of business tax. On July 31, 2012, the Ministry of Finance and the SAT jointly issued the Circular on the Pilot
Program for the Collection of Value Added Tax Instead of Business Tax in the Transportation and Certain Modern Service Sectors in
Eight Cities and Provinces such as Beijing, or Circular 71, which further extended areas subject to the pilot program to cover eight
more provinces. On December 12, 2013, the Ministry of Finance and the SAT jointly issued the Interim Implementation Rules on the
Pilot Program for the Collection of Value Added Tax Instead of Business Tax and a series of other rules, which annulled the
preceding trial rules and extended applicable areas of the pilot program to the whole country. As a result of such Implementation
Rules, some of our services provided by Shanghai IT, Shanghai Jiucheng Advertisement and The9 Computer are subject to VAT at
the rate of 6%. Shanghai IT, Shanghai Jiucheng Advertisement and The9 Computer, as General VAT Payers under the applicable tax
regulations, may reduce their VAT payable amount by the VAT which they paid in connection with its purchasing activities, or its
Input VAT. Certain services provided by Shanghai The9 Educational Software Technology Co., Ltd. and our other PRC subsidiaries
or affiliated PRC entities shall be subject to VAT at the rate of 3%, and these companies as Small-scale VAT Payers under the
applicable tax regulations may not reduce their VAT payable by their Input VAT. As such Implementation Rules are newly
introduced and there is significant uncertainty relating to the interpretation and enforcement of such circulars by the national and the
local tax authorities and other relevant authorities. Beginning from August 1, 2013, the VAT reform was expanded to all regions in
the PRC. As a result, we may be subject to more unfavorable tax treatment with respect to our business operations as a result of the
VAT reform, and our business, financial condition and results of operations could be materially and adversely affected.
Strengthened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on our acquisition
strategy.
In connection with the EIT Law, the Ministry of Finance and SAT jointly issued, on April 30, 2009, the Notice on Issues
Concerning Process of Enterprise Income Tax in Enterprise Restructuring Business, or Circular 59. On December 10, 2009, the SAT
issued the Notice on Strengthening the Management on Enterprise Income Tax for Non-resident Enterprises Equity Transfer, or
Circular 698. Both Circular 59 and Circular 698 became effective retroactively on January 1, 2008. Under the two circulars, non-
PRC-resident enterprises may be subject to income tax on capital gains generated from their transfers of equity interests in PRC
resident enterprises. The PRC tax authorities have the discretion under Circular 59 and Circular 698 to make adjustments to the
taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of the investment.
In addition, by promulgating and implementing the circulars, the PRC tax authorities have strengthened their scrutiny over the direct
or indirect transfer of equity interests in a PRC resident enterprise by a non-PRC-resident enterprise. For example, Circular 698
specifies that the PRC SAT is entitled to redefine the nature of an equity transfer where offshore vehicles are interposed for tax-
avoidance purposes and without reasonable commercial purpose.
19
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL&r#hZKŠ
3*
0C
200GaisY$NL&r#hZK
25-Mar-2015 17:47 EST
852134 TX 20
HTM
ESS
Page 1 of 1
On February 3, 2015, the SAT issued the Notice on Several Issues regarding Enterprise Income Tax for Indirect Property
Transfer by Non-resident Enterprises, or SAT Circular 7, which further specifies the criteria for judging reasonable commercial
purpose, and the legal requirements for the voluntary reporting procedures and filing materials in the case of indirect property
transfer. SAT Circular 7 has listed several factors to be taken into consideration by tax authorities in determining whether an indirect
transfer has a reasonable commercial purpose. However, despite these factors, an indirect transfer satisfying all the following criteria
shall be deemed to lack reasonable commercial purpose and be taxable under the PRC laws: (i) 75% or more of the equity value of the
intermediary enterprise being transferred is derived directly or indirectly from the PRC taxable properties; (ii) at any time during the
one year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is
comprised directly or indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from the
PRC; (iii) the functions performed and risks assumed by the intermediary enterprise and any of its subsidiaries that directly or
indirectly hold the PRC taxable properties are limited and are insufficient to prove their economic substance; and (iv) the foreign tax
payable on the gains derived from the indirect transfer of the PRC taxable properties is lower than the potential PRC tax on the direct
transfer of such assets. Nevertheless, the indirect transfer falling into the scope of the safe harbor under SAT Circular 7 may not be
subject to PRC tax and such safe harbor includes qualified group restructuring, public market trading and tax treaty exemptions.
Under SAT Circular 7, the entities or individuals obligated to pay the transfer price to the transferor shall be the withholding agent
and shall withhold the PRC tax from the transfer price. If the withholding agent fails to do so, the transferor shall report to and pay the
PRC tax to the PRC tax authorities. In case neither the withholding agent nor the transferor complies with the obligations under SAT
Circular 7, other than imposing penalties such as late payment interest on the transferors, the tax authority may also hold the
withholding agent liable and impose a penalty of 50% to 300% of the unpaid tax on the withholding agent, provided that such penalty
imposed on the withholding agent may be reduced or waived if the withholding agent has submitted the relevant materials in
connection with the indirect transfer to the PRC tax authorities in accordance with SAT Circular 7.
Since we pursue acquisitions as one of our growth strategies, and have conducted and may conduct acquisitions involving
complex corporate structures, the PRC tax authorities may, at their discretion, adjust the capital gains and impose tax return filing
obligations on us or request us to submit additional documentation for their review in connection with any of our acquisitions, thus
causing us to incur additional acquisition costs.
We have adopted a shareholders rights plan, which, together with the other anti-takeover provisions of our articles of association,
could discourage a third party from acquiring us, which could limit our shareholders’ opportunity to sell their shares, including
ordinary shares represented by our ADSs, at a premium.
On January 8, 2009, our board of directors adopted a shareholder rights plan. Under the rights plan, one right was
distributed with respect to each of our ordinary shares outstanding at the close of business on January 22, 2009. In the event that,
subject to limited exceptions, a person or group obtains beneficial ownership of 15% or more of our voting securities (including by
acquisition of our ADSs representing ordinary shares), or enters into an acquisition transaction without the approval of our board of
directors, such person or group will become the acquiring person under the plan. As a result, these rights will entitle the holders, other
than the acquiring person, to purchase upon the exercise of such right the number of our ordinary shares having a market value of two
times the then current purchase price associated with the right. For example, at a purchase price of US$14.50 per right, each right not
owned by an acquiring person would entitle its holder to purchase US$29.00 worth of our ordinary shares for US$14.50.
This rights plan and the other anti-takeover provisions of our amended and restated memorandum and articles of
association 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. Our
existing authorized ordinary shares confer on the holders of our ordinary shares equal rights, privileges and restrictions. The
shareholders have, by virtue of adoption of our third amended and restated memorandum and articles of association, authorized the
issuance of shares of par value of US$0.01 each without specifying any special rights, privileges and restrictions. Therefore, our
board of directors may, without further action by our shareholders, issue ordinary shares, or issue shares of such class and attach to
such shares special rights, privileges or restrictions, which may be different from those associated with our ordinary shares. Preferred
shares could also be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of
management more difficult. If our board of directors decides to issue ordinary shares or preferred shares, the price of our ADSs may
fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
20
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
We have limited business insurance coverage in China.
25-Mar-2015 17:47 EST
ˆ200GaisY$NL&t5w%ÁŠ
3*
0C
200GaisY$NL&t5w%`
852134 TX 21
HTM
ESS
Page 1 of 1
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited
business insurance products. As a result, we do not have any business liability or disruption insurance coverage for our operations in
China. Any business disruption, litigation or natural disaster might result in our incurring substantial costs and the diversion of our
resources.
Some of our subsidiaries, affiliated entities and joint ventures in China engaged in certain business activities beyond the
authorized scope of their respective licenses, and if they are subject to administrative penalties or fines, our operating results may
be adversely affected.
Some of our subsidiaries and affiliated entities in China engaged in business activities that were not within the authorized
scope of their respective licenses in the past. The relevant PRC authorities may impose administrative fines or other penalties for the
non-compliance with the authorized scope of the business licenses, which may in turn adversely affect our operating results.
Failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of
operations and the trading price of our ADSs.
We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the
SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report
of management in its annual report that contains management’s assessment of the effectiveness of such company’s internal controls
over financial reporting.
Our management has concluded that our internal controls over financial reporting are effective as of December 31, 2014.
We however were not subject to the requirement to provide an attestation report on our management’s assessment of our internal
control over financial reporting as we were not an accelerated filer or a large accelerated filer (as defined in § 240.12b-2 under the
Securities Exchange Act of 1934, as amended, or the Exchange Act) as of December 31, 2014.
However, if we fail to maintain effective internal controls over financial reporting in the future, our management and, if
applicable, our independent registered public accounting firm may not be able to conclude that we have effective internal controls
over financial reporting at a reasonable assurance level. This could result in a loss of investor confidence in the reliability of our
financial conditions which in turn could negatively impact the trading price of our ADSs and result in lawsuits being filed against us
by our shareholders or otherwise harm our reputation. Furthermore, we have incurred and anticipate that we will continue to incur
considerable costs and use significant management time and other resources in an effort to comply with Section 404 and other
requirements of the Sarbanes-Oxley Act.
The audit report included in this annual report is prepared by auditors who are not inspected by the Public Company Accounting
Oversight Board and, as such, you are deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit reports included in our annual reports filed with the
SEC, as auditors of companies that are traded publicly in the United States and as a firm registered with the Public Company
Accounting Oversight Board (United States), or the PCAOB, is required by the laws of the United States to undergo regular
inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our
auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of
the PRC authorities, our auditors are not currently inspected by the PCAOB.
21
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NL&vqqZvŠ
3*
0C
200GaisY$NL&vqqZv
852134 TX 22
HTM
ESS
Page 1 of 1
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit
procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This
lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures.
As a result, investors may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of
our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections.
Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.
If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public
accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC,
with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with
the requirements of the Securities Exchange Act of 1934.
Starting in 2011, the Chinese affiliates of the ‘‘big four’’ accounting firms, including our independent registered public
accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and
audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related
documents. The firms were, however, advised and directed that under China law they could not respond directly to the U.S. regulators on
those requests, and such requests by foreign regulators for access to such papers in China had to be channeled through the China Securities
Regulatory Commission, or CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and
also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting
firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against
the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the
SEC, although that proposed penalty did not take effect pending review by the commissioners of the SEC. On February 6, 2015, before a
review by the commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future
requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive requests matching
Section 106, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to
facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains the authority to impose a variety of additional
remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate,
an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in
extreme cases the resumption of the current proceeding against all four firms.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the
United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which
could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible
delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding
China-based, 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 ordinary shares from Nasdaq or deregistration from the SEC, or both, which would substantially reduce or
effectively terminate the trading of our ADSs in the United States.
We face risks related to health epidemics and other natural disasters.
Our business could be adversely affected by swine or avian influenza, severe acute respiratory syndrome, or SARS, or another
epidemic or outbreak. Any prolonged recurrence of swine or avian influenza, SARS or other adverse public health developments in China
may have a material adverse effect on our business operations. Our operations may be impacted by a number of health-related factors,
including, among other things, quarantines or closures of our offices which could severely disrupt our operations, the sickness or death of our
key officers and employees and closure of Internet cafés and other public areas where people access the Internet. Any of the foregoing events
or other unforeseen consequences of public health problems could adversely affect our business and results of operations. We have not
adopted any written preventive measures or contingency plans to combat any future outbreak of swine or avian influenza, SARS or any other
epidemic. In addition, other major natural disasters may also adversely affect our business by, for example, causing disruptions of the
Internet network or otherwise affecting access to our games, or resulting in damages to our facilities.
22
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NL&y3HZtŠ
3*
0C
200GaisY$NL&y3HZt
852134 TX 23
HTM
ESS
Page 1 of 1
Risks Related to Doing Business in China
Our business may be adversely affected by public opinion and government policies in China.
Currently, most of our recurring users are young males, including students. Due to the higher degree of user loyalty to
MMORPGs, easy access to PCs and Internet cafés, and lack of more appealing forms of entertainment in China, many teenagers
frequently play online games. This may result in these teenagers spending less time on, or refraining from, other activities, including
education and sports. Internet cafés, which are currently the most important outlets for online games, have been criticized by the
general public in China as exerting a negative influence on young people. Due primarily to such adverse public reaction, some local
governments in China have tightened their regulation of Internet café operations through, among other things, limiting the number of
new operating licenses issued and further reducing the hours during which Internet cafés are permitted to be open for business. Also,
local and higher-level governmental authorities may from time to time decide to more strictly enforce the customers’ age limit and
other requirements relating to Internet cafés as a result of the occurrence of, and the media attention on, gang fights, arson or other
incidents in or related to Internet cafés. As a significant portion of our customers’ access our games from Internet cafés, any
restrictions placed on Internet café operations could result in a reduction of the amount of time our customers spend on our online
games or a reduction or slowdown in the growth of our customer base, thus adversely affecting our business and results of operations.
In April 2007, various governmental authorities, including GAPP, MIIT, the Ministry of Education, the Ministry of Public
Security, and other relevant authorities jointly issued a circular concerning the mandatory implementation of an “anti-fatigue system”
in online games, which aims to protect the physical and psychological health of minors. This circular required all online games to
incorporate an “anti-fatigue system” and an identity verification system, both of which have limited the amount of time that a minor
or other user may continuously spend playing an online game. We have implemented such “anti-fatigue” and identification systems
on all of our online games as required. Since March 2011, various governmental authorities, including MIIT, the Ministry of
Education, the Ministry of Public Security, and other relevant authorities have jointly launched the “Online Game Parents
Guardianship Project for Minors,” which allows parents to require online game operators to take relevant measures to limit the time
spent by the minors playing online games and the minors’ access to their online game accounts. On February 5, 2013, the Ministry of
Culture, MIIT, GAPP and various other governmental authorities, jointly issued the Working Plan on the Comprehensive Prevention
Scheme on Online Game Addiction of Minors, which further strengthens the administration of Internet cafés, reinstates the
importance of the “anti-fatigue system” and “Online Game Parents Guardianship Project for Minors” as prevention measures against
the online game addiction of minors and orders all relevant governmental authorities to take all necessary actions in implementing
such measures. Further strengthening of these systems, or enactment by the PRC government of any additional laws to further tighten
its administration over the Internet and online games or its supervision of Internet cafés may result in less time spent by customers or
fewer customers playing our online games, which may materially and adversely affect our business results and prospects for future
growth.
Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall
economic growth of China, which could adversely affect our business.
We conduct substantially all of our business operations in China. As the gaming industry is highly sensitive to business and
personal discretionary spending, it tends to decline during general economic downturns. Accordingly, our results of operations,
financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s
economy differs from the economies of most developed countries in many respects, including with respect to the amount of
government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth in the past twenty years, growth has been uneven across different regions and among
various economic sectors of China. The PRC government has implemented various measures to encourage economic development
and guide the allocation of resources. While some of these measures benefit the overall PRC economy, they may also have a negative
effect on us. For example, our financial condition and results of operations may be adversely affected by government control over
capital investments or changes in tax regulations that are applicable to us. As the PRC economy is increasingly intricately linked to
the global economy, it is affected in various respects by downturns and recessions of major economies around the world, such as the
recent financial services and economic crises of these economies. The various economic and policy measures the PRC government
enacts to forestall economic downturns or shore up the PRC economy could affect our business.
23
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NL&!PoZBŠ
3*
0C
200GaisY$NL&!PoZB
25-Mar-2015 17:47 EST
852134 TX 24
HTM
ESS
Page 1 of 1
The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC
government has implemented measures since the late 1970s 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 are still owned by the PRC government. In addition, the PRC government continues
to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises
significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-
denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Since
late 2003, the PRC government implemented a number of measures, such as raising interest rates and bank reserve requirements to
place additional limitations on the ability of commercial banks to make loans, in order to contain the growth of specific segments of
China’s economy that it believed to be overheating. These actions, as well as future actions and policies of the PRC government,
could materially affect our liquidity and access to capital and our ability to operate our business.
The laws and regulations governing the online game industry in China are developing and subject to future changes. If we fail to
obtain or maintain all applicable permits and approvals, our business and operations could be materially and adversely affected.
The online game industry in China is highly regulated by the PRC government. Various regulatory authorities of the PRC
central government, such as the State Council, MIIT, GAPPRFT, the Ministry of Culture and the Ministry of Public Security, are
empowered to issue and implement regulations governing various aspects of the online games industry.
We are required to obtain applicable permits or approvals from different regulatory authorities in order to provide online
games to our customers. For example, an Internet content provider must obtain a value-added telecommunications business operating
license for ICP, or ICP License, in order to engage in any commercial ICP operations within China. In addition, an online games
operator must also obtain a license from the Ministry of Culture and a license from GAPPRFT in order to distribute games through
the Internet. Furthermore, an online game operator is required to obtain approval from the Ministry of Culture in order to distribute
virtual currencies for online games such as prepaid value cards, prepaid money or game points. If we fail to obtain or maintain any of
the required filings, permits or approvals in the future, we may be subject to various penalties, including fines and the discontinuation
or restriction of our operations. Any such disruption in our business operations would materially and adversely affect our financial
condition and results of operations.
As the online games industry is at an early stage of development in China, new laws and regulations may be adopted from
time to time to require additional licenses and permits other than those we currently have, and may address new issues that arise from
time to time. For example, a new rule issued in June 2009 requires existing online game operators, such as our company, to obtain
additional approval from the Ministry of Culture for the issuance of virtual currencies to users for online game services within three
months. We obtained the approval on November 20, 2009. As a result, substantial uncertainties exist regarding the interpretation and
implementation of current and any future PRC laws and regulations applicable to the online gaming industry. However, we cannot
assure you that we will be able to timely obtain any new license required in the future, or at all. While we believe that we are in
compliance in all material respects with all applicable PRC laws and regulations currently in effect, we cannot assure you that we will
not be found in violation of any current or future PRC laws and regulations.
24
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NL&@xSZ^Š
3*
0C
200GaisY$NL&@xSZ^
852134 TX 25
HTM
ESS
Page 1 of 1
Intensified government regulation of Internet cafés could limit our ability to maintain or increase our revenues and expand our
customer base.
In April 2001, the PRC government began tightening its supervision of Internet cafés, closing down unlicensed Internet
cafés, and required those remaining open to install software to prevent access to sites deemed subversive and required web portals to
sign a pledge not to host subversive sites. Furthermore, the PRC government’s policy, which encourages the development of a limited
number of national and regional Internet café chains and discourages the establishment of independent Internet cafés, may slow the
overall growth of Internet cafés. Currently, the issuance of Internet café licenses is subject to the overall planning of the Ministry of
Culture and the local branches of the Ministry of Culture above certain level in respect of the total number and location of Internet
cafés. Since 2004, the grant of new Internet café licenses has been suspended from time to time, and was again suspended in 2007.
The PRC government maintains strict controls on the granting of new licenses. As Internet cafés are the primary venue for users to
play our games, any reduction in the number, or any slowdown in the growth of, Internet cafés in China will limit our ability to
maintain or increase our revenues and expand our customer base, which will in turn materially and adversely affect our business and
results of operations.
Regulation and censorship of information disseminated over the Internet in China may adversely affect our business, and we may
be liable for information displayed on, retrieved from, or linked to our Internet websites.
The PRC government has adopted certain regulations governing Internet access and the distribution of news and other
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 is obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements could result in the revocation
of ICP and other required licenses and the closure of the concerned websites. The website operator may also be held liable for such
prohibited information displayed on, retrieved from or linked to such website.
The Ministry of Culture has promulgated laws and regulations that reiterate the government’s policies to prohibit the
distribution of games with violence, cruelty or other elements that are believed to have the potential effect of instigating crimes, and
to prevent the influx of harmful cultural products from overseas.
The Ministry of Culture has promulgated laws and regulations that require, among other things, (i) the review and prior
approval of (i) all new online games licensed from foreign game developers and related license agreements, (ii) the review of patches
and updates with substantial changes of games which have already been approved, and (iii) the filing of domestically developed
online games. Furthermore, online games, regardless of whether imported or domestic, will be subject to content review and approval
by GAPPRFT prior to the commencement of games operations in China. Failure to obtain or renew approvals or to complete filings
for online games or mobile games may materially delay or otherwise affect game operator’s plans to launch new games, and the
operator may be subject to fines, restriction or suspension of operations of the related games or revocation of licenses in the event that
the relevant governmental authority believes that the violation is severe. We obtained the necessary approvals from and completed
necessary filings with the Ministry of Culture and GAPP for operations of our games as applicable. Consistent with the general
practice of the mobile and TV game industry in China, we have not yet completed filings with the Ministry of Culture and GAPPRFT
for our mobile and TV games before we commenced our operations. If any such negative event occurs, our business, financial
condition and results of operations may be materially and adversely affected.
In addition, MIIT has published regulations that subject website operators to potential liability for content included on their
websites and the actions of users and others using their websites, including liability for violations of PRC laws prohibiting the
dissemination of content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local
Internet service provider to block any Internet website maintained outside China at its sole discretion. Periodically, the Ministry of
Public Security has stopped the dissemination over the Internet of information which it believes to be socially destabilizing. The State
Secrecy Bureau, which is directly responsible for the protection of State secrets of the PRC government, is authorized to block any
website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets in the
dissemination of online information.
25
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NL&$0h%+Š
3*
0C
200GaisY$NL&$0h%+
852134 TX 26
HTM
ESS
Page 1 of 1
As these regulations are relatively new and subject to interpretation by the relevant authorities, it may not be possible for us
to determine in all cases the type of content that could result in liability for us as a website operator. In addition, we may not be able
to control or restrict the content of other Internet content providers linked to or accessible through our websites, or content generated
or placed on our websites by our users, despite our attempt to monitor such content. To the extent that regulatory authorities find any
portion of our content objectionable, they may require us to limit or eliminate the dissemination of such information or otherwise
curtail the nature of such content on our websites, which may reduce our user traffic and have a material adverse effect on our
financial condition and results of operations. In addition, we may be subject to significant penalties for violations of those regulations
arising from information displayed on, retrieved from or linked to our websites, including a suspension or shutdown of our operations.
Future movements in exchange rates between the U.S. dollar and the RMB may adversely affect the value of our ADSs.
We are exposed to foreign exchange risk arising from various currency exposures. Our profit or loss in Red 5 and a portion
of our financial assets are denominated in U.S. dollars while currently a significant portion of our revenues are denominated in RMB,
the legal currency in China. We have not used any forward contracts or currency borrowings to hedge our exposure to foreign
currency risk. The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other
things, changes in political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government
changed its decade-old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a managed band based on market supply and demand and by reference to a basket of certain foreign currencies. This
change in policy has resulted in a significant appreciation of the RMB against the U.S. dollar since the introduction of new policy.
A significant portion of our revenues and costs are denominated in RMB, while a portion of our financial assets are
denominated in U.S. dollars. We rely substantially on dividends and other fees paid to us by our subsidiaries and affiliated entities in
China. Any significant appreciation of RMB against the U.S. dollar may adversely affect our cash flows, revenues, earnings and
financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of the
RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent
that we need to convert U.S. dollars into RMB for such purposes.
Restrictions on currency exchange in China limit our ability to utilize our revenues effectively, make dividend payments and meet
our foreign currency denominated obligations.
Currently, a significant portion of our revenues are in RMB. Restrictions on currency exchange in China limit our ability to
utilize revenue generated in RMB to fund our business activities outside China, make dividend payments in U.S. dollars, or obtain
and remit sufficient foreign currency to satisfy our foreign currency-denominated obligations, such as paying license fees and royalty
payments. The principal regulation governing foreign currency exchange in China is the Foreign Exchange Administration Rules
(1996), as amended. Under such rules, the RMB is generally freely convertible for trade and service-related foreign exchange
transactions, but not for direct investment, loans or investment in securities outside China unless the prior approval of SAFE is
obtained. Although the PRC government regulations now allow greater convertibility of RMB for current account transactions,
significant restrictions still remain. For example, foreign exchange transactions under our PRC subsidiaries’ capital account, including
principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls
and the approval of SAFE. These limitations could affect our ability to obtain foreign exchange for capital expenditures. We cannot
be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB, especially
with respect to foreign exchange transactions.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC
resident shareholders or us to penalties and fines, and limit our ability to inject capital into our PRC subsidiaries, limit our
subsidiaries’ ability to increase their registered capital, distribute profits to us, or otherwise adversely affect us.
On July 4, 2014, SAFE issued the Circular on Several Issues Concerning Foreign Exchange Administration of Domestic
Residents Engaging in Overseas Investment, Financing and Round-Trip Investment via Special Purpose Vehicles, or SAFE Circular
37. SAFE Circular 37 and its detailed guidelines require PRC residents to register with the local branch of SAFE before contributing
their legally owned onshore or offshore assets or equity interest into any special purpose vehicle, or SPV, directly established, or
indirectly controlled, by them for the purpose of investment or financing. SAFE Circular 37 further requires that when there is (a) any
change to the basic information of the SPV, such as any change relating to its individual PRC resident shareholders, name or
operation period or (b) any material change, such as increase or decrease in the share capital held by its individual PRC resident
shareholders, a share transfer or exchange of the shares in the SPV, or a merger or split of the SPV, the PRC resident must register
such changes with the local branch of SAFE on a timely basis.
26
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NL&%9xZ"Š
3*
0C
200GaisY$NL&%9xZ"
852134 TX 27
HTM
ESS
Page 1 of 1
We have requested all of our shareholders who, based on our knowledge, are PRC residents or whose ultimate beneficial
owners are PRC residents to comply with all applicable SAFE registration requirements. However, we have no control over our
shareholders. We cannot assure you that the PRC beneficial owners of our company and our subsidiaries have completed the required
SAFE registrations or complied with other related requirements. Nor can we assure you that they will be in full compliance with the
SAFE registration in the future. Any non-compliance by the PRC beneficial owners of our company and our subsidiaries may subject
us or such PRC resident shareholders to fines and other penalties. It may also limit our ability to contribute additional capital to our
PRC subsidiaries and our subsidiaries’ ability to distribute profits or make other payments to us.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business primarily through our subsidiaries and affiliated entities incorporated in China. These entities are
generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly-
foreign owned enterprises. Almost all of these agreements are governed by PRC law and disputes arising out of these agreements are
expected to be decided by arbitration in China. The PRC legal system is based on written statutes. Prior court decisions may be cited
for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However, since 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, which may limit legal protections available to us. In addition, any litigation in China may be protracted
and result in substantial costs and diversion of resources and management attention.
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.
In January 2015, MOFCOM published a draft of the proposed Foreign Investment Law, or Draft FIL. If enacted, the Draft
FIL would replace the existing laws regulating foreign investment in China and harmonize the regulations governing both foreign
invested enterprises and PRC domestic entities. However, foreign invested enterprises that operate in industries deemed to be either
“restricted” or “prohibited” in a “negative list” will be subject to entry clearance and other approvals not required for PRC domestic
entities unless such foreign invested enterprises can demonstrate that the ultimate controlling person(s) is/are of PRC nationality
(either PRC citizen, or PRC government and its branches or agencies). Because the negative list has yet to be published, it is unclear
whether it will differ from the current list of industries subject to restrictions or prohibitions on foreign investment. The entry
clearance and approvals could prevent certain foreign invested enterprises that operate in industries on the negative list from
continuing to conduct their operations through contractual arrangements.
There is substantial uncertainty regarding the Draft FIL, including, the content of its final form and the timing of its
adoption and implementation. For example, our actual controlling person, Mr. Jun Zhu, is a citizen of Singapore, which could be one
of the significant factors for purposes of determining whether we are ultimately controlled by persons that are of PRC nationality
under the Draft FIL. Moreover, it is uncertain whether the Internet content provision service, online gaming, internet publishing and
other internet-based industries, in which our subsidiaries and affiliated entities operate, will be subject to the foreign investment
restrictions or prohibitions set forth in the “negative list” to be issued. If adopted in its current form, the Draft FIL could have a
material and adverse impact on our ability to participate in key sectors of the Chinese economy, including the online game business,
as well as the effectiveness or the necessity of our contractual arrangements with our affiliated entities.
27
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NL&&M6%"Š
3*
0C
200GaisY$NL&&M6%"
852134 TX 28
HTM
ESS
Page 1 of 1
We may not be able to pursue growth through strategic acquisitions in China due to complicated procedures under PRC laws and
regulations for foreign investors to acquire PRC companies.
In recent years, certain PRC laws and regulations have established procedures and requirements that are expected to make
merger and acquisition activities in China by foreign investors more time-consuming and complex. These laws and regulations
include, without limitation, the Rules on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, or the M&A
Rules, and the Anti-Monopoly Law and the MOFCOM Security Review Rules. In some instances, MOFCOM needs to be notified in
advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. The approval by
MOFCOM may also need to be obtained in circumstances where overseas companies established or controlled by PRC enterprises or
residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to
be subject to merger control review or security review. The MOFCOM Security Review Rules, effective from September 1, 2011,
provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors shall be subject to
the security review by MOFCOM, the principle of substance over form shall be applied. In particular, foreign investors are prohibited
from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans,
control through contractual arrangements or offshore transactions.
If the business of any target company that we expect to acquire becomes subject to the security review, we may not be able
to successfully complete the acquisition of such company, either by equity or asset acquisition, capital contribution or through any
contractual arrangement. Complying with the requirements of the PRC laws and regulations to complete acquisition transactions
could become more time-consuming and complex. Any required approval, such as approval by MOFCOM, may delay or inhibit our
ability to complete such transactions, which could affect our ability to grow our business or increase our market share. Furthermore, it
is uncertain whether the M&A Rules, security review rules or the other PRC regulations regarding the acquisitions of PRC companies
by foreign investors will be amended when the Draft FIL becomes effective in the future.
The limited use of personal computers in China and the relatively high cost of Internet access with respect to per capita gross
domestic product may limit the development of the Internet in China and impede our growth.
Although the use of personal computers in China has increased in recent years, the penetration rate for personal computers
in China is significantly lower than in the United States and other developed countries. Furthermore, despite a decrease in the cost of
Internet access in China due to a decrease in the cost of personal computers and the introduction and expansion of broadband access,
the cost of Internet access in China still remains relatively high compared to the average per capita income. The limited use of
personal computers in China and the relatively high cost of Internet access may limit the growth of our business. In addition, there is
no assurance that there will not be any increase in Internet access or telecommunication fees in China. If that happens, the number of
our users may decrease and the growth of our user base may be materially impeded.
The continued growth of China’s Internet market depends on the establishment of adequate telecommunications infrastructure.
Although private sector Internet service providers currently exist in China, almost all access to the Internet is maintained
through state-owned telecommunication operators under the administrative control and regulatory supervision of China’s MIIT. In
addition, the national networks in China connect to the Internet through government-controlled international gateways. These
government-controlled international gateways are the only channel through which a domestic PRC user can connect to the
international Internet network. We rely on this infrastructure to provide data communications capacity primarily through local
telecommunications lines. Although the government has announced plans to aggressively develop the national information
infrastructure, we cannot assure you that this infrastructure will be developed as planned or at all. In addition, we will have no access
to alternative networks and services, on a timely basis if at all, in the event of any infrastructure disruption or failure. The Internet
infrastructure in China may not support the demands necessary for the continued growth in Internet usage.
28
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Risks Related to Our Shares and ADSs
25-Mar-2015 17:47 EST
ˆ200GaisY$NM01FCZxŠ
3*
0C
200GaisY$NM01FCZx
852134 TX 29
HTM
ESS
Page 1 of 1
Our ADSs may be delisted from the Nasdaq Global Market as a result of our not meeting the Nasdaq Global Market continued
listing requirements.
Our ADSs are currently listed on the Nasdaq Global Market under the symbol “NCTY.” We must continue to meet the
requirements set forth in Nasdaq Listing Rule 5450 to remain listing on the Nasdaq Global Market. For example, under the “Equity
Standard” set forth in Nasdaq Listing Rule 5450(b), we are required to, among others things, have stockholders’ equity of at least
US$10 million. As of December 31, 2014, our total equity was US$10.5 million. If we fail to satisfy Nasdaq Global Market’s
continued listing requirements in the future and fail to regain compliance on a timely basis, our ADSs could be delisted from Nasdaq
Global Market, and we may need to transfer the listing or trading of our ADSs to other stock exchange or trading venues.
However, there can be no assurance that our ADSs will be eligible for trading on any such alternative exchanges or
markets in the United States. If Nasdaq determines to delist our ordinary shares, or if we fail to list of ADSs on other stock exchanges
or find alternative trading venue for our ADSs, the market liquidity and the price of our ADSs and our ability to obtain financing for
our operations could be materially and adversely affected.
We were a passive foreign investment company for the taxable year ended December 31, 2014, which could result in adverse U.S.
federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.
Based on the market price of our ADSs and the value and composition of our income, assets and liabilities, although not
free from doubt, we believe we were a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes for our
taxable year ended December 31, 2014. In addition, it is likely that one or more of our subsidiaries were also PFICs for such year.
A non-U.S. corporation will be a PFIC for any taxable year if either (1) at least 75% of its gross income for such year is
passive income, or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such
year is attributable to assets that produce passive income or are held for the production of passive income. We must make a separate
determination after the close of each taxable year as to whether we were a PFIC for that year. Because the value of our assets for
purposes of the PFIC test will generally be determined by reference to the market price of our ADSs or ordinary shares, our PFIC
status will depend in part on the market price of the ADSs or ordinary shares, which may fluctuate significantly, and the composition
of our assets and liabilities. Because we believe we were a PFIC for the taxable year ended December 31, 2014, certain adverse U.S.
federal income tax consequences could apply to U.S. Holders (as defined in “Item 10. Additional Information—E. Taxation—U.S.
Federal Income Taxation”) of our ADSs or ordinary shares with respect to any “excess distribution” received from us and any gain
from a sale or other disposition of the ADSs or ordinary shares. See “Item 10. Additional Information—E. Taxation—U. S. Federal
Income Taxation—Passive Foreign Investment Company.”
You are strongly urged to consult your tax advisors regarding the impact of our being a PFIC in any taxable year on your
investment in our ADSs and ordinary shares as well as the application of the PFIC rules.
The future sales or issuance of a substantial number of our ADSs or ordinary shares could adversely affect the price of our ADSs.
If our shareholders sell substantial amounts of our ADSs, including those issued upon the exercise of outstanding options,
in the public market, the market price of our ADSs could fall. Such sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem appropriate. If any existing shareholder or shareholders sell a
substantial amount of ordinary shares, the prevailing market price for our ADSs could be adversely affected.
In addition, we may issue additional ordinary shares or ADSs for future acquisitions. If we pay for our future acquisitions
in whole or in part with additionally issued ordinary shares or ADSs, your ownership interest in our company would be diluted and
this, in turn, could have a material adverse effect on the price of our ADSs.
The market price for our ADSs may be volatile.
The market price for our ADSs is likely to be highly volatile and subject to wide fluctuations in response to factors
including the following:
•
actual or anticipated fluctuations in our quarterly operating results;
29
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NM02ovZÉŠ
3*
0C
200GaisY$NM02ovZ
852134 TX 30
HTM
ESS
Page 1 of 1
•
•
•
•
•
•
•
•
•
announcements of new games by us or our competitors;
changes in financial estimates by securities analysts;
price fluctuations of publicly traded securities of other China-based companies engaging in Internet-related services
or other similar businesses;
conditions in the Internet or online game industries;
changes in the economic performance or market valuations of other Internet or online game companies;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital
commitments;
fluctuations in the exchange rates between the U.S. dollar and the RMB;
addition or departure of key personnel; and
pending and potential litigation.
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not
related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the
market price of our ADSs.
You may face difficulties in protecting your interests, and our ability to protect our rights through the U.S. federal courts may be
limited, because we are incorporated under Cayman Islands law.
Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2013
Revision) and common law of 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 precedents in the United States. In
particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides
significantly less protection to investors. Therefore, our public shareholders may have more difficulties protecting their interests in the
face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a
jurisdiction in the United States. In addition, shareholders of Cayman Islands companies may not have standing to initiate a
shareholder derivative action before the federal courts of the United States. As a result, our shareholders may not be able to protect
their interests if they are harmed in a manner that would otherwise enable them to sue in a United States federal court.
Your ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, will be
limited because we are incorporated in the Cayman Islands, because we conduct a substantial portion of our operations in China
and because the majority of our directors and officers reside outside of the United States.
We are incorporated in the Cayman Islands, and we conduct a substantial portion of our operations through our wholly-
owned subsidiaries and affiliated entities in China. Most of our directors and officers reside outside of the United States and most of
the assets of those persons are located outside of 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 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.
30
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
You may not be able to exercise your right to vote.
ˆ200GaisY$NM03y4%Š
4*
0C
200GaisY$NM03y4%´
25-Mar-2015 17:47 EST
852134 TX 31
HTM
ESS
Page 1 of 1
As a holder of ADSs, you may instruct the depositary of our ADSs to vote the shares underlying your ADSs but only if we
ask the depositary to request your instruction. Otherwise, you will not be able to exercise your right to vote unless you withdraw the
shares. However, you may not know about a shareholders’ meeting enough in advance to withdraw the shares. Pursuant to our
amended and restated memorandum and articles of association, a shareholders’ meeting may be convened by us on seven business
days’ notice. If we ask for your instructions, the depositary will notify you of the upcoming vote and 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. Pursuant to the amended and revised Deposit Agreement dated November 2010 that we entered into with our
depositary, if after complying with the procedures set forth in the agreement, the depositary does not receive instructions from the
owner of a receipt on or before the instruction date, the depositary shall vote such deposited securities in accordance with the
recommendations of our board of directors as advised by our company in writing. In addition, the depositary and its agents are not
responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions, if any such action or non-
action is in good faith. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the
shares underlying your ADSs are not voted as you request.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we
cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under
the Securities Act of 1933, as amended, or the Securities Act, or an exemption from the registration requirements is available. Also,
under the deposit agreement, the depositary bank will not make rights available to you unless the distribution to ADS holders of both
the rights and any related securities are either registered under the Securities Act, or exempt from registration under the Securities
Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause
such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under
the Securities Act. The depositary may, but is not required to, sell such undistributed rights to third parties in this situation.
Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
You may not receive distributions on ordinary shares or 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 ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in
proportion to the number of ordinary 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. We have no obligation to register ADSs, ordinary
shares, rights or other securities under U.S. securities laws. We also have no obligation to take any other action to permit the
distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive the
distribution we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you.
These restrictions may have a material adverse effect on the value of your ADSs.
You may be subject to limitations on transfer of your ADSs.
Your ADSs represented by the ADRs are transferable on the books of the depositary. However, the depositary may close
its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In
addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the
depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any
government or governmental body, or under any provision of the deposit agreement, or for any other reason.
Item 4.
INFORMATION ON THE COMPANY
A.
History and Development of the Company
We were incorporated in the Cayman Islands on December 22, 1999 under the name GameNow.net Limited as a company
limited by shares and were renamed The9 Limited in February 2004. We formed GameNow.net (Hong Kong) Limited, or GameNow,
on January 17, 2000 in Hong Kong, as a wholly-owned subsidiary. We have historically conducted our operations in large part
through The9 Computer, a direct wholly-owned subsidiary of GameNow in China.
31
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NM05To%MŠ
3*
0C
200GaisY$NM05To%M
852134 TX 32
HTM
ESS
Page 1 of 1
Due to the current restrictions on foreign ownership of ICP, Internet culture operation and advertising businesses in China,
currently, we primarily rely on the following significant affiliated entities in holding certain licenses and approvals necessary for our
business operations through a series of contractual arrangements with Shanghai IT and its shareholders:
•
•
Shanghai IT, which holds ICP, Internet culture operation and Internet publishing licenses. Current shareholders of
Shanghai IT include Zhimin Lin and Wei Ji, our employees; and
Shanghai Jiucheng Advertisement (a wholly owned subsidiary of Shanghai IT), whose business license permits it to
conduct advertisement operations.
We do not hold any equity interest in Shanghai IT. See “Item 7. Major Shareholders and Related Party Transactions —
B. Related Party Transactions — Arrangements with Affiliated PRC Entities” for details of the contractual arrangements with
Shanghai IT and its shareholders.
We operated WoW, a MMORPG licensed from Blizzard Entertainment, Inc., in China between June 2005 and June 2009.
During the same period, we had relied on the game as a major source of revenue. After the non-renewal of the WoW license, we
continued to operate our other licensed and proprietary games.
In April 2010, we acquired a controlling interest in Red 5, an online game developer based in the United States, through
the investment in its preferred shares. We then continued to acquire additional equity interest of Red 5 from its existing shareholders.
In January 2014, Red 5 entered into certain share purchase agreements for the issue and sale of series B redeemable preferred stocks
of Red 5 to Shanghai Oriental Pearl Culture Development Co., Ltd., a wholly-owned subsidiary of Shanghai Oriental Pearl (Group)
Co., Ltd., which is a public company listed on the Shanghai Stock Exchange and operates in culture and entertainment industry in
China, at a total consideration of US$19.2 million. In addition, two directors of Red 5, including our chairman and chief executive
officer, Mr. Jun Zhu, also entered into share transfer agreements with Shanghai Oriental Pearl Culture Development Co., Ltd. to sell
certain of their common stocks in Red 5 at a total consideration of US$4.2 million. As of December 31, 2014, on an as-converted
basis, The9 and Shanghai Oriental Pearl (Group) Co., Ltd. owned approximately 72.7% and 22.9% , respectively, of the equity
interest in Red 5. Red 5 is developing Firefall, a MMOFPS game, which we launched in North America and Europe in 2014 and
expect to launch in China in the second half of 2015.
In February 2013, we established a new joint venture, namely Zhongxing The9 Network Technology Co., Ltd., or ZTE9, in
cooperation with Shanghai Zhongxing Communication Technology Enterprise Co., Ltd. and Shanghai Ruigao Information
Technology Co., Ltd., in Wuxi, Jiangsu province, to develop and operate the business of “Fun Box,” a home entertainment set top
box. In February 2014, Guangdong Hongtu Guangdian Investment Limited Company made a capital investment of RMB12.5 million
to acquire 10% equity interests in ZTE9. As a result, as of December 31, 2014, we held 30.2% equity interest of ZTE9. We do not
consolidate the results of ZTE9 into our results of operation and treat it as an equity investee.
In July 2014, we entered into an agreement to form a joint venture with Qihoo 360 Technology Co., Ltd., or Qihoo 360.
Qihoo 360 and we will each own 50% equity interest in the joint venture and share profits based on the equity interest each party
owns in the joint venture. The joint venture, System Link Limited, or System Link, was formed in August 2014. In August 2014, our
subsidiary Red 5 Singapore Pte. Ltd., or Red 5 Singapore, entered into a license agreement with System Link for publishing and
operating Firefall for a five-year term in mainland China. Currently we are preparing for the launch of Firefall in China in the second
half of 2015. Under this license agreement, System Link is expected to pay to us no less than US$160 million (including license fee
and royalties) during the term of the agreement. We did not consolidate the results of System Link into our results of operation and
treat it as an equity investee.
In August 2014, Shanghai IT disposed Huopu Cloud to Shanghai Zhengwu Investment Center (Limited Partnership), a
third party, for a total consideration of RMB200 million (US$32.2 million) in cash. Huopu Cloud developed and held a web game
QiJiGuiLai.
In October 2014, we entered into a sale and purchase agreement with Mr. Zhang Qiang, a third party, to dispose 100% of
our interest in Beijing Linkage Technology Co., Ltd., or Beijing Linkage, one of the our equity investees, for consideration of RMB14
million (US$2.3 million). The consideration of RMB14 million (US$2.3 million) was received in November 2014.
32
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM07mF%,Š
3*
0C
200GaisY$NM07mF%,
25-Mar-2015 17:47 EST
852134 TX 33
HTM
ESS
Page 1 of 1
In November 2014, we entered in to an agreement with Suzhou Industry Park 825 New Media Investment Enterprise
(Limited Partnership), a third party for the sale of our entire equity interests in Shanghai Kai Yue Information Technology Co. Ltd.,
or Kai Yue, which was then 85% owned by us, for the total consideration of RMB25.5 million (US$4.1 million) in cash. Kai Yue
developed and held a mobile application named KingReader for online reading. We received RMB12.8 million (US$2.1 million) and
RMB12.8 million (US$2.1 million) in December 2014 and February 2015, respectively.
Our principal executive office is located at Building No. 3, 690 Bibo Road, Zhangjiang Hi-Tech Park, Pudong New Area,
Shanghai 201203, People’s Republic of China, and our telephone number is +86-21-5172-9999. Our registered office in the Cayman
Islands is located at the offices of CARD Corporate Services Ltd, Zephyr House, Mary Street, PO Box 709 George Town, Grand
Cayman. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York,
New York 10011. In addition to our operational headquarters in Shanghai, we currently have subsidiaries located in the U.S.,
Singapore and South Korea. We also have small branch offices in China including Beijing, Chengdu, Nanjing, Shenyang, Wuhan and
Xi’an. For the list of licensed and proprietary games of our company as of the date of this annual report, see “—B. Business
Overview—Products and Services.”
B.
Business Overview
We primarily develop and operate online games, including MMORPGs, MMOFPSs, web games, social games and mobile
games. We have developed proprietary games, including Firefall and other web and mobile games. We also obtained licenses to
operate other games in mainland China, including Planetside 2. We are developing several proprietary mobile online games by our in-
house development team. In February 2013, we established a new joint venture, namely ZTE9, in cooperation with Shanghai
Zhongxing Communication Technology Enterprise Co., Ltd. and Shanghai Ruigao Information Technology Co., Ltd., in Wuxi,
Jiangsu province, to develop and operate the business of “Fun Box,” a home entertainment set top box, which enables online video
and video games on TV.
We generate our online game service revenues primarily through an item-based revenue model, under which players play
games for free, but they are charged for in-game items, such as performance-enhancing items, clothing and accessories. Our
customers typically access our online games through PCs at home or in Internet cafés, or in the case of mobile phones, through cell
phones and other mobile devices. They purchase in-game items primarily through our Pass9 payment system, or by using prepaid
cards purchased at online game platforms. Pass9 is a proprietary, fully integrated online membership management and payment
system, which offers one-stop account management and payment services to our customers. To ensure quality customer service and
seamless operations, we maintain a powerful technology platform consisting of numerous servers and network devices located in
eleven Internet data centers throughout China.
As wireless business has become increasingly popular in China, we are also developing our wireless application platforms.
We established a wireless business unit in April 2010 and started to expand into the wireless business. We also develop and operate
our mobile advertising platform, Juzi, under our wireless business unit.
We plan to further expand the size and capabilities of our development team by recruiting additional talented program
developers, game designers and graphic artists. We also plan to introduce new game features and improve operations infrastructure to
meet evolving customer tastes and expectations.
Products and Services
Online Games
We offer online games including MMORPGs, MMOFPSs, web games, social games and mobile games that we developed
or licensed. Our other products and services include training, advertisement and short message services. In a typical MMORPG or
MMOFPS, thousands of players play in the same game world at the same time. MMORPG and MMOFPS players can select a
specific character to compete within the game with which they develop experience and enhance game attributes, which can be carried
over into the next higher game levels. MMORPGs and MMOFPSs incorporate many cutting-edge technology features, including:
•
sophisticated 3D graphics which create captivating screen scenes;
33
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NM09%m%;Š
3*
0C
200GaisY$NM09%m%;
852134 TX 34
HTM
ESS
Page 1 of 1
•
•
player upgrading system which allows players to attain higher game attributes with their characters as they develop
experience and enhanced game capabilities over time; and
instant messaging system which allows players to communicate with each other during the game and form groups
with other players, thereby coordinating their game skills to achieve collective objectives.
As of December 31, 2014, we owned or had exclusive licenses to operate the following major MMORPGs, MMOFPSs,
web games and social games and other games in China and other countries:
Game
Developer/ Licensor
Description
Status
Q Jiang San Guo
The9
Planetside 2
Firefall
TianTianWanDiaoChan
Dao Feng
Sony Online
Entertainment LLC
Red 5
The9
The9
Social game
3D MMOFPS
3D MMOFPS
Mobile game
Mobile game
Commercially launched in
China in October 2010
Commercially launched in
China in June 2013
Commercially launched in
North America and Europe in
July 2014
In beta testing
In developing
•
•
•
Q Jiang San Guo. We commercially launched our proprietary social game Q Jiang San Guo in October 2010 in
different social websites in China and other countries.
Planetside 2. In June 2010, we obtained an exclusive license from Sony Online Entertainment LLC, an online game
developer, to operate Planetside 2 in mainland China. We commercially launched this game in June 2013.
Firefall. Since our acquisition of Red 5 in April 2010, Red 5 devoted substantially all of its operating activities to
the development of Firefall, a MMOFPS. Red 5 had previously entered into a game development and licensing
agreement with Webzen, a third-party operator, in February 2006.
In September 2011, pursuant to a series of assignment arrangements, Webzen assigned the license of Firefall to Red
5 Singapore. Upon the assignment, Red 5 Singapore replaced Webzen and became a party under the game
development and licensing agreement between Red 5 and Webzen, including the publishing rights in all of the
countries worldwide other than the United States, Canada and Europe, as well as all the intellectual properties
related to Firefall. Red 5 will continue to have the publishing right of Firefall in the United States, Canada and
Europe. Webzen will no longer be involved in marketing and publishing Firefall in any geographic region.
As part of the assignment arrangement, we paid US$10.0 million and guaranteed to pay US$12.7 million to
Webzen. We also pledged certain intellectual property in relation to the game to secure the guaranteed amount. As
of December 31, 2014, the outstanding guaranteed payment amount was US$6.1 million (RMB37.7 million). In
addition, Webzen will also share certain future revenues generated from the licensing and royalties of Firefall for a
certain period of time.
In November 2011, Red 5 Singapore granted a six-year license of Firefall to Garena Online Private Limited for
exclusive distribution rights in Taiwan, Singapore, Malaysia, Vietnam, Thailand, Indonesia, Hong Kong and the
Philippines, for US$23 million plus any royalties payable.
In August 2014, Red 5 Singapore entered into a license agreement with System Link, our joint venture with Qihoo
360, for System Link to publish and operate Firefall® for a five-year term in mainland China. Under this license
agreement, System Link is expected to pay to us no less than US$160 million (including license fee and royalties)
during the term of the agreement.
34
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0DjgZHŠ
3*
0C
200GaisY$NM0DjgZH
852134 TX 35
HTM
ESS
Page 1 of 1
Firefall was commercially launched in North America and Europe in July 2014. Currently we are preparing for the
launch of Firefall in China in the second half of 2015.
TianTianWanDiaoChan. We have been developing our own proprietary mobile game, TianTianWanDiaoChan,
since 2014. TianTianWanDiaoChan is in beta testing now.
Dao Feng. We have been developing our own proprietary mobile game, Dao Feng, since 2014. We expect to launch
•
•
this game in 2015.
In preparation for the commercial launch of a new game, we conduct “closed beta testing” of the game to resolve
operational issues, which is followed by “open beta testing” in which we allow our registered users to play without removing their in-
game data to ensure the performance consistency and stability of our operating systems. We can choose to start charging users at the
close of beta testing or at a later stage at our discretion.
Our online games are available 24 hours a day, seven days a week. Our users can access our online games from any
location with an Internet connection. Substantially all of our users in China access the game servers either from PCs at home or at
Internet cafés equipped with multiple personal computers that have Internet access. Currently, a significant portion of our users access
the game through Internet cafés throughout China which sell prepaid game cards or prepaid game points to their customers. To offset
the impact of the limited use of online and credit card payment systems in China, we have introduced Pass9, a prepaid game playing
time purchase and management system. See “—B. Business Overview—Membership Management and Payment System.”
TV Game Platform. In February 2013, we established ZTE9, a joint venture, with Shanghai Zhongxing Communication
Technology Enterprise Co., Ltd. and Shanghai Ruigao Information Technology Co., Ltd. in Wuxi, Jiangsu Province. In February
2014, Guangdong Hongtu Guangdian Investment Limited Company made capital investment to ZTE9. The joint venture is going to
develop and operate the business of “Fun Box,” a home entertainment set top box, which enables online video and video games on
TV.
Other Products and Services
Our other products and services mainly consist of training, mobile advertising and short message services.
Training Services. Our training services primarily relate to smart phone application programming training provided to
college students in China.
Mobile Application Advertising Platform. We established a wireless business unit in April 2010 and started to expand into
the wireless business. We develop and operate our mobile advertising platform, Juzi, under our wireless business unit.
SMS. Leveraging our existing user base, we offer several different SMS products and subscription packages that enable our
users to, among other things, transmit and receive SMS messages, receive password protection and other value-added services.
Membership Management and Payment System
We established Pass9 in China, a pioneering integrated membership management and payment system in early 2001, which
allows us to maintain a single customer database that contains each customer’s profile and payment history. Pass9 provides one-stop
service to our customers, distributors and developers. Pass9 provides our customers with an integrated platform to log in, pay and use
any of the fee-based products and services we offer. It also allows our distributors to sell our online points to Internet cafés, and
enables Internet cafés to check the balance of their points and pay us on their customers’ behalf. In addition, Pass9 provides our game
development partners with a simple interface with which to integrate their games into our system.
Our integrated membership management and payment system also incorporates a variety of community-building features,
such as chat rooms, which provide registered users a platform to interact in real-time groups or one-on-one discussions, and bulletin
boards which allow registered users to post notes or inquiries and respond to other users’ notes or inquires. We believe these features
encourage user congregation on our site and facilitate player interaction for the games we offer.
35
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Customer Service
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0G#5ZvŠ
3*
0C
200GaisY$NM0G#5Zv
852134 TX 36
HTM
ESS
Page 1 of 1
Since our inception, we have continuously focused on providing excellent customer service in order to retain our existing
customers and to attract new customers. Our online games customers can access our customer service center via phone or e-mail at
any time, or visit our visitor center in Shanghai during regular business hours. We have in-game game masters dedicated to each of
the online games that we operate. Game masters are responsible for organizing in-game events, troubleshooting and actively and
continuously monitoring the online game environment. Game masters are available to respond to players’ inquiries, to initiate the bug
reporting and removal processes, as well as to identify, record and deal with players’ inappropriate behavior such as dishonesty, fraud
or other conducts that violates our rules and policies. We believe that positioning game masters to monitor the gaming environment is
important to us to maintain customer loyalty and to efficiently address any technical problems that may arise.
Purchase of In-game Items
A customer can purchase in-game items through any of the following methods:
Prepaid Cards. A customer can purchase virtual prepaid cards through online game platforms such as iwan.baidu.com and
games.QQ.com.
Online Payment. A customer can access online games free of charge and buy in-game items online by charging a payment
directly to a credit or debit card.
Pricing, Distribution and Marketing
Pricing. We price our in-game virtual items near the end of the free testing period based on several factors, including the
prices of other comparable games, the technological and other features of the game, and the targeted marketing position of the game.
Our prepaid game cards are offered in a variety of denominations to provide users with maximum flexibility.
Distribution. We primarily rely on game platforms and distributors to distribute, promote, market and sell our games in
China and overseas markets, such as North America and Europe. End users can purchase our virtual currencies and prepaid cards
through such game platforms and distributors. A substantial portion of our sales are carried out via such game platforms and
distributors. We do not have long-term agreements with any online game platforms or distributors. In addition, we also directly sell
game points through our game players’ online accounts.
Marketing. Our overall marketing strategy is to rapidly attract new customers and increase revenues from recurring
customers. The marketing programs and promotional activities that we employ to promote our games include:
Advertising and Online Promotion. We place advertisements in many game magazines and on online game sites, which
are updated regularly.
Cross-Marketing. We have cross-marketing relationships with major consumer brands, technology companies and major
telecom carriers. We believe that our cross-marketing relationships with well-known companies will increase the recognition of our
online game brands.
On-Site Promotion. We distribute free game-related posters, promotional prepaid cards for beginners, game-related
souvenirs such as watches, pens, mouse pads and calendars at trade shows, selected Internet cafés and computer stores.
In-Game Marketing. We conduct “in-game” marketing programs from time to time, including online adventures for grand
prizes.
36
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Game Development and Licensing
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0KGeZ7Š
4*
0C
200GaisY$NM0KGeZ7
852134 TX 37
HTM
ESS
Page 1 of 1
We believe that the online game industry in China will continue its pattern of developing increasingly sophisticated online
games tailored to the local market. In order to remain competitive, we focus on continuing to develop new proprietary online games,
mobile games and web games. Our product development team is responsible for game design, technical development and art design.
We also plan to further enhance our game development capability and diversify our game portfolio and pipeline.
Our game licensing process begins with a preliminary screening, review and testing of a game, followed by a cost analysis,
negotiations and ultimate licensing of a game, including all regulatory and approval processes. A team is then designated to conduct
“closed beta testing” of the game to resolve operational matters, followed by “open beta testing” during which our registered users
may play the game without removing their in-game data to ensure performance consistency and stability of our operation systems.
Testing generally takes three to six months, during which time we commence other marketing activities.
Technology
We aim to build a reliable and secure technology infrastructure to fully support our operations, and we maintain separate
technology networks for each of our games. Our current technology infrastructure consists of the following:
•
•
•
servers and network devices located in 5 Internet data centers throughout China as of December 31, 2014;
proprietary software, including game monitor tools, that are integrated with our websites and customer service
center operations; and
hardware platform and server sites primarily consisting of Inspur, Hewlett-Packard/Compaq, Dell and IBM servers;
EMC, IBM storage systems, H3C and Cisco network equipment.
We have a network operation team responsible for the stability and security of our network. The team monitors our server
and works to detect, record, analyze and solve problems that arise from out network. In addition, we frequently upgrade our game
server software to ensure the stability of our operations and to reduce the risks of hacking.
Competition
Our major competitors include, but are not limited to, online game operators in China. These include Tencent Inc. (which
operates Dungeon & Fighter, CrossFire, Legend of Yulong), Shanda Games Limited (which operates Woool, Mir II, Dragon Nest and
Million Arthur), NetEase.com, Inc. (which operates Fantasy Westward Journey, World of Warcraft and StarCraft II), Changyou.com
Limited (which operates Tian Long Ba Bu, The Legend of Qin II), Perfect World, Co. Ltd. (which operates Perfect World II, Zhu
Xian, DOTA2), Youzu Interactive CO., LTD. (which operates Legend of the Warriors, The Grandmaster), Shanghai 37wan Network
Technology Co., Ltd. (which operates DTS, The legend of BR), and Jiuyou Times (Beijing) Technology Limited (which operates
Audition Dance Battle Online(AU), Gundam online).
Our existing and potential competitors may compete with us on marketing activities, quality of online games and sales and
distribution networks. Some of our existing and potential competitors have greater financial and marketing resources than us. For a
discussion of risks relating to competition, see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our
Industry—We may not be able to recover our market share and profitability as we operate in a highly competitive industry and
compete against many companies.”
37
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Intellectual Property
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0M8i%qŠ
3*
0C
200GaisY$NM0M8i%q
852134 TX 38
HTM
ESS
Page 1 of 1
Our intellectual property rights include trademarks and domain names associated with the name “The9” in China and
copyright and other rights associated with our websites, technology platform, self-developed software and other aspects of our
business. We regard our intellectual property rights as critical to our business. We rely on trademark and copyright law, trade secret
protection, non-competition and confidentiality agreements with our employees, and license agreements with our partners, to protect
our intellectual property rights. We require our employees to enter into agreements requiring them to keep confidential all information
relating to our customers, methods, business and trade secrets during and after their employment with us and assign their inventions
developed during their employment to us. Our employees are required to acknowledge and recognize that all inventions, trade secrets,
works of authorship, developments and other processes made by them during their employment are our property.
We have registered our domain names with third-party domain registration entities, and have legal rights over these
domain names through Shanghai IT, our affiliated PRC entity. We conduct our business under the “The9 Limited” brand name and
“The9” logo.
Legal Proceedings
See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
Government Regulations
Current PRC laws and regulations impose substantial restrictions on foreign ownership of the online gaming and ICP
businesses in China. As a result, we conduct our online gaming and ICP businesses in China through contractual arrangements with
Shanghai IT and Shanghai Jiucheng Advertisement, our affiliated PRC entities. Shanghai IT is owned by Zhimin Lin and Wei Ji, both
of whom are PRC citizens.
In the opinion of our PRC counsel, Zhong Lun Law Firm, subject to the interpretation and implementation of the GAPP
Circular, the ownership structure and the business operation models of our PRC subsidiaries and our affiliated PRC entities comply
with all applicable PRC laws, rules and regulations, and no consent, approval or license is required under any of the existing laws and
regulations of China for their ownership structure and business operation models except for those which we have already obtained or
which would not have a material adverse effect on our business or operations as a whole.
In the online games industry in China, new laws and regulations may be adopted from time to time to require additional
licenses and permits other than those we currently have, and address new issues that arise from time to time. As a result, substantial
uncertainties exist regarding the interpretation and implementation of current and any future PRC laws and regulations applicable to
the online games industry. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The laws
and regulations governing the online game industry in China are developing and subject to future changes. If we fail to obtain or
maintain all applicable permits and approvals, our business and operations could be materially and adversely affected.”
Regulations on Internet Content Provision Service, Online Gaming and Internet Publishing
Our provision of online game-related content on our websites is subject to various PRC laws and regulations relating to the
telecommunications industry, Internet and online gaming, and is regulated by various government authorities, including MIIT, the
Ministry of Culture, GAPPRFT and the State Administration for Industry and Commerce. The principal PRC regulations governing
the ICP industry as well as the online gaming services in China include:
•
•
•
•
•
•
•
•
Telecommunications Regulations (2000), as amended in 2014;
The Administrative Rules for Foreign Investments in Telecommunications Enterprises (2001), as amended in 2008;
The Administrative Measures for Telecommunications Business Operating License (2009);
The Administrative Measures for Internet Information Services (2000), as amended in 2011;
The Tentative Measures for Administration of Internet Culture (2003), as amended and reissued in 2011;
The Tentative Measures for Administration of Internet Publication (2002);
The Tentative Measures for Administration of Online Games (2010); and
The Foreign Investment Industrial Guidance Catalogue (2015).
38
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0SZW%XŠ
3*
0C
200GaisY$NM0SZW%X
852134 TX 39
HTM
ESS
Page 1 of 1
In July 2006, MIIT issued the New MII Notice. The New MII Notice prohibits ICP license holders from leasing,
transferring or selling a telecommunications business operating license to any foreign investors in any form, or providing any
resource, sites or facilities to any foreign investors for their illegal operation of telecommunications businesses in China. The notice
also requires that ICP license holders and their shareholders directly own the domain names and trademarks used by such ICP license
holders in their daily operations. The notice further requires each ICP license holder to have the necessary facilities for its approved
business operations and to maintain such facilities in the regions covered by its license. In addition, all the value-added
telecommunication service providers are required to maintain network and information security in accordance with the standards set
forth under relevant PRC regulations. The local authorities in charge of telecommunications services are required to ensure that
existing ICP license holders conduct a self-assessment of their compliance with the New MII Notice and submit status reports to
MIIT before November 1, 2006. For those which are not in compliance with the above requirements and further fail to rectify the
situation, the relevant governmental authorities would have broad discretion to adopt one or more measures against them, including
but not limited to revoking their operating licenses. See “Item 3. Key Information—D. Risk Factors —Risks Related to Our Company
and Our Industry—PRC laws and regulations restrict foreign ownership of Internet content provision, Internet culture operation and
Internet publishing licenses, and substantial uncertainties exist with respect to the application and implementation of PRC laws and
regulations.”
Under these regulations, a foreign investor is currently prohibited from owning more than 50% of the equity interest in a
PRC entity that provides value-added telecommunications services (except for e-commerce services, as effective from April 10,
2015). ICP services are classified as value-added telecommunications businesses, and a commercial operator of such services must
obtain an ICP License from the appropriate telecommunications authorities in order to carry on any commercial ICP operations in
China.
With respect to the online gaming industry in China, since online games fall into the definition of “Internet culture
products” under The Tentative Measures for Administration of Internet Culture (2011), a commercial operator of online games must,
in addition to obtaining the ICP License, obtain an Internet culture operation license from the appropriate culture administrative
authorities for its operation of online games. Furthermore, according to The Tentative Measures for Administration of Internet
Publication (2002), the provision of online games is deemed an Internet publication activity. Therefore, approval from the appropriate
press and publication administrative authorities as an Internet publisher or cooperation with a licensed Internet publisher is required
for an online game operator to carry on its online gaming businesses in China. Furthermore, online games and mobile games,
regardless of whether imported or domestic, shall be subject to a content review and approval by or a filing with the Ministry of
Culture and GAPPRFT prior to commencement of operations in China.
GAPPRFT and MIIT jointly impose a license requirement for any company that intends to engage in Internet publishing,
defined as 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. Furthermore, the distribution of online game cards and CD-keys for online
gaming programs is subject to a licensing requirement. Shanghai IT holds the license necessary to distribute electronic publications,
which allows it to distribute prepaid cards and CD-Keys for the games we operate. We sell our prepaid cards and CD-Keys through
third-party distributors, which are responsible for maintaining requisite licenses for distributing our prepaid cards and CD Keys in
China.
On February 15, 2007, fourteen governmental authorities, including the Ministry of Culture, MIIT, the State
Administration for Industry and Commerce, and the People’s Bank of China, or the PBOC, jointly issued a circular entitled Circular
for Further Strengthening the Administration of Internet Café and Online Games. This circular gave the PBOC administrative
authority over virtual currencies issued by online game operators for use by players in online games to avoid the potential impact such
virtual currencies may have on the real-world financial systems. According to this circular, the volume that may be issued and the
purchase of such virtual currencies must be restricted, and virtual currency must not be used for the purchase of any physical
products, refunded with a premium or otherwise illegally traded. The Notice of Strengthening the Management of Virtual Currency of
Online Games promulgated by the Ministry of Culture and MOFCOM on June 4, 2009 and the Tentative Measures for Administration
of Online Games promulgated by the Ministry of Culture on June 3, 2010 impose more restrictions and requirements on online game
operators that issue virtual currencies. According to the above regulations, an online game operator which issues virtual currency used
for online game services shall apply for approval from the Ministry of Culture. An online game operator shall further report detailed
rules of issuance for virtual currencies, such as distribution scope, pricing, and terms for refunds and shall make certain periodic and
supplementary filings as required by the relevant regulations. In addition, under the new rules, online game operators are prohibited
from assigning game tools or virtual currency to users by way of drawing lots, random samplings or other arbitrary means in
exchange for users’ cash or virtual currency. The new rules also require that service agreements entered into between online game
operators and end users contain the general terms of a standard online game service agreement issued by the Ministry of Culture.
39
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0VSaZdŠ
3*
0C
200GaisY$NM0VSaZd
852134 TX 40
HTM
ESS
Page 1 of 1
In September 2009, GAPP further promulgated the GAPP Circular, which provides that foreign investors are prohibited
from making investment and engaging in online game operation services by setting up foreign-invested enterprises in China. Further,
foreign investors shall not control and participate in PRC online game operation businesses indirectly or in a disguised manner by
establishing joint venture companies or entering into agreements with or providing technical support to such PRC online game
operation companies, or by inputting the users’ registration, account management, game cards consumption directly into the
interconnected gaming platform or fighting platform controlled or owned by the foreign investor. It is not clear whether the regulatory
authority of GAPPRFT applies to the regulation of ownership structures of online game companies based in China and online game
operation in China. Other government agencies that have regulatory jurisdiction over the online game operations in China, such as the
Ministry of Culture and MIIT, did not join GAPP in issuing the GAPP Circular. To date, GAPPRFT has not issued any interpretation
of the GAPP Circular. It is not yet clear how this GAPP Circular will be implemented. The relevant governmental authorities have
broad discretion to adopt one or more of administrative measures against companies now in compliance with these measures,
including revoking relevant licenses and relevant registration. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our
Company and Our Industry—PRC laws and regulations restrict foreign ownership of Internet content provision, Internet culture
operation and Internet publishing licenses, and substantial uncertainties exist with respect to the application and implementation of
PRC laws and regulations.”
The operation of SMS in China is classified as a value-added telecommunication business and SMS service providers shall
obtain the relevant value-added telecommunication business permits.
Regulations on Internet Content
The PRC government has promulgated measures relating to Internet content through a number of ministries and agencies,
including MIIT, the Ministry of Culture and GAPPRFT. These measures specifically prohibit Internet activities, including the
operation of online games that result in the publication of any content which is found to, among other things, propagate obscenity,
gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security
or secrets. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The laws and regulations
governing the online game industry in China are developing and subject to future changes. If we fail to obtain or maintain all
applicable permits and approvals, our business and operations could be materially and adversely affected.” If an ICP license holder
violates these measures, the PRC government may revoke its ICP license and shut down its websites.
In April 2007, various governmental authorities, including GAPP, MIIT, the Ministry of Education, the Ministry of Public
Security, and other relevant authorities jointly issued a circular concerning the mandatory implementation of an “anti-fatigue system”
in online games, which was aimed at protecting the physical and psychological health of minors. This circular required all online
games to incorporate an “anti-fatigue system” and an identity verification system, both of which have limited the amount of time that
a minor or other user may continuously spend playing an online game. We have implemented such “anti-fatigue” and identification
systems on all of our online games as required. Since March 2011, various governmental authorities, including the Ministry of
Culture, MIIT, the Ministry of Education, the Ministry of Public Security, and other relevant authorities have jointly launched the
“Online Game Parents Guardianship Project for Minors,” which allows parents to require online game operators to take relevant
measures to limit the time spent by the minors on playing online games and the minors’ access to their online game accounts. On
February 5, 2013, the Ministry of Culture, MIIT, GAPP and various other governmental authorities, jointly issued the Working Plan
on the Comprehensive Prevention Scheme on Online Game Addiction of Minors, which further strengthened the administration of the
Internet cafés, reinstated the importance of the “anti-fatigue system” and “Online Game Parents Guardianship Project for Minors” as
prevention measures against the online game addiction of minors and ordered all relevant governmental authorities to take all
necessary actions in implementing such measures. Additional requirements for anti-fatigue and identification systems in our games,
as well as the implementation of any other measures required by any new regulations the PRC government may enact to further
tighten its administration of the Internet and online games, and its supervision of Internet cafés, may limit or slow down our prospects
for growth, or may materially and adversely affect our business results. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Doing Business in China—Our business may be adversely affected by public opinion and government policies in China.”
40
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM0XLe%@Š
3*
0C
200GaisY$NM0XLe%@
25-Mar-2015 17:47 EST
852134 TX 41
HTM
ESS
Page 1 of 1
Internet content in China is also regulated and restricted from a state security standpoint. The National People’s Congress,
China’s national legislative body, has enacted a law that may subject to criminal punishment in China any effort to: (1) gain improper
entry into a computer or system of strategic importance; (2) disseminate politically disruptive information; (3) leak state secrets;
(4) spread false commercial information; or (5) infringe intellectual property rights.
The Ministry of Public Security has promulgated measures that prohibit the use of the Internet in ways which, among other
things, results in a leakage of state secrets or a spread of socially destabilizing content. The Ministry of Public Security has
supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local security bureaus. See “Item 3.
Key Information—D. Risk Factors—Risks Related to Doing Business in China—Regulation and censorship of information
disseminated over the Internet in China may adversely affect our business, and we may be liable for information displayed on,
retrieved from, or linked to our Internet websites.” If an ICP license holder violates these measures, the PRC government may revoke
its ICP license and shut down its websites.
Regulations on Internet Cafés
Internet cafés are required to obtain a license from the Ministry of Culture and the State Administration for Industry and
Commerce, and are subject to requirements and regulations with respect to location, size, number of computers, age limit of
customers and business hours. Although we do not own or operate any Internet cafés, many Internet cafés distribute our virtual pre-
paid cards. The PRC government has enacted laws to intensify its regulation and administration of Internet cafés, which are currently
the primary venue for our users to play online games. Intensified government regulation of Internet cafés could restrict our ability to
maintain or increase our revenues and expand our customer base. See “Item 3. Key Information—D. Risk Factors—Risks Related to
Doing Business in China—Intensified government regulation of Internet cafés could limit our ability to maintain or increase our
revenues and expand our customer base.”
Regulations on Privacy Protection
PRC laws and regulations do not prohibit Internet content providers from collecting and analyzing personal information
from their users subject to the user’s prior consent. We require our users to accept a user agreement whereby they agree to provide
certain personal information to us. PRC law prohibits Internet content providers from disclosing to any third parties any information
transmitted by users through their networks unless otherwise permitted by law. If an Internet content provider violates these
regulations, it may be liable for damages caused to its users and it may be subject to administrative penalties such as warnings, fines,
confiscation of its unlawful income, revocation of licenses, cancellation of filings, shutdown of their websites or even criminal
liabilities.
Import Regulations
Our ability to obtain licenses for online games from abroad and import them into China is regulated in several ways. We
are required to register with MOFCOM any license agreement with a foreign licensor that involves an import of technologies,
including online game software into China. Without that registration, we may not remit licensing fees out of China to any foreign
game licensor. In addition, the Ministry of Culture requires us to submit for its content review and/or approval any online games we
want to license from overseas game developers or any patch or updates for such game if it contains substantial changes. If we license
and operate games without that approval, the Ministry of Culture may impose penalties on us, including revoking the Internet culture
operation license required for the operation of online games in China. Also, pursuant to a jointly issued notice in July 2004, GAPP
and the State Copyright Bureau require us to obtain their approval for imported online game publications. Furthermore, the State
Copyright Bureau requires us to register copyright license agreements relating to imported software. Without the State Copyright
Bureau registration, we cannot remit licensing fees out of China to any foreign game licensor and we are not allowed to publish or
reproduce the imported game software in China.
41
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Regulations on Intellectual Property Rights
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0YuG%bŠ
3*
0C
200GaisY$NM0YuG%b
852134 TX 42
HTM
ESS
Page 1 of 1
The State Council and the State Copyright Bureau have promulgated various regulations and rules relating to the protection
of software in China. Under these regulations and rules, software owners, licensees and transferees may register their rights in
software with the State Copyright Bureau 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 receive better protection. We have registered all of our in-house developed online games
with the State Copyright Bureau.
Regulations on Foreign Currency Exchange and Dividend Distribution
Foreign Currency Exchange. Foreign currency exchange regulation in China is primarily governed by the following rules:
•
•
Foreign Exchange Administration Rules (1996), as amended in 1997 and 2008; and
Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996).
Pursuant to the Foreign Exchange Administration Rules (1996), as amended in 1997 and 2008, the RMB is generally freely
convertible for trade and service-related foreign exchange transactions, but not for direct investment, loans, investment in securities,
or other transactions through a capital account outside China unless the prior approval of SAFE is obtained. Furthermore, foreign
investment enterprises in China in general may purchase foreign exchange without the approval of SAFE for trade and service-related
foreign exchange transactions by providing commercial documents evidencing these transactions. Foreign investment enterprises that
need foreign exchange for the distribution of profits to their shareholders may effect payment from their foreign exchange account or
purchase and pay foreign exchange at the designated foreign exchange banks to their foreign shareholders by producing board
resolutions for such profit distribution. Under the Administration Rules of the Settlement, Sale and Payment of Foreign Exchange
(1996), based on their needs, foreign investment enterprises are permitted to open foreign exchange settlement accounts for current
account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of
foreign exchange at certain designated foreign exchange banks.
On November 19, 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange
Administration Policies on Foreign Direct Investment, or SAFE Circular 59, which became effective on December 17, 2012. The
major developments under SAFE Circular 59 were that the opening of various special purpose foreign exchange accounts (e.g. pre-
establishment expenses account, foreign exchange capital account, guarantee account) no longer required the approval of SAFE.
Furthermore, multiple capital accounts for the same entity may be opened in different provinces, which was not possible before the
issuance of SAFE Circular 59. Reinvestment of RMB proceeds by foreign investors in the PRC no longer required SAFE approval or
verification, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no
longer required SAFE approval.
On May 10, 2013, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange
Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents, which specifies that the
administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be based on registration.
Institutions and individuals shall register with SAFE and/or its branches for their direct investment in the PRC. Banks shall process
foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and
its branches.
On February 13, 2015, SAFE issued the Circular on Further Simplifying and Improving the Foreign Exchange
Administration Policies on Direct Investments, or SAFE Circular 13, pursuant to which the administrative examination and approval
procedures with SAFE or its local branches relating to the foreign exchange registration approval for domestic direct investments as
well as overseas direct investments have been cancelled, and qualified banks are delegated the power to directly conduct such foreign
exchange registrations under the supervision of SAFE or its local branches. SAFE Circular 13 will take effect on June 1, 2015.
42
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM0a=8Z)Š
3*
0C
200GaisY$NM0a=8Z)
25-Mar-2015 17:47 EST
852134 TX 43
HTM
ESS
Page 1 of 1
Dividend Distribution. The principal regulations governing distribution of dividends of foreign holding companies include:
•
•
The Wholly Foreign Invested Enterprise Law (1986), as amended in 2000; and
Administrative Rules under the Wholly Foreign Invested Enterprise Law (1990), as amended in 2001 and 2014.
Under these regulations, foreign investment enterprises in China may pay dividends only out of their accumulated profits,
if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign investment enterprises in China
are required to allocate at least 10% of their respective profits each year, if any, to fund certain reserve funds until the cumulative total
of the allocated reserve funds reaches 50% of an enterprise’s registered capital and a portion of their respective after-tax profits to
their staff welfare and bonus reserve funds as determined by their respective board of directors or shareholders. These reserves are not
distributable as dividends.
Regulations on Foreign Exchange in Certain Onshore and Offshore Transactions
On July 4, 2014, SAFE issued SAFE Circular 37, which is the Circular on Several Issues Concerning Foreign Exchange
Administration of Domestic Residents Engaging in Overseas Investment, Financing and Round-Trip Investment via Special Purpose
Vehicles. SAFE Circular 37 and its detailed guidelines require PRC residents to register with the local branch of SAFE before
contributing their legally owned onshore or offshore assets or equity interest into any SPV directly established, or indirectly
controlled, by them for the purpose of investment or financing. In addition, when there is (a) any change to the basic information of
the SPV, such as any change relating to its individual PRC resident shareholders, name or operation period or (b) any material
change, such as increase or decrease in the share capital held by its individual PRC resident shareholders, a share transfer or exchange
of the shares in the SPV, or a merger or split of the SPV, the PRC resident must register such changes with the local branch of SAFE
on a timely basis. According to the relevant SAFE rules, failure to comply with the registration procedures set forth in SAFE Circular
37 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore companies of SPVs, including
the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from such offshore entity, and
may also subject the relevant PRC residents and onshore companies to penalties under PRC foreign exchange administration
regulations. Further, failure to comply with various SAFE registration requirements described above would result in liability for
foreign exchange evasion under PRC laws. On February 13, 2015, SAFE issued SAFE Circular 13, which is the Circular on Further
Simplifying and Improving the Foreign Exchange Administration Policies on Direct Investments. Under SAFE Circular 13, qualified
banks are delegated the power to register all PRC residents’ investments in SPVs pursuant to SAFE Circular 37, saving for
supplementary registration application made by PRC residents who failed to comply with SAFE Circular 37, which shall still fall into
the jurisdiction of the local branch of SAFE. SAFE Circular 13 will take effect on June 1, 2015.
As a result of the uncertainties relating to the interpretation and implementation of SAFE Circular 37 and SAFE Circular
13, we cannot predict how these regulations will affect our business operations or strategies. For example, our present or future PRC
subsidiaries’ ability to conduct foreign exchange activities, such as remittance of dividends and foreign-currency-denominated
borrowings, may be subject to compliance with such SAFE registration requirements by relevant PRC residents, over whom we have
no control. In addition, we cannot assure you that any such PRC residents will be able to complete the necessary approval and
registration procedures required by the SAFE regulations. We have requested all of our shareholders who, based on our knowledge,
are PRC residents or whose ultimate beneficial owners are PRC residents to comply with all applicable SAFE registration
requirements, but we have no control over our shareholders. We cannot assure you that the PRC beneficial owners of our company
and our subsidiaries have completed the required SAFE registrations. Nor can we assure you that they will be in full compliance with
the SAFE registration in the future. Any non-compliance by the PRC beneficial owners of our company and our subsidiaries may
subject us or such PRC resident shareholders to fines and other penalties. It may also limit our ability to contribute additional capitals
to our PRC subsidiaries and our subsidiaries’ ability to distribute profits or make other payments to us.
43
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM0fXa%-Š
4*
0C
200GaisY$NM0fXa%-
1
25-Mar-2015 17:47 EST
852134 TX 44
HTM
ESS
Page 1 of 1
C.
Organizational Structure
The following diagram illustrates our organizational structure, the place of formation, ownership interest of each of our
significant subsidiaries and affiliated entities that operate our major game platforms in China as of the date of this annual report:
D.
Property, Plants and Equipment
Our headquarters are located on premises comprising approximately 14,000 square meters in an office building in
Shanghai, China. We purchased the office building in which our headquarters are located, and lease all of our other premises from
unrelated third parties. In addition, we have subsidiaries located in the U.S., Singapore and South Korea and small branch offices in
Beijing, Nanjing, Wuhan, Xi’an, Chengdu and Shenyang, China. Our equipment consists substantially of numerous servers and
network devices located in 5 Internet data centers throughout China.
Item 4A.
UNRESOLVED STAFF COMMENTS
None.
Item 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations is based upon and should be read in
conjunction with our consolidated financial statements and their related notes included in this annual report. This report contains
forward-looking statements. See “—G. Safe Harbor.” In evaluating our business, you should carefully consider the information
provided under the caption “Risk Factors” in this annual report. We caution you that our businesses and financial performance are
subject to substantial risks and uncertainties.
44
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM0g%B%sŠ
3*
0C
200GaisY$NM0g%B%s
25-Mar-2015 17:47 EST
852134 TX 45
HTM
ESS
Page 1 of 1
A.
Operating Results
The major factors affecting our results of operations and financial conditions include:
•
•
•
our revenues’ composition and sources of revenues;
our cost of revenue; and
our operating expenses.
Revenue Composition and Sources of Revenue. In 2012, 2013 and 2014, we generated substantially all of our revenues
from online game services, and the remaining portion of our revenues from other services. The following table sets forth our revenues
generated from providing online game services and other services, both as absolute amounts and as percentages of total revenues for
the periods indicated.
For the Year Ended December 31,
2014
RMB % RMB % RMB US$
2013
2012
%
Revenue:
Online game services
Other revenues
Total revenues
(in thousands, except percentages)
157,391 96.2 95,131 89.2 55,418 8,932 85.5
3.8 11,496 10.8 9,422 1,519 14.5
64,840 10,451 100.0
163,581 100.0 106,627 100.0
6,190
Online Game Services. In 2012, 2013 and 2014, revenues from our online game services amounted to RMB157.4 million,
RMB95.1 million and RMB55.4 million (US$8.9 million), respectively. The decrease in revenue from 2013 to 2014 was mainly due
to a decrease in revenue from certain web games, including Winning Goal and Winning Dunk, and MMO games, including Planetside
2 and SUN. We primarily generate our online game service revenues through item-based revenue models. Under an item-based
revenue model, players of our games play the games for free, but are charged for purchases of in-game items, such as performance-
enhancing items, clothing and accessories. Thus, we generate revenues through the sale of such in-game premium features that
players use game points to purchase. The distribution of points to end users is typically made through sales of prepaid game cards and
prepaid online points. Fees from prepaid game cards and prepaid online points are deferred when initially received. This revenue is
recognized over the life of the premium features or as the premium features are consumed. Future usage patterns may differ from the
historical usage patterns on which the virtual items and services consumption model is based. We will continue to monitor the
operational statistics and usage patterns affecting our recognition of these revenues.
Other Revenues. Other revenues mainly included revenues from mobile advertisement, trainings and short message
services. In 2012, 2013 and 2014, our other revenues amounted to RMB6.2 million, RMB11.5 million and RMB9.4 million (US$1.5
million), respectively. Our other revenues decreased from 2013 to 2014 primarily due to a decrease in revenue from Juzi platform
caused by intense market competition.
Cost of Revenue. Our cost of revenue consists of costs directly attributable to rendering our services, including online
game royalties, payroll, sharing to third party game platform, telecom carries and other suppliers, depreciation and rental of Internet
data center sites, depreciation and amortization of computer equipment and software, intangible assets amortization and other
overhead expenses directly attributable to the services we provide.
Operating Expenses. Our operating expenses consist primarily of product development expenses, sales and marketing
expenses, general and administrative expenses, impairment on equipment, intangible assets and other long-lived assets and allowance
on long-term receivables and gain on disposal of subsidiaries. Our total operating expenses continued to decrease from 2012 to 2014,
reflecting the continued decrease of our product development expenses, sales and marketing expenses and general and administrative
expenses during the same period.
Product Development Expenses. Our product development expenses consist primarily of compensation to our product
development personnel, outsourced research and development expenses, equipment and software depreciation charges and other
overhead expenses for the development of our proprietary games. Our product development expenses amounted to RMB301.5
million, RMB213.2 million and RMB156.3 million (US$25.2 million) for the years ended December 31, 2012, 2013 and 2014,
respectively. Most of our proprietary online games have entered into their final stages of development and we have ability to control
the level of discretionary spending on product development in the near future.
45
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0i7VZcŠ
3*
0C
200GaisY$NM0i7VZc
852134 TX 46
HTM
ESS
Page 1 of 1
Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of advertising and marketing expenses
incurred to promote our games and compensation expenses relating to our sales and marketing personnel. Our sales and marketing
expenses amounted to RMB187.0 million, RMB116.7 million and RMB51.8 million (US$8.3 million) for the years ended
December 31, 2012, 2013 and 2014, respectively. Marketing expenses decreased from 2013 to 2014, primarily because the expenses
incurred for launching Firefall in North America and Europe in 2014 were less than those incurred for Planetside 2 in 2013.
General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation and
travel expenses for our administrative staff, depreciation of property and equipment, entertainment expenses, administrative office
expenses, as well as fees paid to professional service providers for auditing and legal services. General and administration expenses
amounted to RMB170.4 million, RMB162.0 million and RMB111.2 million (US$17.9 million) for the year ended December 31,
2012, 2013 and 2014, respectively. General and administrative expenses continued to decrease from 2013 to 2014 reflecting our cost
cutting efforts. We expect general and administrative expenses including share-based compensation expenses will remain relatively
stable at the current level in the near future.
Impairment on Equipment, Intangible Assets, Other Assets and Allowance (Reversal of Allowance) of Long-term
Receivable. Impairment charges relate to the impairment on certain equipment, intangible assets and other assets and amounted to
RMB0.6 million, RMB17.5 million and RMB3.6 million (US$0.6 million) for the years ended December 31, 2012, 2013 and 2014,
respectively. In addition, we recorded allowance on long-term receivable of nil and RMB17.9 million for the year ended
December 31, 2012 and 2013, respectively. We reversed the provision of RMB17.9 million (US$2.9 million) for the year ended
December 31, 2014. The allowance on long-term receivable in 2013 was primarily due to certain prepayment made to an equipment
supplier. In 2014, we reversed all such allowance as we reevaluated the collectability of the receivables and determined the payments
can be collected. We collected the amount in full in 2015. See Note 15 to the consolidated financial statements included in this annual
report on Form 20-F for more information regarding the allowance made in 2013 and the reversal in 2014.
Gain on Disposal of Subsidiaries. We recorded a gain on disposal of subsidiaries disposal of RMB165.4 million (US$26.7
million) in 2014 in connection with disposal of Huopu Cloud and Kai Yue. We did not record any gain on disposal of subsidiaries in
2013.
Other Operating Income. Our other operating income in 2012, 2013, and 2014 represented rental income, which amounted
to RMB120,000, RMB120,000 and RMB75,000 (US$12,088), respectively.
Holding Company Structure
We are a holding company incorporated in the Cayman Islands and rely primarily on dividends and other distributions
from our subsidiaries and our affiliated entities in China for our cash requirements. Current PRC regulations restrict our affiliated
entities and subsidiaries from paying dividends in the following two principal aspects: (i) our affiliated entities and subsidiaries in
China are only permitted to pay dividends out of their respective accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations; and (ii) these entities are required to allocate at least 10% of their respective accumulated
profits each year, if any, to fund certain capital reserves until the cumulative total of the allocated reserves reach 50% of registered
capital, and a portion of their respective after-tax profits to their staff welfare and bonus reserve funds as determined by their
respective boards of directors. These reserves are not distributable as dividends. See “Item 4. Information on the Company—B.
Business Overview—Government Regulations.” In addition, failure to comply with relevant SAFE regulations may restrict the ability
of our subsidiaries to make dividend payments to us. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing
Business in China —PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may
subject our PRC resident shareholders or us to penalties and fines, and limit our ability to inject capital into our PRC subsidiaries,
limit our subsidiaries’ ability to increase their registered capital, distribute profits to us, or otherwise adversely affect us.”
46
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Income and Sales Taxes
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0ld8%XŠ
3*
0C
200GaisY$NM0ld8%X
852134 TX 47
HTM
ESS
Page 1 of 1
The National People’s Congress of the PRC adopted and promulgated the EIT Law on March 16, 2007. The EIT Law went
into effect as of January 1, 2008, and unified the tax rate generally applicable to both domestic and foreign-invested enterprises in the
PRC. Our company’s subsidiaries and affiliated entities in the PRC are generally subject to EIT at a statutory rate of 25%. Our
subsidiaries that hold a HNTE qualification are entitled to enjoy a 15% preferential EIT rate.
In addition, under the EIT Law, enterprises organized under the laws of their respective jurisdictions outside the PRC may
be classified as either “non-resident enterprises” or “resident enterprises.” Non-resident enterprises are subject to withholding tax at
the rate of 20% with respect to their PRC-sourced dividend income if they have no establishment or place of business in the PRC or if
such income is not related to their establishment or place of business in the PRC, unless otherwise exempted or reduced according to
treaties or arrangements between the PRC central government and the governments of other countries or regions. The State Council
has reduced the withholding tax rate to 10% in the newly promulgated implementation rules of the EIT Law. As we are incorporated
in the Cayman Islands, we may be regarded as a “non-resident enterprise.” We hold equity interests in certain PRC subsidiaries
through subsidiaries in Hong Kong. According to the Tax Agreement between the PRC and Hong Kong, dividends paid by a foreign-
invested enterprise in the PRC to its corporate shareholder in Hong Kong holding 25% or more of its equity interest may be subject to
withholding tax at the maximum rate of 5% if certain criteria are met. Entitlement to such lower tax rate on dividends according to tax
treaties or arrangements between the PRC central government and governments of other countries or regions is further subject to
approval of relevant tax authority.
Furthermore, the SAT promulgated Circular 601 which provides guidance for determining whether a resident of a
contracting state is the “beneficial owner” of an Item of income under China’s tax treaties and tax arrangements. According to
Circular 601, a beneficial owner generally must be engaged in substantial business activities. An agent or conduit company will not
be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits. The conduit company normally refers to a
company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. In June 2012, SAT
further promulgated Circular 30 which provides that the tax authorities shall make the decision based on comprehensive consideration
of all determining factors provided in Circular 601 rather than the status of a single determining factor. We cannot assure you that any
dividends to be distributed by us or by our subsidiaries to our non-PRC shareholders and ADS holders whose jurisdiction of
incorporation has a tax treaty with China providing a different withholding arrangement will be entitled to the benefits under the
relevant withholding arrangement.
The EIT law deems an enterprise established offshore but having its management organ in the PRC as a “resident
enterprise” that will be subject to PRC tax at the rate of 25% of its global income. Under the Implementation Rules of the New
Enterprise Income Tax Law, the term “management organ” is defined as “an organ which has substantial and overall management and
control over the manufacturing and business operation, personnel, accounting, properties and other factors.” On April 22, 2009, the
SAT further issued Circular 82. According to Circular 82, a foreign enterprise controlled by a PRC company or a PRC company
group shall be deemed a PRC resident enterprise, if (i) the senior management and the core management departments in charge of its
daily operations are mainly located and function in the PRC; (ii) its financial decisions and human resource decisions are subject to
the determination or approval of persons or institutions located in the PRC; (iii) its major assets, accounting books, company seals,
minutes and files of board meetings and shareholders’ meetings are located or kept in the PRC; and (iv) more than half of the
directors or senior management with voting rights reside in the PRC. On July 27, 2011, SAT issued SAT Bulletin 45 which further
clarified the detailed procedures for determination of the resident status provided in Circular 82, competent tax authorities in charge
and post-determination administration of such resident enterprises. Although our offshore companies are not controlled by any PRC
company or PRC company group, we cannot assure you that we will not be deemed to be a “resident enterprise” under the EIT Law
and thus be subject to PRC EIT on our global income.
According to the EIT Law and its implementation rules, dividends are exempted from income tax if such dividends are
received by a PRC resident enterprise on equity interests it directly owns in another PRC resident enterprise. However, foreign
corporate holders of our shares or ADSs may be subject to taxation at a rate of 10% on any dividends received from us or any gains
realized from the transfer of our shares or ADSs if we are deemed to be a resident enterprise or if such income is otherwise regarded
as income “sourced within the PRC.” See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our
Industry—The PRC income tax laws may increase our tax burden or the tax burden on the holders of our shares or ADSs, and tax
benefits available to us may be reduced or repealed, causing the value of your investment in us to suffer.”
47
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0nYFZ[Š
3*
0C
200GaisY$NM0nYFZ[
852134 TX 48
HTM
ESS
Page 1 of 1
With respect to sales taxes, before December 31, 2011, all the services provided by our PRC subsidiaries were subject to
business taxes at the rate of 5%. In October, 2011, China’s Ministry of Finance and the SAT jointly issued the Circular 110 to launch
the VAT reform pilot program in Shanghai. Following the Circular 110, the Ministry of Finance and the SAT jointly issued the
Circular 111 in November 2011 to provide detailed implementation rules for the program. The two circulars, which would be
effective from January 1, 2012, stipulated that certain services, subject to the pilot programs, shall be subject to VAT instead of
business tax. On July 31, 2012, the Ministry of Finance and the SAT jointly issued Circular 71 which further extended areas subject
to the pilot program to eight more provinces. On December 12, 2013, the Ministry of Finance and the SAT jointly issued the Interim
Implementation Rules on the Pilot Program for the Collection of Value Added Tax Instead of Business Tax and a series of other rules,
which annulled the preceding trial rules and extended applicable areas of the pilot program to the whole country. As a result of such
Implementation Rules, some of our services provided by Shanghai IT, Shanghai Jiucheng Advertisement and The9 Computer are
subject to VAT at the rate of 6%. Shanghai IT and Shanghai Jiucheng Advertisement and The9 Computer, as General VAT Payers
under the applicable tax regulations, may reduce their Input VAT. Certain services provided by Shanghai The9 Education Software
Technology Co., Ltd. and other PRC subsidiaries or affiliated PRC entities shall be subject to VAT at the rate of 3%, and these
companies as Small-scale VAT Payers under the applicable tax regulations may not reduce their VAT payable by their Input VAT.
Our subsidiaries in the United States are registered in California and are subject to U.S. federal corporate marginal income
tax at a rate of 34% and state income tax at a rate of 0.48%, respectively.
Critical Accounting Policies
We prepare financial statements in conformity with U.S. Generally Accepted Accounting Principles, or U.S. GAAP, which
requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities on the date of the financial statements, and the reported amounts of revenue and expenses during the financial reporting
period. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical
experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since
the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some
of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed
below to be critical to an understanding of our financial statements as their application assists management in making their business
decisions.
Consolidation of Variable Interest Entities, or VIEs
PRC laws and regulations, including the GAPP Circular, currently prohibit or restrict foreign ownership of Internet-related
businesses. We believe, consistent with the view of our PRC legal counsel, that our current structure complies with these foreign
ownership restrictions, subject to the interpretation and implementation of the GAPP Circular. Specifically, we operate our business
through Shanghai IT and have entered into a series of contractual arrangements with Shanghai IT and its equity owners. See the
contractual arrangements set forth in “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.”
As a result of these contractual arrangements, we are entitled to receive service fees for services provided to Shanghai IT for an
amount determined at our discretion, up to 90% of PRC entities’ profits. In addition, the equity owners of record for these entities
have pledged all their equity interests in the VIEs to us as collateral for all of their payments due to the wholly-owned foreign
enterprise, or WOFE, and to secure performance of all obligations of the VIEs and their shareholders under various agreements. In
addition, the agreements provide that any dividend distributions made by the VIEs, if any, are required to be deposited in an escrow
account over which we have exclusive control. Moreover, through the Call Option Agreements and Shareholder Voting Proxy
Agreements, each shareholder of the VIEs granted WOFE or any third parties designated by the WFOE an irrevocable power of
attorney to act on all matters pertaining to the VIEs. We believe that the terms of the Call Option Agreements are currently
exercisable and legally enforceable under the PRC laws and regulations. We also believe that the minimum amount of consideration
permitted by the applicable PRC law to exercise the options does not represent a financial barrier or disincentive for us to exercise our
rights under the Call Option Agreements. A simple majority vote of our board of directors is required to pass a resolution to exercise
our rights under the Call Option Agreements, for which consent of the shareholder of the VIEs is not required. As a result of the
totality of these arrangements, we have both the power to direct activities that most significantly impact the VIEs economic
performance and the obligation to absorb losses of or right to receive benefits from the VIEs that are significant to Shanghai IT. As a
result, we concluded we are the primary beneficiary of Shanghai IT and as such Shanghai IT is consolidated VIE of our company.
48
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM0qy@%4Š
3*
0C
200GaisY$NM0qy@%4
25-Mar-2015 17:47 EST
852134 TX 49
HTM
ESS
Page 1 of 1
The GAPP Circular reiterates and reinforces the long-standing prohibition of foreign ownership of Internet-related
publication businesses via direct, indirect or disguised methods. However, it is not clear whether the regulatory authority of
GAPPRFT applies to the regulation of ownership structures of online game companies based in China and online game operation in
China. In addition, the GAPP Circular does not specifically invalidate VIE agreements, and we are not aware of any online game
companies adopting similar contractual arrangements as ours having been penalized or ordered to terminate such arrangements since
the GAPP Circular first became effective. Therefore, we believe that our ability to direct the activities of Shanghai IT that most
significantly impact our economic performance is not affected by the GAPP Circular. Any changes in PRC laws and regulations that
affect our ability to control Shanghai IT might preclude us from consolidating Shanghai IT in the future. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Company and Our Industry—PRC laws and regulations restrict foreign
ownership of Internet content provision, Internet culture operation and Internet publishing licenses, and substantial uncertainties exist
with respect to the application and implementation of PRC laws and regulations.”
Revenue Recognition
Online Game Services
We earn revenue from provision of online game operation services to players on our game servers and third party platform
and overseas licensing of the online game to other operators. We recognize revenues when persuasive evidence of an arrangement
exists, services are delivered or performed, our price is fixed or determinable and collectability is reasonably assured.
Online game services to players on our game server
We generate revenue primarily from the sale of our prepaid game cards and prepaid online points for our online game
services products to distributors who in turn ultimately sell them to players. We also sell the points directly to players via certain
online payment platforms.
We utilize a virtual item/service consumption model to recognize revenue. Under this model, we generate online game
service revenues through the sale of in-game premium features. In this model, players can access our basic games free of charge and
then may purchase game points to acquire in-game premium features. The distribution of points to players is typically made through
sales of prepaid game cards and prepaid online points. Fees for prepaid game cards and prepaid online points are deferred when
initially received. This revenue is recognized over the estimated life of the premium features or as the premium features are
consumed.
For in-game premium features that are immediately consumed, revenue is recognized upon consumption. For premium
features with a stated expiration time, which ranges from one to 180 days, revenue is recognized ratably over the period starting from
when the feature is first used to the expiration time. For perpetual features with no predetermined expiration, revenue is recognized
ratably over the estimated average lives of the perpetual features, which are typically less than one year. When estimating the average
lives of the in-game perpetual features, we considers the average period that players typically play the game, other player behavior
patterns, and factors including the acceptance and popularity of expansion packs, promotional events launched, and market
conditions. Future usage patterns of players may differ from the historical usage patterns on which the virtual item / service
consumption revenue recognition model is based. We continually monitor the operational statistics and usage patterns.
Online game services over third party platform
Certain social games, TV games, certain web games and certain MMOGS, have adopted the virtual item / service
consumption model, and are launched on the third party game platforms and telecom carriers. Revenue from social and web games
operated through third party game platforms are recognized upon consumption of the in-game premium features with the amount net
of remittance to the third party game platforms as we do not set the pricing of the in-game currency of the third party game platforms.
Revenue from TV games operated through telecom carriers and certain MMOGS operated on the third party game
platforms are recognized upon consumption of the in-game premium features based on the gross amount paid, as we are the primary
obligor of the games operation. The remittance to the telecom carrier and third party game platforms is recognized as costs of revenue
when incurred.
49
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Licensing revenue
25-Mar-2015 17:47 EST
ˆ200GaisY$NM0un4%OŠ
3*
0C
200GaisY$NM0un4%O
852134 TX 50
HTM
ESS
Page 1 of 1
We license our proprietary online games to other game operators and receive license fees and royalty income in connection
with their operation of the games. License fee revenue is recognized over the license period upon the commercialization of the game
in the overseas market. Royalty income is recognized when earned, provided that collectability is reasonably assured.
Other Revenues
Other revenues include those generated from training and advertisement.
Training and advertisement
Training and advertisement revenue include revenues generated from providing technical training to college students on
mobile application programming and advertising services on our mobile advertising platform. These revenues are recognized when
delivery of the website advertisement has occurred or when services have been rendered and the collection of the related fees is
reasonably assured.
Income Taxes. We account for income taxes under the asset and liability method. Deferred taxes are determined based
upon the differences between the carrying value of assets and liabilities for financial reporting and tax purposes at currently enacted
statutory tax rates for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates
is recognized in income in the period of change.
A valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that such deferred tax
assets will not be realized. The total income tax provision includes current tax expenses under applicable tax regulations and the
change in the balance of deferred tax assets and liabilities. Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including our ability to generate taxable income within the period during which the temporary differences
reverse or our tax loss carry forwards expire, the outlook for the PRC economic environment, and the overall future industry outlook.
We consider these factors in reaching our conclusion on the recoverability of the deferred tax assets and determine the valuation
allowances necessary at each balance sheet date.
We recognize the impact of an uncertain income tax position at the largest amount that is more-likely-than-not to be
sustained upon audit by the relevant tax authority. Income tax related interest is classified as interest expenses and penalties as income
tax expense. As of December 31, 2012, 2013 and 2014, we did not have any material liability for uncertain tax positions. Our policy
is to recognize, if any, tax-related interest as interest expenses and penalties as income tax expenses. For the years ended
December 31, 2012, 2013 and 2014, we did not have any material interest and penalties associated with tax positions.
Intangible Assets. Our intangible assets consist primarily of acquired game licenses and acquired game development costs
from business combination.
Acquired game licenses are amortized on a straight-line basis over the shorter of the useful economic life of the relevant
online game or license period, which range from two to seven years. Amortization of upfront licensing fees commences upon the
monetization of the related online game. We recognize intangible assets acquired through business acquisitions as assets separate
from goodwill. Acquired in-process research and development costs are initially considered an indefinite-lived asset. Subsequently,
they are recorded as acquired game development cost upon completion of the research and development efforts and are amortized on
a straight-line basis over the useful economic life of the relevant online game. Amortization of acquired game development cost
commences upon the monetization of the related online game.
50
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM0yziZXŠ
3*
0C
200GaisY$NM0yziZX
852134 TX 51
HTM
ESS
Page 1 of 1
Goodwill. Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities
acquired as a result of an acquisition we make. Goodwill is not amortized, but tested for impairment annually, or more frequently if
events or changes in circumstances indicate that it might be impaired. In December of each year, we test impairment of goodwill at
the reporting unit level and recognize impairment in the event that the carrying value exceeds the fair value of each reporting unit.
Goodwill impairment assessment requires significant judgment, including assumptions used to determine the fair value of the
reporting units. We determine the fair value of our reporting units based on the present value of estimated future cash flows of the
reporting units. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the
reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. Any excess of the carrying value of the reporting
unit’s goodwill over the implied fair value of the reporting unit’s goodwill is recorded as an impairment loss. After completing our
annual impairment reviews during the fourth quarter of 2012, 2013 and 2014, the reporting unit that was subject to the annual
impairment testing had a fair value which exceeded its respective carrying value by a significant margin with no risk of failing the
first step of the impairment test. We concluded that goodwill was not impaired as of December 31, 2012, 2013 and 2014.
Share-Based Compensation. Under our Amended 2004 Stock Option Plan, we granted a total of 355,000 options to our
employees and directors in 2013. We did not grant any options under the Amended 2004 Stock Option Plan in 2012 or 2014.
We measure the cost of employee services received in exchange for stock-based compensation measured at the grant date
fair value of the award. For the awards that are modified, we determine the incremental cost as the excess of the fair value of the
modified award over the fair value of the original award immediately before its terms are modified, measured based on the share price
and other pertinent factors at that date. We recognize the compensation costs, net of the estimated forfeiture, on a straight-line basis
over the vesting period of the award, which generally ranges from one to four years. Forfeiture rates are estimated based on historical
forfeiture patterns and adjusted to reflect future changes in circumstances and facts, if any. If actual forfeitures differ from those
estimates, the estimates may be revised in subsequent periods. We use historical data to estimate pre-vesting option forfeitures and
record stock-based compensation expense only for those awards that are expected to vest.
Determining the fair value of stock options requires significant judgment. We measure the fair value of the stock options
using the Black-Scholes option-pricing model with assumptions made regarding expected term, volatility, risk-free interest rate, and
dividend yield. The expected term represents the period of time that the awards granted are expected to be outstanding. The expected
term is determined based on historical data on employee exercise and post-vesting employment termination behavior, or the
“simplified” method for stock option awards with the characteristics of “plain vanilla” options for 2010 and 2011. Expected
volatilities are based on historical volatilities of our ordinary shares. Risk-free interest rate is based on U.S. government bonds issued
with maturity terms similar to the expected term of the stock-based awards. While we paid a discretionary cash dividend in January
2009, we do not anticipate paying any recurring cash dividends in the foreseeable future.
In addition, on December 8, 2010, we granted 1,500,000 ordinary shares to Jun Zhu, which will only be vested if our
company achieves certain income targets and the shares are not entitled to receive dividends until they become vested. We considered
the grant of ordinary shares as an incentive to retain Mr. Jun Zhu’s services with our company. The awarded non-vested shares would
be valid for five years from December 8, 2010. The fair value of the granted non-vested shares is US$6.48 per share, the market price
on the date of grant. We record share-based compensation expenses for these performance-based awards based upon our estimate of
the probable outcome at the end of the performance period (i.e., the estimated performance against the performance targets). We
periodically adjust the cumulative share-based compensation recorded when the probable outcome for these performance-based
awards is updated based upon changes in actual and forecasted operating results. Our actual performance against the performance
targets could differ materially from our estimates.
In May 2011, the Board of Directors granted 30,000 ordinary shares to each of our four non-executive directors, of which
10,000 ordinary shares vest for each director on July 1 of each year from 2011 to 2013 so long as such director continues his service
as of such date. An aggregate of 40,000 ordinary shares vested in each of July 2011, July 2012 and July 2013, respectively. The fair
value of the shares granted was US$6.03 per share, being the market price on the date of the grant.
In February 2006, Red 5 adopted a Stock Incentive Plan, or Red 5 Stock Incentive Plan, under which Red 5 may grant to
its employees, director and consultants stock options to purchase common stocks or restricted stocks of Red 5. Red 5 granted options
to purchase an aggregate of 28,963,258 shares of common stock under the Red 5 Stock Incentive Plan from April 6, 2010 to
December 31, 2013. In September 2012, Red 5 granted an aggregate of 6,122,435 restricted common stocks to two directors of Red 5
including Mr. Zhu for their services to Red 5. We measure the share-based compensation based on the fair value of the award as of
the grant date. We measure the fair value of the stock options using the Black-Scholes option-pricing model with assumptions made
regarding the fair value of the common stock, expected term, volatility, risk-free interest rate, and dividend yield.
51
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
11.6.14
NCR venkp1dc
HKG
26-Mar-2015 00:55 EST
ˆ200GaisY$NWkmTV%sŠ
4*
0C
200GaisY$NWkmTV%s
852134 TX 52
HTM
ESS
Page 1 of 1
Share-based compensation expenses of RMB37.4 million, RMB29.2 million and RMB3.7 million (US$0.6 million) were
recognized for the years ended December 31, 2012, 2013 and 2014, respectively, for options and warrants granted to our company’s
and its subsidiaries’ employees and directors, including incremental compensation cost due to the modification of option exercise
price in April 2013.
Impairment Loss of Equity Investment. We assess our equity investments for impairment on a periodic basis by
considering factors including, but not limited to, current economic and market conditions, the operating performance of the investees
including current earnings trends, the technological feasibility of the investee’s products and technologies, the general market
conditions in the investee’s industry or geographic area, factors related to the investee’s ability to remain in business, such as the
investee’s liquidity, debt ratios, and cash burn rate and other company-specific information including recent financing rounds. If it has
been determined that the carrying amount of equity investment are higher than related fair value and that this decline is other-than-
temporary, the carrying value of the equity investment is adjusted downward to reflect these declines in value. Impairment loss
relating to investment in an equity investee of RMB3.2 million, RMB41.7 million and nil was recognized in 2012, 2013 and 2014,
respectively.
Impairment on Equipment, Intangible Assets, Other Assets and Allowance on Long-term Receivable. We review long-
lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset or asset group may not be recoverable. We assess the recoverability of long-lived assets and intangible assets (other than
goodwill) by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. We
recognize impairment of long-lived assets and intangible assets in the event that the net book value of such assets exceeds the
estimated future undiscounted cash flow attributable to such assets. We use estimates and judgment in our impairment tests, and if
different estimates or judgments had been utilized, the timing or the amount of the impairment charges could be different. Impairment
charges relating to equipment amounting to nil, RMB1.9 million and nil were recognized in 2012, 2013 and 2014, respectively.
Impairment charges relating to intangible assets and other assets amounting to RMB0.6 million, RMB3.8 million and RMB3.6
million (US$0.6 million) were recognized in 2012, 2013 and 2014, respectively. Impairment charges relating to other long-lived
assets amounting to nil, RMB11.8 million and nil were recognized in 2012, 2013 and 2014, respectively. We determine the
allowances on long-term receivables when facts and circumstances indicate that the long-term receivable is unlikely to be collected.
When the collectability of the long-term receivable became likely subsequently, we reverse the allowance. We provided allowance on
long-term receivables amounting to nil and RMB17.9 million in 2012 and 2013, respectively, while in 2014 we reversed the
allowance on long-term receivables amounting to RMB17.9 million (US$2.9 million).
Refund of WoW Game Points. As a result of non-renewal of WoW license on June 7, 2009, we announced a refund plan in
connection with unactivated WoW game point cards. According to the plan, unactivated WoW game point card holders are eligible to
receive a cash refund from us. We recorded a liability in connection with both unactivated points cards and activated but unconsumed
point cards of approximately RMB200.4 million, of which RMB4.0 million was refunded in 2009. Upon the loss of the WoW license,
we concluded that the nature of the obligation substantively changed from deferred revenue, for which we had the ability to satisfy the
underlying performance obligation, to an obligation to refund players for their unconsumed points. Thus, we have accounted for this
refund liability by applying the relevant derecognition guidance when determining the proper accounting treatment. In accordance
with this guidance, the refund liability associated with these WoW game points, to the extent not refunded, will be recorded as other
operating income after we are legally released from the obligation to refund amounts under the applicable laws. As we announced the
refund plan on September 7, 2009, the statute of limitations of the creditors (in this case the game players with claims for refund of
unactivated WoW game point cards) to assert their claims for refund is two years from such date under applicable laws and thus our
legal liability relating to the unactivated WoW game point cards was extinguished on September 7, 2011 and the associated liability
amounting to RMB26.0 million was recognized as other operating income for the year ended December 31, 2011. With respect to the
remaining refund liability, based on current PRC laws, to the extent not refunded, we, in consultation with legal counsel, have
determined that we will be legally released from this liability in 2029, which represents 20 years from the date of discontinuation of
WoW in 2009. However, if management were to publicly announce a refund policy, we would be legally released from any remaining
liability for these activated, but unconsumed points, sooner than 20 years. To date, we have determined not to publicly announce any
refund policy with respect to this remaining liability, and no refunds have been claimed. The remaining refund liability relating to the
activated, but unconsumed WoW game points was RMB170.0 million (US$27.4 million) as of December 31, 2014.
52
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
11.6.14
NCR venkp1dc
HKG
26-Mar-2015 00:56 EST
ˆ200GaisY$NWlNXzZ#Š
4*
0C
200GaisY$NWlNXzZ#
852134 TX 53
HTM
ESS
Page 1 of 1
Redeemable Non-controlling Interests Redeemable non-controlling interests are equity interests of our consolidated
subsidiary not attribute to us that have redemption features that are not solely within our control. These interests are classified as
temporary equity because their redemption is considered probable. These interests are measured at the greater of estimated
redemption value at the end of each reporting period or the initial carrying amount of the redeemable non-controlling interests
adjusted for cumulative earning allocations.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board, or FASB and International Accounting Standards Board, or
IASB, issued their converged standard on revenue recognition. The objective of the revenue standard Accounting Standards Update
2014-09, or ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” is to provide a single, comprehensive revenue
recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital
markets. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of
when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to
customers at an amount that the entity expects to be entitled to in exchange for those goods or services. For public companies, the
revenue standard is effective for the first interim period within annual reporting periods beginning after December 15, 2016 and early
adoption is not permitted. We are in the process of evaluating the impact of the standard on our consolidated financial statements.
On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how reporting
entities must disclose going-concern uncertainties in their financial statements. The new standard requires management to perform
interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the
entity’s financial statements (or within one year after the date on which the financial statements are available to be issued, when
applicable). Further, an entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a
going concern.” The ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early
adoption is permitted. The ASU shall be applied at the effective date, and we are in the process of evaluating the impact of the
standard on our consolidated financial statements.
In November 2014, the FASB issued a new pronouncement which provides guidance on determining whether the host
contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity. The new standard requires
management to determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid
financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract.
The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption, including adoption in an interim period, is permitted. The effects of initially adopting the amendments in this Update should
be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning
of the fiscal year for which the amendments are effective. We are assessing the effect of adoption of this guidance on our consolidated
financial statements.
53
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
11.6.14
NCR venkp1dc
HKG
ˆ200GaisY$NWl$KD%yŠ
5*
0C
200GaisY$NWl$KD%y
26-Mar-2015 00:56 EST
852134 TX 54
HTM
ESS
Page 1 of 1
Results of Operations
The following table sets forth a summary of our consolidated statements of operations for the periods indicated.
Consolidated Statement of Operation Data
Revenues:
Online game services
Other revenues
Sales taxes
Net revenues
Cost of revenue
Gross profit (loss)
Operating expenses:
Product development
Sales and marketing
General and administrative
Impairment on equipment, intangible assets, other assets and
allowance (reversal of allowance) of long-term receivable
Loss on termination of R&D VIE arrangements
Gain on disposal of subsidiaries
Total operating expenses
Other operating income
Loss from operations
Impairment on available-for-sale investment
Investment income from cost method investment
Interest income, net
Other income (expenses), net
Income tax expenses
Loss before gain on investment disposal, impairment loss on
investments and share of loss in equity investments
Gain on disposal of equity investee and available-for-sale
investment
Impairment loss on investments
Share of loss in equity investments
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to redeemable noncontrolling interest
Net loss attributable to The9 Limited
Accretion on redeemable noncontrolling interest
Net loss attributable to holders of ordinary shares
For the Year Ended December 31,
2012
RMB
2013
RMB
2014
RMB
US$(1)
157,390,602
6,190,562
(9,147,349)
154,433,815
(69,415,631)
85,018,184
95,131,347 55,417,700 8,931,712
9,421,865 1,518,529
11,495,630
(90,687)
(562,674)
(1,850,908)
104,776,069 64,276,891 10,359,554
(107,803,360) (85,782,569) (13,825,640)
(3,027,291) (21,505,678) (3,466,086)
(301,471,091)
(187,011,621)
(170,382,896)
(213,243,567) (156,253,036) (25,183,418)
(116,672,411) (51,758,100) (8,341,891)
(161,958,423) (111,157,250) (17,915,298)
(569,139)
(18,093,999)
—
(677,528,746)
120,000
(592,390,562)
—
—
21,785,899
4,643,937
—
—
120,000
(35,466,122) 14,371,918 2,316,333
—
—
— 165,392,382 26,656,413
(527,340,523) (139,404,086) (22,467,861)
12,088
(530,247,814) (160,834,764) (25,921,859)
—
184,114
550,327
(339,341)
—
—
1,142,353
3,414,559
(2,105,478)
—
(6,268,900)
—
8,376,355
9,301,565
—
75,000
(565,960,726)
(518,838,794)
(158,383,330)
(25,526,759)
15,725,792
(3,243,744)
(6,347,447)
(559,826,125)
(45,824,033)
—
(514,002,092)
—
(514,002,092)
—
(41,701,985)
(2,375,826)
(562,916,605)
(36,655,033)
—
(526,261,572)
—
(526,261,572)
33,153,452
—
(3,712,530)
(128,942,408)
(21,443,321)
(20,876,617)
(86,622,470)
21,076,744
(107,699,214)
5,343,366
—
(598,351)
(20,781,744)
(3,456,036)
(3,364,700)
(13,961,008)
3,396,955
(17,357,963)
(1) Translation from RMB amounts into U.S. dollars was made at a rate of RMB6.2046 to US$1.00 for the convenience of the
reader only. See “Item 3. Key Information—A. Selected Financial Information—Exchange Rate Information.”
We incurred a net loss of RMB559.8 million, RMB562.9 million and RMB128.9 million (US$20.8 million) in the years
ended December 31, 2012, 2013 and 2014, respectively. In addition, our cash and cash equivalents decreased from RMB554.3 million
as of December 31, 2012 to RMB157.0 million as of December 31, 2013, primarily due to the cash outflows from operating activities
associated with the product development and sales and marketing efforts for our new games. Our cash and cash equivalents increased
to RMB181.5 million (US$29.2 million) as of December 31, 2014, primarily due to the net proceeds of RMB151.0 million (US$24.3
million) from the disposal of Huopu Cloud and the proceeds of RMB118.3 million from the investment made by Shanghai Oriental
Pearl Culture Development Co., Ltd. in Red 5, partially offset by the continued net cash outflows from operating activities associated
with the product development and sales and marketing efforts. We recorded negative operating cash flow of RMB489.2 million,
RMB357.6 million and RMB269.1 million (US$43.4 million) in the years ended December 31, 2012, 2013 and 2014, respectively.
54
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM13$i%}Š
5*
0C
200GaisY$NM13$i%}
852134 TX 55
HTM
ESS
Page 1 of 1
As of December 31, 2012, 2013 and 2014, we recorded net current assets of RMB346.9 million, net current liabilities of
RMB112.0 million, and net current liabilities of RMB40.7 million (US$6.6 million), respectively. Our net current liabilities positions
as of December 31, 2013 and 2014 were primarily due to the continuous cash outflow in connection with our product development
and sales and marketing activities. The decrease of the net current liabilities value as of December 31, 2014 as compared to
December 31, 2013 was primarily due to the increase in cash and cash equivalents relating to our disposal of Huopu Cloud and the
investment made by Shanghai Oriental Pearl Culture Development Co., Ltd. in Red 5. We cannot assure you that our cash and cash
equivalents and net current liabilities position will improve in the future. We may continue to incur losses, negative cash flows from
operating activities and net current liabilities in the future, which may have a material and adverse effect on our business, prospects,
liquidity, financial condition and results of operations. See “Item 3. Key Information—D. Risk Factors—We may continue to incur
losses, negative cash flows from operating activities and net current liabilities in the future and may not return to profitability.”
Year 2014 Compared to Year 2013
Revenues. Our revenues decreased by 39.2%, from RMB106.6 million in 2013 to RMB64.8 million (US$10.5 million) in
2014, primarily due to a decrease in revenue from our online game services.
Online Game Services. Our revenues from our online game services decreased by 41.7%, from RMB95.1 million in 2013
to RMB55.4 million (US$8.9 million) in 2014. The decrease was primarily due to a decrease in revenues from PC online games
which decreased from RMB67.1 million in 2013 to RMB33.5 million (US$5.4 million) in 2014. Such decrease was primarily due to
the net effect of (i) the increase of our average quarterly revenue per paying user from RMB228 in 2013 to RMB254 (US$40.9) in
2014, and (ii) the decrease in average quarterly paying users which was in line with the decrease in average quarterly active users
from 2,095,890 in 2013 to 983,805 in 2014.
The number of quarterly active users refers to the number of users who log into our games at least once during a quarter.
The number of average quarterly active users is the average of quarterly active users for each of the four quarters during a year.
Quarterly paying user refers to the number of users who purchase virtual currency at least once for our online games during a quarter.
Average quarterly paying user is the average of quarterly paying users for each of the four quarters during a year. Quarterly revenue
per paying user refers to our revenues from online games during a given quarter divided by the number of the quarterly paying users.
Average quarterly revenue per paying user is the average of quarterly revenues per paying users for each of the four quarters during a
year.
Our revenues from TV games decreased from RMB21.6 million in 2013 to RMB19.2 million (US$3.1 million) in 2014.
This decrease was primarily due to a decrease in the number of average quarterly paying users from 211,880 in 2013 to 132,116 in
2014, partially offset by an increase in our average quarterly revenue per paying user from RMB25 in 2013 to RMB37 (US$6.0).
Unlike PC online games, our TV games are operated through telecommunication carriers and we do not maintain information relating
to active users pursuant to our cooperation agreements with the telecom carriers.
The average quarterly revenue per paying user of our PC online games is significantly higher than that of our TV games
because the PC online game players are mostly teenagers with higher spending power while the TV game players are mostly children
and elderly people with lower spending power.
Other Revenues. Revenues generated from other products and services decreased by 18.0% from RMB11.5 million in 2013
to RMB9.4 million (US$1.5 million) in 2014. The decrease is mainly due to a decrease in revenue from our mobile advertising
platform Juzi caused by intense market competition.
Cost of Revenue. Cost of revenue decreased by 20.4% from RMB107.8 million in 2013 to RMB85.8 million (US$13.8
million) in 2014. The decrease was primarily driven by a decrease of the rental cost in connection with the Internet data center, which
is in line with revenue decrease, and a decrease in employee salary and welfares as we continued to reduce the headcounts in our
customer service department in 2014 as part of our cost saving efforts. In addition, while we recorded impairment cost of royalty fee
for Planetside 2 due to the lower-than-expected revenue generated in 2013.
Operating Expenses. Operating expenses decreased by 73.6% from RMB527.3 million in 2013 to RMB139.4 million
(US$22.5 million) in 2014.
Product Development Expenses. Product development expenses decreased by 26.7% from RMB213.2 million in 2013 to
RMB156.3 million (US$25.2 million) in 2014. The decrease was primarily due to the decrease of research and development staff cost
and development outsourcing expenses due to less volume of outsourced development works.
55
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM16icZ"Š
5*
0C
200GaisY$NM16icZ"
852134 TX 56
HTM
ESS
Page 1 of 1
Sales and Marketing Expenses. Sales and marketing expenses decreased by 55.6% from RMB116.7 million in 2013 to
RMB51.8 million (US$8.3 million) in 2014. The decrease in sales and marketing expenses primarily reflected less expenses incurred
for launching Firefall in North America and Europe in 2014 compared to those incurred for launching Planetside 2 in 2013.
General and Administrative Expenses. General and administrative expenses decreased by 31.4% from RMB162.0 million
in 2013 to RMB111.2 million (US$17.9 million) in 2014, primarily due to a decrease in share based compensation and professional
services fees.
Impairment on Equipment, Intangible Assets, Other Assets and Allowance (Reversal of Allowance) of Long-term
Receivable. Impairment charges relate to the impairment on certain equipment, intangible assets and other assets and amounted to
RMB17.5 million and RMB3.6 million (US$0.6 million) in 2013 and 2014, respectively. In addition, we recorded allowance on long-
term receivable of RMB17.9 million in 2013. We reversed the provision of RMB17.9 million (US$2.9 million) for the year ended
December 31, 2014. The allowance on long-term receivable in 2013 was primarily due to certain prepayments made to an equipment
supplier. In 2014, we reversed all such allowance as we reevaluated the collectability of the receivables and determined the payments
can be collected. We collected the amount in full in 2015.
Gain on Disposal of Subsidiaries. We recorded a gain on disposal of subsidiaries disposal of RMB165.4 million (US$26.7
million) in 2014 in connection with disposal of Huopu Cloud and Kai Yue. We did not record any gain on disposal of subsidiaries in
2013.
Other Operating Income. We recorded rental income of RMB120,000 and RMB75,000 (US$12,088) in 2013 and 2014,
respectively, as other operating income.
Impairment on Available-for-Sale Investment. In 2014, we did not incur any impairment loss on available-for-sale
investment. We had RMB6.3 million of impairment loss on available-for-sale investment in 2013.
Investment Income from Cost Method Investment. Our investment income from cost method investment was RMB1.1
million (US$184,114) in 2014. We did not have investment income from cost method investment in 2013.
Interest Income, Net. Net interest income decreased by 59.2% from RMB8.4 million in 2013 to RMB3.4 million (US$0.6
million) in 2014, mainly due to the decrease in cash balance during the first half year of 2014.
Other Income (Expenses), Net. Other expenses were RMB2.1 million (US$0.3 million) in 2014, which mainly reflected
exchange loss, partially offset by the government subsidy we received. Other income was RMB9.3 million in 2013, which mainly
reflected a refund of game license fee, exchange gains and a government subsidy.
Gain on Disposal of Equity Investee and Available-for-Sale Investment. We recorded a gain on disposal of equity
investee and available-for-sale investment of RMB33.2 million (US$5.3 million) in 2014 in connection with the disposal of Beijing
Linkage, Tandem Fund II, L.P., or Tandem Fund, and Youjia Group Limited, or Youjia. We did not record any gain on investment
disposal in 2013.
Impairment Loss on Investments. In 2014, we did not incur any impairment loss on investment. We had RMB41.7 million
of impairment loss on investment in 2013 in connection with our investments in several early-stage mobile game and application
development companies in the United States and China.
Net Loss Attributable to Holders of Ordinary Shares. As a result of the cumulative effect of the above factors, net loss
attributable to our holders of ordinary shares was RMB107.7 million (US$17.4 million) in 2014, compared to the net loss of
RMB526.3 million in 2013.
Year 2013 Compared to Year 2012
Revenues. Our revenues decreased by 34.8%, from RMB163.6 million in 2012 to RMB106.6 million in 2013, primarily
due to a decrease in revenue from our online game services, partially offset by an increase in revenue from our smart phone
advertising platform business.
56
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1BXlZWŠ
4*
0C
200GaisY$NM1BXlZW
852134 TX 57
HTM
ESS
Page 1 of 1
Online Game Services. Our revenues from our online game services decreased by 39.6%, from RMB157.4 million in 2012
to RMB95.1 million in 2013. The decrease was primarily due to a decrease in revenues from PC online games which decreased from
RMB131.0 million in 2012 to RMB67.1 million in 2013. The decrease was also due to a combination of decreases in (i) our average
quarterly revenue per paying user, from RMB299 in 2012 to RMB228 in 2013 and (ii) our number of average quarterly paying users,
from 102,293 in 2012 to 90,955 in 2013. The decrease in average quarterly paying users was in line with the decrease in average
quarterly active users from 2,282,863 in 2012 to 2,095,890 in 2013. We expect the revenue from the mature games to continue to
decrease, and if we are unable to introduce more popular new games on a timely manner, this decreasing trend will have a material
and adverse effect on our business, prospects, liquidity, financial condition and results of operations.
The number of quarterly active users refers to the number of users who log into our games at least once during a quarter.
The number of average quarterly active users is the average of quarterly active users for each of the four quarters during a year.
Quarterly paying user refers to the number of users who purchase virtual currency at least once for our online games during a quarter.
Average quarterly paying user is the average of quarterly paying users for each of the four quarters during a year. Quarterly revenue
per paying user refers to our revenues from online games during a given quarter divided by the number of the quarterly paying users.
Average quarterly revenue per paying user is the average of quarterly revenues per paying users for each of the four quarters during a
year.
Our revenues from TV games increased from RMB18.5 million in 2012 to RMB21.6 million in 2013. This increase was
primarily due to an increase in the number of average quarterly paying users from 157,968 in 2012 to 211,880 in 2013, due to
continuous expansion in our TV game platform and more games launched in 2013, partially offset by a decrease in our average
quarterly revenue per paying user from RMB30 in 2012 to RMB25 in 2013. Unlike PC online games, our TV games are operated
through telecommunication carriers and we do not maintain information relating to active users pursuant to our cooperation
agreements with the telecom carriers.
The average quarterly revenue per paying user of our PC online games is significantly higher than that of our TV games
because the PC online game players are mostly teenagers with higher spending power while the TV game players are mostly children
and elderly people with lower spending power.
Other Revenues. Revenues generated from other products and services increased by 85.7% from RMB6.2 million in 2012
to RMB11.5 million in 2013. The increase is mainly due to the increase in our revenue from our mobile advertising platform, Juzi,
and our training services.
Cost of Revenue. Cost of revenue increased by 55.3% from RMB69.4 million in 2012 to RMB107.8 million in 2013. The
increase was primarily driven by an increase in the impairment cost of royalty fee for Planetside 2, which we prepaid in previous
years and recorded an impairment cost in 2013 due to the lower-than-expected revenue generated in the year, an increase in Internet
data center, rental relating to Firefall’s limited beta testing in the U.S. and Europe, and an increase in the amortization cost of license
fees relating to Firefall’s beta testing, partially offset by a decrease in employee salary and welfares as we reduced the headcounts in
our customer service department in 2013.
Operating Expenses. Operating expenses decreased by 22.2% from RMB677.5 million in 2012 to RMB527.3 million in
2013. The decrease was primarily attributable to a decrease in product development expenses and a decreased in sales and marketing
expenses.
Product Development Expenses. Product development expenses decreased by 29.3% from RMB301.5 million in 2012 to
RMB213.2 million in 2013. The decrease was primarily due to our disposal of certain research and development entities due to lower-
than-expected performances in the third quarter of 2012, which impacted the product development expenses for the whole year of
2013 and also reduced our product development headcount, as well as a decrease in game development outsourcing expenses due to
less volume of outsourced development works.
Sales and Marketing Expenses. Sales and marketing expenses decreased by 37.6% from RMB187.0 million in 2012 to
RMB116.7 million in 2013. The decrease in sales and marketing expenses was primarily attributable to the decrease in the marketing
expenses of ShenXianZhuan and various endorsement fees.
57
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1FyT%rŠ
5*
0C
200GaisY$NM1FyT%r
852134 TX 58
HTM
ESS
Page 1 of 1
General and Administrative Expenses. General and administrative expenses decreased by 4.9% from RMB170.4 million in
2012 to RMB162.0 million in 2013, primarily due to a decrease in share based compensation, employee salary and meeting and
travelling expenses in line with our revenue decrease, partially offset by an increase in the audit and legal services fees.
Impairment on Equipment, Intangible Assets, Other Assets and Allowance of Long-term Receivable. Impairment charges
relate to the impairment on certain equipment, intangible assets and other assets and amounted to RMB0.6 million and RMB17.5
million for 2012 and 2013, respectively. In addition, we recorded allowance on long-term receivable of nil and RMB17.9 million for
the year ended December 31, 2012 and 2013, respectively. The allowance on long-term receivable in 2013 was primarily due to
certain prepayments made to an equipment supplier.
Loss on Termination of R&D VIE Arrangements. We recorded a loss on the restructuring of investments in and termination
of certain contractual arrangements with Fire Rain and Wanyouyl, two entities engaging in research and development activities, of
RMB18.1 million in 2012. As a result of the restructuring, we deconsolidated these entities in 2012. See “Item 7. Major Shareholders
and Related Party Transactions—B. Related Party Transactions.” We did not record any loss in this regard in 2013.
Other Operating Income. We recorded rental income of RMB120,000 and RMB120,000 in 2012 and 2013, respectively,
as other operating income.
Impairment on Available-for-Sale Investment. We recorded an impairment on available-for-sale investment of RMB6.3
million, mainly related to the full impairment provision made on our investment in Youjia Group Limited, a mobile social application
development company based in China, that we invested in November 2011.
Interest Income. Net interest income decreased by 61.6% from RMB21.8 million in 2012 to RMB8.4 million in 2013,
mainly due to the decrease in our cash balance.
Other Income (Expenses), Net. Other income was RMB9.3 million in 2013, which mainly reflected a refund of game
license fee, an exchange gain and a government subsidy. Other income was RMB4.6 million in 2012, which mainly reflected an
exchange gain.
Gain on Disposal of Equity Investee and Available-for-Sale Investment. We did not record any gain on investment
disposal in 2013. We recorded a gain on investment disposal of RMB15.7 million in 2012 in connection with the disposal of our
investments in OpenFeint Inc, or OpenFeint, in 2011.
Impairment Loss on Investment. Impairment loss on investment amounted to RMB3.2 million in 2012. In 2013,
impairment loss on investment amounted to RMB41.7 million in connection with our investments in several early-stage mobile game
and application development companies in the U.S. and China, including Beijing Linkage and CrowdStar Inc., or Crowdstar. We
recorded an impairment loss of RMB21.0 million in connection with our investment in Crowdstar because CrowdStar issued equity to
certain unrelated third party at a price lower than our original investment price. See Note 8 to the consolidated financial statements
included in this annual report on Form 20-F for more information regarding the impairment loss of Crowdstar.
Net Loss Attributable to Holders of Ordinary Shares. As a result of the cumulative effect of the above factors, net loss
attributable to our holders of ordinary shares was RMB526.3 million in 2013, compared to the net loss of RMB514.0 million in 2012.
B.
Liquidity and Capital Resources
We are a holding company and conduct our operations primarily through our subsidiaries and affiliated PRC entities in
China. As a result, our cash requirements and our ability to pay dividends principally depend upon dividends and other distributions
from our subsidiaries, which in turn are derived principally from earnings generated by our affiliated PRC entities. Specifically, The9
Computer (one of our subsidiaries in China) obtains funds from the PRC entities in the form of payments under the exclusive
technical service agreements, pursuant to which The9 Computer is entitled to determine the amount of payment.
58
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM1LYR%~Š
4*
0C
200GaisY$NM1LYR%~
25-Mar-2015 17:48 EST
852134 TX 59
HTM
ESS
Page 1 of 1
We acknowledge that the PRC government imposes controls on the convertibility of the RMB into foreign currencies, and
in certain cases, the remittance of currency out of China. However, under existing PRC foreign exchange regulations, payments of
current account items, including profit distributions and trade and service-related foreign exchange transactions, can be made in
foreign currencies without prior approval from SAFE, by complying with certain procedural requirements. Therefore, we are able to
pay dividends in foreign currencies without prior approval from SAFE. Approval from or registration with appropriate government
authorities is required where RMB 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.
Furthermore, if our subsidiaries or any newly formed subsidiaries incur debt on their own behalf, the agreements governing
their debt may restrict their ability to pay dividends to us. See “Item 3. Key Information —D. Risk Factors—Risks Related to Doing
Business in China—Restrictions on currency exchange in China limit our ability to utilize our revenues effectively, make dividend
payments and meet our foreign currency denominated obligations.”
Current PRC regulations restrict our affiliated entities and subsidiaries from paying dividends in the following two
principal aspects: (i) our affiliated entities and subsidiaries in China are only permitted to pay dividends out of their respective
accumulated profits, if any, determined in accordance with PRC accounting standards and regulations; and (ii) these entities are
required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain capital reserves until the
cumulative total of the allocated reserves reaches 50% of registered capital, and a portion of their respective after-tax profits to their
staff welfare and bonus reserve funds as determined by their respective boards of directors. Although the statutory reserves can be
used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective
companies, companies may not distribute the reserve funds as cash dividends except upon a liquidation of these subsidiaries. In
addition, dividend payments from our PRC subsidiaries could be delayed as we may only distribute such dividends upon completion
of annual statutory audits of the subsidiaries. As of December 31, 2014, such restricted portion was RMB23.7 million (US$3.8
million). We have not directed our PRC subsidiaries or affiliated entities to distribute any dividends to-date.
The aggregate net assets as of December 31, 2013 and 2014, as reflected on our statutory accounts, including registered
capital and statutory reserves, was approximately RMB67.0 million and RMB75.6 million (US$12.2 million) higher than the amount
determined under U.S. GAAP, respectively.
Cash Flows and Working Capital
We financed our operations primarily through our available cash in hand as well as cash generated from our operating,
financing and investing activities. As of December 31, 2012, 2013 and 2014, we had RMB554.3 million, RMB157.0 million and
RMB181.5 million (US$29.2 million), respectively, in cash and cash equivalents. The increase in the cash and cash equivalents from
2013 to 2014 was primarily due to the net effect of cash consideration received from the disposal of Huopu Cloud and the proceeds
from the investment made by Shanghai Oriental Pearl Culture Development Co., Ltd. in Red 5 and the net cash outflow from
operating activities for product development and sales and marketing.
Our directors believe that we have sufficient financial resources as of December 31, 2014 to meet our operating cash flow
requirements and to enable our company to meet its obligations and to pay off liabilities as and when they fall due for the coming
twelve months. We have launched Firefall in North America and Europe in 2014 and are currently preparing for the launch of Firefall
in China in the second half of 2015. We also plan to launch several mobile games in 2015. In addition, we have the ability to manage
our working capital by obtaining external debt financing and controlling the level of discretionary spending on product development
and sales and marketing. We did not have any outstanding balance of bank or other borrowings as of December 31, 2012, 2013 and
2014. In February 2015, Shanghai IT, our affiliated PRC entity, obtained a commitment letter from China Merchants Bank for a credit
facility of RMB200 million with a term of one year which may be used for our proprietary game Firefall. As of the date of this annual
report, we have not made any drawn-down under this credit facility. We may consider drawing down such facility if we require
additional working capital in the future.
59
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1MghZGŠ
4*
0C
200GaisY$NM1MghZG
852134 TX 60
HTM
ESS
Page 1 of 1
The following table sets forth the summary of our cash flows for the periods indicated:
For the Year Ended December 31,
2012
RMB
2013
RMB
2014
RMB
US$
(in thousands)
Net cash used in operating activities
Net cash (used in)/provided by investing activities
Net cash (used in)/provided by financing activities
Effect of foreign exchange rate changes on cash
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(489,190)
(22,173)
(7,084)
1,000
(517,447)
1,071,726
554,279
(357,570) (269,098) (43,371)
(2,932) 197,752 31,872
(38,689) 100,222 16,153
(706)
(397,292) 24,495 3,948
554,279 156,987 25,302
156,987 181,482 29,250
(4,381)
1,899
Operating Activities
Net cash used in operating activities was RMB269.1 million (US$43.4 million) in 2014, compared to RMB357.6 million in
2013 and RMB489.2 million in 2012. The decrease of net cash used in operating activities from 2013 to 2014 and from 2012 to 2013
were mainly due to a decrease in cash outflow associated with product development and sales and marketing expenses. In particular,
the net cash used in operating activities in 2014 primarily reflected a net loss of RMB128.9 million (US$20.8 million) in 2014 and the
gain on disposal of subsidiary of RMB165.4 million (US$26.7 million), partially offset by the adjustments for amortization of
intangible assets of RMB28.9 million (US$4.7 million) and depreciation and amortization of property, equipment and software of
RMB15.7 million (US$2.5 million). The net cash used in 2013 primarily reflected a net loss of RMB562.9 million, partially offset by
an adjustment for impairment loss on other long-lived assets of RMB29.7 million, an adjustment for impairment loss on investments
of RMB41.7 million, and an adjustment for a stock-based compensation expenses of RMB29.2 million. The net cash used in
operating activities in 2012 primarily reflected a net loss of RMB559.8 million in 2012, partially offset by the adjustments for a stock-
based compensation expenses of RMB37.4 million.
Investing Activities
Net cash provided by investing activities was RMB197.8 million (US$31.9 million) in 2014. Net cash used in investing
activities was RMB2.9 million in 2013 and RMB22.2 million in 2012. The net cash received in investing activities in 2014 primarily
included, among other things, (i) proceeds from disposal of subsidiaries of RMB163.7 million (US$26.4 million) relating to Huopu
Cloud and Kai Yue, (ii) proceeds from disposal of equity investees of RMB25.0 million (US$4.0 million) and proceeds from disposal
of available-for-sale investment of RMB6.3 million (US$1.0 million), relating to Beijing Linkage, Tandem Fund and Youjia,
(iii) proceeds from refund of upfront license fees and upfront property, equipment and software purchase payment of RMB4.0 million
(US$0.6 million), partially offset by the cash used for capital expenditures including purchase of property, equipment and software of
RMB4.3 million (US$0.7 million).
The net cash used in investing activities in 2013 primarily included, among other things, purchase of property, equipment
and software of RMB7.1 million, and cash paid to acquire equity investees and available-for-sale investments of RMB9.2 million
relating to ZTE9 and Tandem Fund, partially offset by proceeds from refund of our investment in G10 Entertainment Corporation, a
Korean online game developer and operator, of RMB7.3 million and our investments relating to the sale of OpenFeint of RMB5.5
million.
The net cash used in investing activities in 2012 primarily included, among other things, (i) cash used for capital
expenditures including purchase of property, equipment and software of RMB27.6 million, purchase of intangible assets of RMB7.5
million and prepayment and deposits paid for property, equipment and software of RMB4.3 million, (ii) cash paid in equity
investments of RMB13.6 million, and (iii) proceeds from refund of investment of RMB29.1 million and proceeds from disposal of
cost method investee of RMB10.3 million in 2012.
60
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Financing Activities
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1Npw%fŠ
4*
0C
200GaisY$NM1Npw%f
852134 TX 61
HTM
ESS
Page 1 of 1
Net cash provided by financing activities in 2014 was RMB100.2 million (US$16.2 million), primarily attributable to
issuance of redeemable noncontrolling interest relating to the investment made by Shanghai Oriental Pearl Culture Development Co.,
Ltd. in Red 5 of RMB118.3 million (US$19.1 million). Net cash used in financing activities in 2013 was RMB38.7 million, primarily
attributable to cash used to repurchase our ADSs in the amount of RMB29.0 million, partially offset by cash generated from stock
option exercises in the amount of RMB4.3 million. Net cash used in financing activities in 2012 was RMB7.1 million, primarily
attributable to payment for accounts payable related to the purchase of intangible assets.
As a result of non-renewal of WoW license on June 7, 2009, we announced a refund plan in connection with unactivated
WoW game point cards. According to the plan, unactivated WoW game point card holders are eligible to receive a cash refund from
us. We recorded a liability in connection with both unactivated points cards and activated but unconsumed point cards of
approximately RMB200.4 million, of which RMB4.0 million was refunded in 2009. Upon the loss of the WoW license, we concluded
that the nature of the obligation substantively changed from deferred revenue, for which we had the ability to satisfy the underlying
performance obligation, to an obligation to refund players for their unconsumed points. Thus, we have accounted for this refund
liability by applying the relevant derecognition guidance when determining the proper accounting treatment. In accordance with this
guidance, the refund liability associated with these WoW game points, to the extent not refunded, will be recorded as other operating
income after we are legally released from the obligation to refund amounts under the applicable laws. As we announced the refund
plan on September 7, 2009, the statute of limitations of the creditors (in this case the game players with claims for refund of
unactivated WoW game point cards) to assert their claims for refund is two years from such date under applicable laws and thus our
legal liability relating to the unactivated WoW game point cards was extinguished on September 7, 2011 and the associated liability
amounting to RMB26.0 million was recognized as other operating income for the year ended December 31, 2011. With respect to the
remaining refund liability, based on current PRC laws, to the extent not refunded, we, in consultation with legal counsel, has
determined that we will be legally released from this liability in 2029, which represents 20 years from the date of discontinuation of
WoW in 2009. However, if management were to publicly announce a refund policy, we would be legally released from any remaining
liability for these activated, but unconsumed points, sooner than 20 years. To date, we have determined not to publicly announce any
refund policy with respect to this remaining liability, and no refunds have been claimed. The remaining refund liability relating to the
activated, but unconsumed WoW game points is RMB170.0 million (US$27.4 million) as of December 31, 2014.
We have engaged an agent to facilitate the refund to the game point card holders and game point distributors. As of
December 31, 2014, the balance of the advance payment to the agent was RMB17.2 million (US$2.8 million). In February 2012, we
entered into an agreement with the agent pursuant to which the agent will ensure a refund of the remaining advance to us in five
installments in five years. We received the first installment of RMB8.6 million in February 2012, the second installment of RMB8.6
million in March 2013, the third installment of RMB8.6 million in December 2014, the fourth installment of RMB8.6 million
(US$1.4 million) was received in March 2015.
Capital Expenditures
We incurred capital expenditures of RMB46.5 million, RMB21.6 million and RMB19.7 million (US$3.2 million) in 2012,
2013 and 2014, respectively. The capital expenditures principally consisted of purchases of servers, computers and other items related
to our network infrastructure and license fees. If we license new games or enter into strategic joint ventures or acquisitions, we may
require additional funds for necessary capital expenditures.
C.
Research and Development, Patents and Licenses, etc.
Our research and development efforts are primarily focused on the development of our proprietary online games, the
localization of licensed games from foreign developers, and the maintenance of our websites. Our research and development expenses
were RMB301.5 million, RMB213.2 million and RMB156.3 million (US$25.2 million) in 2012, 2013 and 2014, respectively.
61
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
D.
Trend Information
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1RVqZ!Š
5*
0C
200GaisY$NM1RVqZ!
852134 TX 62
HTM
ESS
Page 1 of 1
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands,
commitments or events for the period from January 1, 2014 to December 31, 2014 that are reasonably likely to have a material
adverse effect on our net sales or revenues, results of operations, profitability, liquidity or capital resources, or that would cause the
reported financial information not necessarily to be indicative of future operating results or financial conditions.
E.
Off-Balance Sheet Arrangements
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap
transactions or foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded contracts.
F.
Contractual Obligations
We have entered into leasing arrangements related to the use of certain office premises and Internet data centers. The
following table sets forth our commitments under operating leases as of December 31, 2014:
Payments Due by Period
Operating Lease Obligations
Capital Obligations (1)
Less than 1
year
Total
1-2 years
(RMB)
36,420,602 6,321,152 6,241,753 18,671,241 5,186,456
—
—
—
—
—
3-5 years
More than
5 years
(1)
In July 2014, we entered into an agreement to form a joint venture with Qihoo 360, under which Qihoo 360 and we will each
own 50% equity interest in the joint venture and share profits based on each party’s equity interest in the joint venture. The joint
venture, System Link, was formed in August 2014. According to the terms of the joint venture agreement, we paid US$6.0
million in cash to System Link as our initial capital contribution in January 2015, and we are obligated to further contribute an
additional US$4.0 million in cash to System Link when its board of directors calls for such contribution within two years of the
establishment of System Link.
G.
Safe Harbor
This annual report on Form 20-F contains statements of a forward-looking nature. These statements are made under the
“safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking
statements by terminology such as “may,” “will,” “expects,” “anticipates,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are
likely to” or other and similar expressions. The accuracy of these statements may be impacted by a number of risks and uncertainties
that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include, but are not
limited to, the following:
•
•
•
•
•
•
•
our ability to successfully launch and operate additional games in China and overseas;
our ability to develop, license or acquire additional online games that are attractive to users;
the maintenance and expansion of our relationships with game distributors and online game developers, including
our existing licensors;
uncertainties in and the timeliness of obtaining necessary governmental approvals and licenses for operating any
new online game;
risks inherent in the online game business;
risks associated with our future acquisitions and investments;
our ability to compete effectively against our competitors;
62
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1TNu%VŠ
7*
0C
200GaisY$NM1TNu%V
852134 TX 63
HTM
ESS
Page 1 of 1
•
•
risks associated with our corporate structure and the regulatory environment in China; and
other risks outlined in our filings with the SEC including this annual report on Form 20-F.
These risks are not exhaustive. We operate in an emerging and evolving environment. New risk factors emerge from time
to time and it is impossible 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 specific factor, or combination of factors, may cause actual results to differ materially from those contained
in any forward-looking statements.
We would like to caution you not to place undue reliance on forward-looking statements and you should read these
statements in conjunction with the risk factors disclosed in “Item 3. Key Information—D. Risk Factors.” We do not undertake any
obligation to update forward-looking statements except as required under applicable law.
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.
Directors and Executive Officers(1)
Jun Zhu
Cheung Kin Au-Yeung
Davin Alexander Mackenzie(2)(3)
Chao Y. Wang(2)(3)
Ka Keung Yeung(2)(3)
George Lai
Chris Shen
Position/Title
Age
48 Chairman of the Board and Chief Executive Officer
66 Director
54 Independent Director
50 Independent Director
55 Independent Director
37 Chief Finance Officer
46 Vice President
(1) Yong Wang, our former vice president, resigned in August of 2014.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Each of our officers will hold office until such officer’s successor is duly elected and qualified, or until such officer’s
death, bankruptcy, insanity, resignation or removal. There are no family relationships among any of the directors or executive officers
of our company. For the terms of our directors, see “—C. Board Practices —Terms of Directors.”
Biographical Information
Jun Zhu is one of our co-founders. He has served as the chairman of our board of directors and chief executive officer
since our inception. Prior to founding The9, Mr. Zhu co-founded Flagholder New Technology Co. Ltd., an information technology
company based in China, in 1997, and served as its director from 1997 to 1999. From 1993 to 1997, Mr. Zhu worked at QJ (U.S.A.)
Investment, Ltd., a trading company in the United States. Mr. Zhu attended an undergraduate program at Shanghai Jiaotong
University.
Cheung Kin Au-Yeung has served as our director since December 2007. Mr. Au-Yeung currently also serves as a member
of the board of directors and the audit committee of Xueda Education Group, a NYSE-listed company. He joined Morningside Group
in 1996 to oversee its PRC portfolio operations. While with Morningside, he served on the board of directors of Media Partners
International Holdings Inc. from June 2001 to November 2005, and was seconded to Sohu.com as chief operating officer from July
1999 to December 1999. Mr. Au-Yeung has over twenty years of operating experience in mainland China, and prior to joining
Morningside, he ran the greater China operations of several multinational companies for more than sixteen years as general manager.
Mr. Au-Yeung holds an MBA and an MS in Physics from Indiana University.
63
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1XS8%uŠ
5*
0C
200GaisY$NM1XS8%u
852134 TX 64
HTM
ESS
Page 1 of 1
Davin Alexander Mackenzie has served as our independent director since July 2005. Mr. Mackenzie is currently a
consultant of Spencer Stuart Beijing Office, a renowned global executive search company. Mr. Mackenzie currently also serves as a
member of the board of directors and audit committee of Mecox Lane Limited, a Nasdaq-listed company. Mr. Mackenzie is also a
director of Sports Beijing, a non-profit recreational youth sports organization, and a director of Mountain Hazelnut Ventures, a private
agricultural company. From 2009 to 2011, Mr. Mackenzie was the Beijing representative of Brocade Capital Limited, a private equity
advisory firm that he founded in 2009. From 2008 to 2009, Mr. Mackenzie was the managing director and Beijing representative of
Arctic Capital Limited, a pan-Asia private equity advisory firm. Between 2000 and 2008, Mr. Mackenzie held the same positions in
Peak Capital LLC, another private equity investment and advisory firm that focuses on the China market. Prior to Peak Capital,
Mr. Mackenzie worked with the International Finance Corporation, a private sector arm of The World Bank Group, for seven years,
including four years as the resident representative for China and Mongolia. Mr. Mackenzie has also worked at Mercer Management
Consultants in Washington, D.C., and at First National Bank of Boston in Taiwan. Mr. Mackenzie received a bachelor’s degree in
Government from Dartmouth College. He received a master’s degree in international studies and an MBA degree from the Wharton
School of Business at the University of Pennsylvania. Mr. Mackenzie has also completed the World Bank Executive Development
Program at Harvard Business School.
Chao Y. Wang has served as our independent director since December 2004. Mr. Wang is the founding partner and chief
executive officer of ChinaEquity Group, a China-based independent venture capital firm which focuses on the technology, media and
telecommunications sectors in China. Before founding ChinaEquity in 1999, Mr. Wang spent twelve years in the investment banking
and financial services industry with Chase, Standard & Poors, Morgan Stanley and the China Development Bank. During that time,
he served as the head of Morgan Stanley’s Beijing operations for three years. Mr. Wang presently serves on the board of directors of
several companies including Origo Sino-India Plc and Rising Tech Co. Mr. Wang holds a bachelor’s degree from Huazhong
University of Science and Technology and an MBA degree from Rutgers University. Mr. Wang has also attended the Senior
Executive Program of Harvard University and Tsinghua University.
Ka Keung Yeung has served as our independent director since July 2005. Mr. Yeung is the executive vice president and
chief financial officer of Phoenix Satellite Television Holdings Limited, or Phoenix, a listed company in Hong Kong, and is in charge
of corporate finance and administration. He is also the company secretary and qualified accountant. Mr. Yeung joined Phoenix in
March 1996 and is in charge of all of Phoenix’s internal and external financial management and arrangements and also supervises
administration and personnel matters. Mr. Yeung also serves as a director of Phoenix New Media, a subsidiary of Phoenix and a
company listed on the NYSE. Mr. Yeung graduated from the University of Birmingham and is qualified as a chartered accountant.
Upon returning to Hong Kong, he worked at Hutchison Telecommunications and STAR in the fields of finance and business
development.
George Lai has served as our chief financial officer since July 2008. Prior to joining us, Mr. Lai worked for Deloitte
Touche Tohmatsu since 2000. Mr. Lai worked in several different Deloitte offices, including Hong Kong, New York and Beijing.
During his eight years at Deloitte, Mr. Lai played key roles in the audit function in a number of IPO projects in the United States and
China. He also assisted public companies in the United States, Hong Kong and China with a wide range of accounting matters.
Mr. Lai received his bachelor of business administration, with a focus in professional accountancy, from the Chinese University of
Hong Kong. Mr. Lai holds various accounting professional qualifications, including from AICPA, FCCA and HKICPA.
Chris Shen has served as our vice president since January 2006. Mr. Shen joined The9 in August 2005 as our senior
director of marketing and is in charge of our mobile social gaming platform and marketing and public relations activities. Prior to
joining us, Mr. Shen served as the group account director and account director for several renowned advertising agencies in Shanghai
and Taipei, mainly serving multinational companies in various industries, such as consumer goods, financial services and retail.
During the past twelve years, Mr. Shen helped numerous local and international brands plan and executed various marketing
initiatives. Mr. Shen received his bachelor’s degree in management science from the National Chiao Tung University in Taiwan.
64
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
B.
Compensation
Compensation of Directors and Executive Officers
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1=txZOŠ
6*
0C
200GaisY$NM1=txZO
852134 TX 65
HTM
ESS
Page 1 of 1
In 2014, the aggregate cash compensation paid to our executive officers was approximately RMB6.6 million (US$1.1
million). We paid a total of RMB1.2 million (US$0.2 million) in cash to our non-executive directors for their services in 2014. No
director or executive officer is entitled to any severance benefits upon termination of his or her employment with or appointment by
our company. In May 2011, our Board of Directors granted 30,000 ordinary shares to each of our four non-executive directors, of
which 10,000 ordinary shares vest for each director on July 1 of each year from 2011 to 2013 so long as such director continues his
services as of such date. An aggregate of 40,000 ordinary shares, 40,000 ordinary shares and 40,000 ordinary shares were vested in
July 2011, 2012 and 2013, respectively. The fair value of the shares granted was US$6.03 per share, being the market price on the
date of the grant.
We recorded share-based compensation of RMB1.9 million, RMB0.4 million and nil with respect to our directors and
officers for the year ended December 31, 2012, 2013 and 2014, respectively.
Share Incentive Plan
Amended 2004 Stock Option Plan
Our board of directors and our shareholders have adopted and approved an Amended 2004 Stock Option Plan in order to
attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to employees,
directors and consultants and to promote the success of our business. As of February 28, 2015, we reserved 6,449,614 shares under
the 2004 option plan, of which 3,061,191 ordinary shares were outstanding. On April 22, 2013, our board of directors approved an
adjustment to the exercise price of options to purchase 2,829,941 shares previously granted from 2008 to 2011 under our Amended
2004 Stock Option Plan to establish a new exercise price for such share options at US$2.41 per ADS, which was the closing price of
our ADSs as of April 22, 2013. The following table provides a summary of the options granted to our directors, executive officers and
other individuals as a group under our Amended 2004 Stock Option Plan as of February 28, 2015 and that remained outstanding.
Jun Zhu
Chris Shen
Chao Y. Wang
Ka Keung Yeung
Davin Alexander Mackenzie
Cheung Kin Au-Yeung
George Lai
All Directors and Senior Executive Officers as a
Group†
Other Individuals as a Group (other than those listed
above)
Total Number of
Ordinary Shares
Underlying Options
Outstanding†
Exercise
Price Range
(in US$)
1,600,000
*
*
*
*
*
317,900
Expiration date
August 27, 2015
2.41
2.41 August 27, 2015 – December 11, 2015
2.41
2.41
2.41
2.41
2.41
August 27, 2015 – April 22, 2018
August 27, 2015 – April 22, 2018
August 27, 2015 – April 22, 2018
August 27, 2015 – April 22, 2018
August 27, 2015 – April 22, 2018
2,457,900
2.41
August 27, 2015 – April 22, 2018
603,291
2.41
August 27, 2015 – April 22, 2018
† Excluding 2,644,411 options forfeited and 1,450,971 options exercised as of February 28, 2015 pursuant to the terms of our
Amended 2004 Stock Option Plan.
* The options held by each of these directors and officers represent less than 1% of our total outstanding shares.
65
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1c6QZ/Š
4*
0C
200GaisY$NM1c6QZ/
852134 TX 66
HTM
ESS
Page 1 of 1
Termination of Options. Where the option agreement permits the exercise or purchase of the options granted for a certain
period of time following the recipient’s termination of service with us, or the recipient’s disability or death, the options will terminate
to the extent not exercised or purchased on the last day of the specified period or the last day of the original term of the options,
whichever occurs first.
Administration. Our stock option plan is administered by our board of directors or an option administrative committee
designated by our board of directors and constituted to comply with applicable laws. In each case, our board of directors or the
committee it designates will determine the provisions, terms and conditions of each option grant, including, but not limited to, the
option vesting schedule, repurchase provisions, forfeiture provisions, form of payment upon settlement of the award, payment
contingencies and satisfaction of any performance criteria.
Vesting Schedule. Options granted under our stock option plan vest over a two to four year period following a specified
vesting commencement date. In general, the options granted will vest over the vesting period on a monthly basis, subject to the
recipient of the options continuing to be employed by us on each vesting date.
Option Agreement. Options granted under our stock option plan are evidenced by an option agreement that contains,
among other things, provisions concerning exercisability and forfeiture upon termination of employment or consulting arrangements,
as determined by our board. In addition, the option agreement also provides that options granted under our stock option plan are
subject to a 180-day lock-up period following the effective date of a registration statement filed by us under the Securities Act, if so
requested by us or any representative of the underwriters in connection with any registration of the offering of any of our securities.
Option Exercise. The term of options granted under our stock option plan may not exceed five years from the date of grant.
The consideration to be paid for our shares upon exercise of an option or purchase of shares underlying the option will be determined
by the plan administrator and may include cash, check, ordinary shares, a promissory note, consideration received by us under a
cashless exercise program implemented by us in connection with our stock option plan, or any combination of the foregoing methods
of payment.
Third-Party Acquisition. If a third party acquires us through the purchase of all or substantially all of our assets, a merger
or other business combination, all outstanding options or share purchase rights will be assumed or equivalent options or rights
substituted by the successor corporation or parent or subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the options or share purchase rights, all options or share purchase rights will become
fully vested and exercisable immediately prior to such transaction and all unexercised awards will terminate unless, in either case, the
awards are assumed by the successor corporation or its parent.
Changes in Capitalization and Other Adjustments. If we shall at any time increase or decrease the number of outstanding
shares, or change in any way the rights and privileges of our outstanding shares, by means of a payment or a stock dividend or any
other distribution upon such ordinary shares, or through a stock split, subdivision, consolidation, combination, reclassification or
recapitalization involving such ordinary shares, then in relation to the ordinary shares that are covered by the options granted or
available under the plan and are affected by one or more of the above events, the number, rights and privileges shall be increased,
decreased or changed in like manner as if such ordinary shares had been issued and outstanding, fully paid and non-assessable at the
time of such occurrence.
Termination of Plan. Unless terminated earlier, our stock option plan will expire in 2024. Our board of directors has the
authority to amend, alter, suspend or terminate our stock option plan. However, no such action may (i) impair the rights of any
optionee unless agreed by the optionee and the stock option plan administrator, or (ii) affect the stock option plan administrator’s
ability to exercise the powers granted to it under our stock option plan.
66
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
C.
Board Practices
Board of Directors
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1f9kZjŠ
4*
0C
200GaisY$NM1f9kZj
852134 TX 67
HTM
ESS
Page 1 of 1
Our board of directors consists of the following five directors: Jun Zhu, Cheung Kin Au-Yeung, Chao Y. Wang, Davin
Mackenzie and Ka Keung Yeung. A director is not required to hold any shares in our company by way of qualification. A director
may vote with respect to any contract, proposed contract or arrangement in which he is materially interested so long as he has
disclosed the nature of the interest at a meeting of the directors. A director may exercise all the powers of our company to borrow
money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed
or as security for any obligation of our company or of any third party.
Committees of the Board of Directors
Audit Committee. Our audit committee consists of Messrs. Chao Y. Wang, Davin A. Mackenzie and Ka Keung Yeung, all
of whom satisfy the “independence” definition under Rule 5605 of the Nasdaq Stock Market, Inc. Marketplace Rules, or the Nasdaq
Rules, and the audit committee independence standard under Rule 10A-3 under the Exchange Act. All the members of our audit
committee meet the “financial expert” definition of the Nasdaq Rules.
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 auditors and pre-approving all auditing and non-auditing services permitted to be
performed by the independent auditors;
reviewing and approving all proposed related-party transactions;
discussing the annual audited financial statements with management and the independent auditors;
annually reviewing and reassessing the adequacy of our audit committee charter;
meeting separately and periodically with management and the independent auditors;
reporting regularly to the full board of directors; and
such other matters that are specifically delegated to our audit committee by our board of directors from time to time.
Compensation Committee. Our compensation committee consists of Messrs. Chao Y. Wang, Davin A. Mackenzie and Ka
Keung Yeung, all of whom meet the “independence” definition under the Nasdaq Rules. The compensation committee assists the
board in reviewing and approving the compensation structure of our executive officers, including all forms of compensation to be
provided to our executive officers. The compensation committee will be responsible for, among other things:
•
•
•
•
•
reviewing and determining the compensation for our five most senior executives;
reviewing the compensation of our other employees and recommending any proposed changes to the management;
reviewing and approving director and officer indemnification and insurance matters;
reviewing and approving any employee loans in an amount equal to or greater than US$60,000 (or such amount as
from time to time announced by the relevant regulatory bodies as requiring the approval of the Committee); and
reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar
arrangements, annual bonuses, employee pensions and welfare benefits plans.
67
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Duties of Directors
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1hX9Z}Š
4*
0C
200GaisY$NM1hX9Z}
852134 TX 68
HTM
ESS
Page 1 of 1
Under Cayman Islands law, our directors have fiduciary duties to act honestly, in good faith and with a view to our best
interests. Our directors also owe to our company a duty to act with skill and care. It was previously considered that a director need not
exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and
experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill
and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must
ensure compliance with our memorandum and articles of association, as amended and restated from time to time. We have the right to
seek damages if a duty owed by our directors is breached.
Terms of Directors
Our board of directors is currently divided into three classes with different terms. This provision would delay the
replacement of a majority of our directors and would make changes to the board of directors more difficult than if such provision
were not in place. Our independent directors, namely Messrs. Chao Y. Wang, Davin A. Mackenzie and Ka Keung Yeung, were re-
elected at our 2012 annual general meeting and each of them is serving a three-year term until the 2015 annual general meeting or
until his successor is duly elected and qualified, whichever is earlier. The other two non-independent directors, namely Messrs. Jun
Zhu and Cheung Kin Au-Yeung, were re-elected at our 2013 annual general meeting and each of them is serving a three-year term
until the 2016 annual general meeting or until his successor is duly elected and qualified, whichever is earlier. Upon expiration of the
term of office of each class, succeeding directors in each class will be elected for a term of three years. Directors may be removed
from office by ordinary resolution of shareholders at any time before the expiration of his/her term. Pursuant to the natural expiration
of the directorial terms, elections for directors would be held on the date of the annual general meeting of shareholders.
Voting Agreement
On November 26, 2004, Incsight and Bosma, our two largest shareholders, entered into a voting agreement with respect to
the election of our board of directors. Both parties have agreed to vote their respective shares to ensure that our board of directors
consists of: (i) one director designated by Incsight, so long as it holds 5% or more of our total outstanding shares, which is currently
Jun Zhu; (ii) one director designated by Bosma, so long as it holds 5% more of our total outstanding shares, which is currently
Cheung Kin Au-Yeung; (iii) two individuals mutually acceptable to Incsight and Bosma, but who are not otherwise affiliated with
either of them, our company or any of our shareholders; and (iv) an additional individual who is not affiliated with either Incsight,
Bosma, our company or any of our shareholders. Both parties agreed to vote to ensure that none of the directors elected pursuant to
the voting agreement shall be removed from office, except for cause or unless by the affirmative vote of both parties. In addition, each
of Incsight and Bosma agrees to elect one or two individuals designated by the other party as directors so long as each of them holds
not less than 20% of the total issued shares of our company. The voting agreement shall continue until both parties mutually agree in
writing to terminate it.
D.
Employees
As of December 31, 2014, we had 498 employees, among which 328 were based in China, including 62 in management
and administration, 38 in our customer service centers, 82 in game operations, sales and marketing, and 146 in product development,
including supplier management personnel and technical support personnel, 167 were based in the United States and three were based
in other regions. We had 695 and 611 employees as of December 31, 2012 and 2013, respectively. The decrease in the number of
employees as of December 31, 2014 as compared to that of December 31, 2013 was primarily due to our disposal of Huopu Cloud.
We consider our relations with our employees to be good.
E.
Share Ownership
As of February 28, 2015, there were 28,783,929 ordinary shares outstanding, including 5,582,328 ordinary shares issued to
The Bank of New York Mellon, our ADS depositary, to facilitate our future issuance of ADSs upon the exercise of options under our
share incentive plan.
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of
February 28, 2015 by:
•
•
each of our directors and executive officers who are also our shareholders; and
each person known to us to own beneficially more than 5% of our ordinary shares.
68
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1jQF%yŠ
6*
0C
200GaisY$NM1jQF%y
852134 TX 69
HTM
ESS
Page 1 of 1
Directors and Executive Officers:
Jun Zhu(3)
Cheung Kin Au-Yeung
Davin Alexander Mackenzie
Chao Y. Wang
Ka Keung Yeung
George Lai
Chris Shen
All Directors and Senior Executive Officers as a Group(4)
Principal Shareholders:
Incsight Limited(5)
Bosma Limited(6)
Ordinary Shares Beneficially Owned
Number(1)
%(2)
7,787,834
*
*
*
*
*
*
8,669,066
6,187,834
4,612,522
27.1%
*
*
*
*
*
*
30.1%
21.5%
16.0%
Less than 1% of our total outstanding shares.
*
(1) Beneficial ownership is determined in accordance with the rules of the SEC, and includes voting or investment power with
respect to the securities. 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 within 60 days of February 28, 2015, including through
the exercise of any option, warrant or other right or the conversion of any other security.
(2) Percentage of beneficial ownership is based on 28,783,929 ordinary shares outstanding as of February 28, 2015, as well as the
shares underlying share options and warrants exercisable by such person or group within 60 days from February 28, 2015.
(3) Consists of (i) 6,187,834 ordinary shares held by Incsight Limited, a British Virgin Islands company 100% owned by Mr. Zhu,
as jointly reported by Incsight Limited and Jun Zhu and (ii) options to purchase 1,600,000 shares held by Mr. Zhu as of
February 28, 2015. The business address for Mr. Zhu is Building No. 3, 690 Bibo Road, Zhangjiang Hi-Tech Park, Pudong New
Area, Shanghai 201203, People’s Republic of China.
Includes ordinary shares, ordinary shares issuable upon exercise of options and restricted shares, held by all of our directors and
executive officers as a group.
(4)
(5) Ordinary shares held by Incsight Limited, a British Virgin Islands company 100% owned by Jun Zhu, our chairman and chief
executive officer, as jointly reported by Incsight Limited and Jun Zhu. The business address for Incsight Limited is Building
No. 3, 690 Bibo Road, Zhangjiang Hi-Tech Park, Pudong New Area, Shanghai 201203, People’s Republic of China.
(6) Consists of 4,145,065 ordinary shares and 467,457 ADSs held by Bosma Limited, as reported by Bosma Limited on the
Schedule 13G/A filed with the SEC on February 13, 2009. Bosma Limited, a British Virgin Islands corporation, is wholly-
owned by Morningside VC Limited, a British Virgin Islands corporation, which is in turn wholly-owned by The HCB Trust, an
Isle of Man trust, the trustee of which is Dunn Investments Limited, an Isle of Man corporation. Dunn Investments Limited
controls indirectly, through The HCB Trust, a 100% interest in Bosma Limited, and as a result has the sole power to vote and
dispose of the shares of The9 Limited held by Bosma Limited. Dunn Investments Limited is controlled by its board of directors,
consisting of Lorna Irene Cameron and Philip Alvaro Salazar, both of whom expressly disclaim beneficial ownership of the
shares held by Bosma Limited. The address for Bosma Limited is Pasea Estate, Road Town, Tortola, British Virgin Islands.
As of February 28, 2015, approximately 65.9 % of the issued and outstanding shares were held by the record shareholders
in the United States, including 18,971,530 ADSs, representing 18,971,530 ordinary shares, held by the Bank of New York Mellon,
our ADS depositary.
None of our shareholders has different voting rights from other shareholders as of the date of this annual report. We are
currently not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
69
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1m17ZÅŠ
5*
0C
200GaisY$NM1m17Z¯
852134 TX 70
HTM
ESS
Page 1 of 1
Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
B.
Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
Related Party Transactions
Arrangements with Affiliated PRC Entities
Current PRC laws and regulations impose substantial restrictions on foreign ownership of entities involved in ICP, Internet
culture operation, Internet publishing businesses and advertising in China, which include online game operations. Therefore, we
conduct part of our activities through a series of agreements with Shanghai IT. Shanghai IT holds the requisite licenses and approvals
for conducting ICP, Internet culture operation and Internet publishing businesses in China. Shanghai IT is owned by our employee
Wei Ji, who acquired his equity interests in Shanghai IT from Jun Zhu in November 2011, and our employee Zhimin Lin, who
acquired his equity interests in Shanghai IT from Yong Wang in April 2014. Shanghai Jiucheng Advertisement, which is wholly-
owned by Shanghai IT, holds the requisite business license for an advertising entity in China.
We have obtained the exclusive right to benefit from Shanghai IT’s licenses and approvals. In addition, through a series of
contractual arrangements with Shanghai IT and Shanghai Jiucheng Advertisement and their respective shareholders, we are able to
direct and control the operation and management of Shanghai IT and Shanghai Jiucheng Advertisement. We believe that the
individual shareholders of Shanghai IT and Shanghai Jiucheng Advertisement will not receive material personal benefits from these
agreements except as shareholders or employees of The9 Limited.
We do not believe we could have obtained these agreements, taken as a whole, from unrelated third parties. Because of the
uncertainty relating to the legal and regulatory environment in China, the terms of most of the agreements were not defined unless
terminated by the parties thereto. According to our PRC counsel, Zhong Lun Law Firm, subject to the interpretation and
implementation of the GAPP Circular, these agreements, except those that have already been terminated, are valid, binding and
enforceable under the current laws and regulations of China. The principal provisions of these agreements are described below.
Domain Name License Agreement. We granted Shanghai IT the right to use the domain name www.the9.com for its
hosting of The9 City and its provision of Internet content in China. The relevant license agreement was terminated when we
transferred the domain name to Shanghai IT.
Exclusive Technical Service Agreement. We provide Shanghai IT with technical services for the operation of computer
software and related businesses, including the provision of systematic solutions for the operation of Internet websites, the rental of
computer and Internet facilities, daily maintenance of Internet servers and databases, the development and update of relevant
computer software, and all other related technical and consulting services. Shanghai IT pays service fees to us based on their actual
operating results at a service fee equal to 90% of all operating profit generated by Shanghai IT. We are the exclusive provider of these
services to Shanghai IT. According to the relevant PRC rules and regulations, related party transactions should be negotiated at the
arm’s length basis and apply reasonable transfer pricing methods. However, the determination of service fees is under the sole
discretion of us. This agreement does not have specific clauses on renewal but does have an initial term of 20 years (with the earliest
expiration date being December 31, 2029). By virtue of the governance rights we maintain over Shanghai IT, through the terms of the
other agreement noted above, we are able to unilaterally renew, extend or amend the service agreement at our discretion.
Shareholder Voting Proxy Agreement. Each of the shareholders of Shanghai IT has entered into a Shareholder Voting
Proxy Agreement with us, under which each shareholder of Shanghai IT irrevocably grants any third parties designate by us the
power to exercise all voting rights to which he/she is entitled as a shareholder of Shanghai IT, including the right to attend
shareholders meetings, to exercise voting rights and to appoint directors, a general manager, and other senior management of
Shanghai IT. The power of proxy is irrevocable and may only be terminated at our discretion. We have also entered into a similar
agreement with the shareholder of Shanghai Jiucheng Advertisement.
70
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM1om0%*Š
4*
0C
200GaisY$NM1om0%*
25-Mar-2015 17:48 EST
852134 TX 71
HTM
ESS
Page 1 of 1
Call Option Agreement. We entered into a call option agreement with each of the shareholders of Shanghai IT, under
which the parties irrevocably agreed that, at our sole discretion, we and/or any third parties designated by us will be entitled to acquire
all or part of the equity interests in Shanghai IT, to the extent permitted by the then-effective PRC laws and regulations. The
consideration for such acquisition will be the price equal to the lower of the amount of the registered capital of Shanghai IT and the
minimum amount permissible by the then- applicable PRC law. The shareholders of Shanghai IT have also agreed not to enter into
any transaction, or fail to take any action, that would substantially affect the assets, liabilities, equity, operations or other legal rights
of Shanghai IT without our prior written consent, including, without limitation, declaration and distribution of dividends and profits;
sale, assignment, mortgage or disposition of, or encumbrances on, Shanghai IT’s equity; merger or consolidation; creation,
assumption, guarantee or incurrence of any indebtedness; entering into other materials contracts. This agreement shall not expire until
such time as we acquire all equity interests of Shanghai IT subject to applicable PRC laws. We and the shareholder of Shanghai
Jiucheng Advertisement have entered into a similar call option agreement.
Loan Agreement. From 2002 to May 2005, we provided an aggregate of RMB23.0 million in loan to the then shareholders
of Shanghai IT, namely Jun Zhu and Yong Wong, for the purposes of capitalizing and increasing the registered capital of Shanghai
IT. Such loan agreement was assumed by the current shareholders of Shanghai IT when Jun Zhu transferred the equity interest in
Shanghai IT to Wei Ji in 2011 and Yong Wang transferred the equity interests in Shanghai IT to Zhimin Lin in 2014. Pursuant to the
terms of this loan agreement, we granted an interest-free loan to each shareholder of Shanghai IT for the explicit purpose of making a
capital contribution to Shanghai IT. The loans have an unspecified term and will remain outstanding for the shorter of the duration of
The9 Computer or that of the Shanghai IT, or until such time that we elect to terminate the agreement (which is at our sole discretion)
at which point the loans are payable on demand. Such loan shall only become immediately due and payable when we send a written
notice to the borrowers requesting repayment. Currently, Zhimin Lin and Wei Ji have pledged all of their equity interests in Shanghai
IT in favor of us under the equity pledge agreements. In the event of a breach of any term in the loan agreement or any other
agreements by either Shanghai IT or its shareholders, we will be entitled to enforce our rights as a pledgee under the agreement. We
and the shareholder of Shanghai Jiucheng Advertisement have entered into a similar loan agreement.
Equity Pledge Agreements. To secure the full performance by Shanghai IT or its shareholders of their respective
obligations under the Shareholder Voting Proxy Agreement, the Call Option Agreement and the Loan Agreement, the shareholders of
Shanghai IT have pledged all of their equity interests in Shanghai IT in favor of us under two equity pledge agreements. In addition,
the dividend distributions to the shareholders of Shanghai IT, if any, will be deposited in an escrow account over which we have
exclusive control. The pledge shall remain effective until all obligations under such agreements have been fully performed. The
shareholder has the obligation to maintain ownership and effective control over the pledged equity. Under no circumstances, without
our prior written consent, may the shareholder transfer or otherwise encumber any equity interests in Shanghai IT. If any event of
default as provided for therein occurs, The9 Computer, as the pledgee, will be entitled to dispose of the pledged equity interests
through transfer or assignment and use the proceeds to repay the loans or make other payments due under the above loan agreement
up to the loan amounts. Each of the shareholders of Shanghai IT has registered the pledge of its equity interests with the relevant local
administration for industry and commerce pursuant to the new PRC Property Rights Law. In the event of a breach of any term in the
above agreements by either Shanghai IT or its shareholders, we will be entitled to enforce our pledge rights over such pledged equity
interests to compensate for any and all losses suffered from such breach. A similar equity pledge agreement was also entered into by
and between us and the individual shareholder of Shanghai Jiucheng Advertisement.
Arrangements with Fire Rain and Wanyouyl
Fire Rain. In February 2009, we made an investment and purchased 20% equity interests in Fire Rain, a company engaged
in research and development of ShenXianZhuan, a MMORPG. We also obtained an exclusive license from Fire Rain to operate
ShenXianZhuan in mainland China. In January 2010, we purchased an additional 5% equity interest and increased our shareholding in
Fire Rain to 25%. ShenXianZhuan was commercially launched in China in August 2011 and we were entitled to 80% of the revenues
from the game since then. Through certain contractual arrangements, we also provided loans in support of Fire Rain’s business
operations. Pursuant to our then contractual arrangement with Fire Rain, we have the power to make decisions that most significantly
affect Fire Rain’s operations and effectively assumed a majority of economic risks associated with it, and has the obligation to absorb
losses and the right to receive returns that are significant to Fire Rain. As such, we were the primary beneficiary of Fire Rain and have
included it in our consolidated financial statements.
71
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1s7pZtŠ
5*
0C
200GaisY$NM1s7pZt
852134 TX 72
HTM
ESS
Page 1 of 1
In late 2012, due to the weaker than expected performance of the game developed by Fire Rain, we decided to restructure
our investments in, and terminate certain contractual arrangements with, Fire Rain, which resulted in the return of the game license
and the cessation of providing additional financial support to Fire Rain. The game operations will be controlled directly by Fire Rain
prospectively. As a result of the restructuring and change in contractual arrangements, we no longer have the power to direct the
activities that most significantly impact Fire Rain’s operations, and as such we ceased to be the primary beneficiary of Fire Rain. As a
result, we deconsolidated Fire Rain on the date the restructuring and change in contractual arrangements happened. As of the date of
deconsolidation, we retained a 25% equity interest and contractual rights to receive repayment of game development expenditures of
RMB17 million and a contractual right to receive 20% of the gross revenues generated by the game. The total loss on deconsolidation
of Fire Rain was RMB12.4 million, of which RMB1.3 million relates to the loss from remeasurement of the 25% retained equity
interest. See Note 4 to the consolidated financial statements included in this annual report on Form 20-F for more information
regarding the deconsolidation of Fire Rain. From the date of deconsolidation to December 31, 2012 and during the year of 2013, we
received RMB0.8 million and RMB2.2 million as the revenue sharing arrangement relating to Fire Rain game operation. As Fire Rain
has become inactive since 2014, we no longer share revenue with Fire Rain.
Of the advancement of RMB17.0 million we made to Fire Rain, RMB4.5 million was repaid in January 2013. In addition,
certain cash advances to Fire Rain were secured by the personal guarantee of the spouse of a third-party shareholder of Fire Rain. In
April 2013, we agreed that such shareholder will transfer a 33.5% equity interest in Fire Rain to us and in return we will release the
personal guarantee provided. In March 2014, another shareholder transferred a 4% equity interest in Fire Rain to us. After these share
transfers and as of the date of this annual report, we own approximately 62.5% of the equity interest in Fire Rain.
Wanyouyl. From July 2009 to June 2010, we made an investment in and purchased 20% equity interest in Wanyouyl, a
company engaged in research and development of Era Zero. We also obtained an exclusive global license from Wanyouyl to operate
Era Zero. Through certain contractual arrangements, we also provided loans in support of Wanyouyl’s business operations. Pursuant
to our then contractual arrangement with Wanyouyl, we established the power to make decisions that most significantly affect
Wanyouyl’s operations and effectively assumed a majority of economic risks associated with the entity, and had the obligation to
absorb losses and the right to receive returns that are significant to Wanyouyl. As such, we were the primary beneficiary of Wanyouyl
and have consolidated the entity in our consolidated financial statements until September 2012.
In late 2012, due to its unsatisfactory testing result, we restructured the investments in and contractual arrangement with
Wanyouyl through certain transactions. In particular, we terminated the product development and license agreement with Wanyouyl
and sold our equity interest in Wanyouyl to a third party for a consideration of RMB3.0 million. We retained a contractual right to
receive 20% of future revenues of Era Zero developed by Wanyouyl, subject to a cap of RMB10 million. We deconsolidated
Wanyouyl as a result of these transactions and recorded a total loss on deconsolidation of RMB5.7 million, which is recognized as
loss on termination of R&D VIE arrangements for the year ended December 31, 2012. In 2013 and 2014, we received RMB2.6
million and nil, respectively, from the 20% revenue sharing arrangement for the game developed by Wanyouyl.
Stock Option Grants
See “Item 6. Directors, Senior Management and Employees—B. Compensation —Share Incentive Plan—Amended 2004
Stock Option Plan.”
Investments or Agreements entered into with Affiliated Entities
In April 2012, we entered into a loan agreement with Beijing Linkage, our related party in which we own 45% equity
interest. Pursuant to the loan agreement, we made a loan in the amount of RMB6.8 million to Beijing Linkage for it to make capital
increase in its invested company. There was RMB5.3 million outstanding balance of such loan as of December 31, 2012. In March
2013, we entered into another loan agreement with Beijing Linkage, pursuant to which we made another loan in the amount of
RMB4.5 million to Beijing Linkage for providing working capital to its invested company. Certain other shareholders of Beijing
Linkage, namely Yong Lv, Qiang Zhang and Linzhen Cheng, have pledged their equity interests in Beijing Linkage for Beijing
Linkage’s obligations under the aforesaid RMB4.5 million working capital loan. Total loan amounted to RMB9.8 million as of
December 31, 2013, and was fully recorded in impairment due to Beijing Linkage’s doubtful ability of repayment, and was fully
impaired in 2013 due to the concern on its recoverability. In November 2014, we sold all of our equity interests in Beijing Linkage to
Qiang Zhang, one of its existing shareholders, for RMB14.0 million (US$2.3 million) cash receipt as consideration. In addition,
Beijing Linkage agreed to repay the total outstanding loan of RMB9.8 million (US$1.6 million) to us. The RMB14 million (US$2.3
million) consideration and part of the loan repayment RMB5.3 million (US$0.9 million) were received in November 2014. The
remaining amount of RMB4.5 million (US$0.7 million) was received in January 2015.
72
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM1usi%ÈŠ
5*
0C
200GaisY$NM1usi%¨
25-Mar-2015 17:48 EST
852134 TX 73
HTM
ESS
Page 1 of 1
In February 2013, we established a new joint venture, namely ZTE9, in cooperation with Shanghai Zhongxing
Communication Technology Enterprise Co., Ltd. and Shanghai Ruigao Information Technology Co., Ltd., in Wuxi, Jiangsu province,
to develop and operate home entertainment set top box business. In February 2014, Guangdong Hongtu Guangdian Investment
Limited Company made a capital investment of RMB12.5 million to acquire 10% equity interests in ZTE9. As a result, as of
December 31, 2014, we held 30.2% equity interest in ZTE9. For the year ended December 31, 2013 and 2014, net royalty charged by
ZTE9 for providing game contents on IPTV to us was RMB6.0 million and RMB6.8 million (US$1.1 million), respectively. As of
December 31, 2014, the outstanding balance due to ZTE9 was RMB6.3 million (US$1.0 million). In 2014, we lent RMB5.3 million
(US$0.9 million) to ZTE9 to fund its operation. The loan was interest-free and will become due in June 2015. Total amount due from
ZTE9 was RMB5.3 million (US$0.9 million) as of December 31, 2014.
C.
Interests of Experts and Counsel
Not applicable.
Item 8.
FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
Legal Proceedings
In May 2011, Diego Maradona, a former Argentina soccer star, filed a lawsuit in the Beijing No. 1 Intermediate People’s
Court against Shanghai IT and a third-party company in China, alleging that the defendants used his name and image in a web and
social game operated by us without his authorization. In July 2011, the plaintiff amended his complaint to include The9 Computer as
a defendant. The plaintiff in the case demanded, among others, that the defendants pay RMB20 million for his alleged losses. In June
2013, the Beijing No.1 People’s Intermediate Court issued a judgment against us for infringing the portraiture right of the plaintiff
and required us to pay a total of RMB3 million as economic damages and other related fees to the plaintiff. We have appealed the
case to the Beijing People’s Superior Court. A hearing was held by the court on December 26, 2013 and the court made a decision
rejecting our appeal on April 10, 2014. We made a petition to the Supreme Court and the Supreme Court accepted our petition on
July 14, 2014. The Supreme Court made a decision upholding the Beijing No. 1 Intermediate People’s Court decision on
December 16, 2014. According to the judgment, we shall pay to the plaintiff an aggregate amount of RMB3 million (US$0.5 million)
and any accrued interests thereof for late payment. In February 2015, we entered into a settlement agreement with the plaintiff to pay
a total of RMB3.3 million (US$0.5 million) to settle the matter.
On December 30, 2014, Shanghai Anjiu Network Information Limited, or Shanghai Anjiu, filed a lawsuit in Shanghai
Pudong People’s Court against Shanghai IT, claiming us for an advertisement fee of approximately RMB1.5 million (US$0.2 million)
and a penalty of RMB82,000 (US$13,216) . Shanghai IT and Anjiu settled this case for paying a total of RMB1.4 million (US$0.2
million) to the plaintiff in January 2015.
Other than the foregoing, we are not currently a party to any material litigation or other legal proceeding and are not aware
of any pending or threatened litigation or other legal proceeding that may have a material adverse impact on our business, financial
condition and results of operations.
73
THE9 LIMITED
FORM 20-F
Dividend Policy
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1x57%bŠ
5*
0C
200GaisY$NM1x57%b
852134 TX 74
HTM
ESS
Page 1 of 1
We currently intend to retain most, if not all, of our available funds and any future earnings for use in the operation and
expansion of our business. Our board of directors has discretion as to whether we will distribute dividends in the future, subject to
applicable laws. Even if our board of directors determines to distribute dividends, the form, frequency and amount of our dividends
will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual
restrictions, legal restrictions and other factors as the board of directors may deem relevant. Any dividend we declare will be paid to
the holders of ADSs, subject to the terms of the deposit agreement, to the same extent as holders of our ordinary shares, less the fees
and expenses payable under the deposit agreement. Any dividend we declare will be distributed by the depositary bank to the holders
of our ADSs. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.
B.
Significant Changes
Except as otherwise disclosed 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.
Offer and Listing Details
Our ADSs, each representing one ordinary share, have been listed on the Nasdaq Global Market since December 15, 2004.
Our ADSs are traded under the symbol “NCTY.” The following table provides the high and low trading prices for our ADSs on the
Nasdaq Global Market for the periods specified.
Annual High and Low
2010
2011
2012
2013
2014
Quarterly High and Low
First Quarter 2013
Second Quarter 2013
Third Quarter 2013
Fourth Quarter 2013
First Quarter 2014
Second Quarter 2014
Third Quarter 2014
Fourth Quarter 2014
Monthly High and Low
September 2014
October 2014
November 2014
December 2014
January 2015
February 2015
March 2015 (through March 24, 2015)
B.
Plan of Distribution
Not applicable.
74
Sales Price
High Low
8.66
8.49
7.98
4.50
4.22
3.70
2.90
2.71
2.08
1.52
3.33
4.50
4.10
3.88
3.20
2.83
4.22
2.51
3.20
2.51
2.20
2.07
1.71
1.70
1.70
2.53
2.40
2.23
2.08
2.09
2.10
2.27
1.52
2.48
1.96
1.93
1.52
1.30
1.40
1.32
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
C.
Markets
ˆ200GaisY$NM1!8W%kŠ
5*
0C
200GaisY$NM1!8W%k
25-Mar-2015 17:48 EST
852134 TX 75
HTM
ESS
Page 1 of 1
Our ADSs, each representing one ordinary share, have been listed on the Nasdaq Global Market since December 15, 2004
under the symbol “NCTY.”
D.
Selling Shareholders
E.
F.
Not applicable.
Dilution
Not applicable.
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 (2013 Revision) of the Cayman Islands, which is referred to as the Companies Law below.
As of the date of this annual report, our authorized share capital is US$2,500,000, consisting of 250,000,000 ordinary
shares, par value of US$0.01 each. The following are summaries of material provisions of our currently effective amended and
restated memorandum and articles of association and the Companies Law insofar as they relate to the material terms of our ordinary
shares.
Ordinary Shares
General. All of our outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary
shares are issued in registered form. Our shareholders may freely hold and vote their shares.
Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors
subject to the Companies Law.
Voting Rights. Each ordinary share is entitled to one vote on all matters upon which the ordinary shares are entitled to
vote. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be demanded by any
shareholder or shareholders together holding at least ten percent of the shares given a right to vote at the meeting, present in person or
by proxy.
A quorum required for a meeting of shareholders consists of holders of not less than one-third of all outstanding shares
entitled to vote. Shareholders’ meetings shall, if required by the Companies Law, be held annually. Annual general meetings and
extraordinary general meetings may be convened by our board of directors on its own initiative. Extraordinary general meetings shall
be convened by our board of directors upon a request to the directors by shareholders holding in aggregate at least 33% of our voting
share capital. Advance notice of at least seven business days is required for the convening of our annual general meeting and other
shareholders meetings.
75
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1#V!%4Š
4*
0C
200GaisY$NM1#V!%4
852134 TX 76
HTM
ESS
Page 1 of 1
An ordinary resolution to be passed by the shareholders requires the affirmative vote of a simple majority of the votes
attaching to the ordinary shares cast in a general meeting, while a special resolution requires the affirmative vote of no less than two-
thirds of the votes attaching to the ordinary shares cast in a general meeting and includes a unanimous written resolution expressly
passed as a special resolution. A special resolution is required for important matters such as a change of name, a decrease of our share
capital, or amending the memorandum and articles of association. Holders of the ordinary shares may effect certain changes by
ordinary resolution, including an increase of our share capital, the consolidation and division of all or any of our share capital into
shares of a larger amount than our existing share capital, and the cancellation of any shares.
Transfer of Shares. Subject to the restrictions of our articles of association, as applicable, any of our shareholders may
transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved
by our board. The transferor shall be deemed to remain the holder of the shares until the name of the transferee is entered in the
register of members in respect thereof.
Liquidation. On a return of capital on winding up or otherwise (other than on conversion, redemption or purchase of
shares), assets available for distribution among the holders of ordinary shares shall be distributed among the holders of the ordinary
shares as the liquidator deems fair. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets
will be distributed so that the losses are borne by our shareholders proportionately.
Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon shareholders for
any amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of
payment. The shares that have been called upon and remain unpaid on the specified time are subject to forfeiture.
Redemption of Shares. Subject to the provisions of the Companies Law and our articles of association, we may issue
shares on terms that are subject to redemption, at our option or at the option of the holders, on such terms and in such manner as may
be determined by our board of directors.
Variation of Rights 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 either with the written consent of a majority of the issued shares of that class or with the sanction of
an ordinary resolution passed at a general meeting of the holders of the shares of that class.
Inspection of Books and Records. Holders of our ordinary 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. See “— H. Documents on Display.”
Differences in Corporate Law
The Companies Law is modeled after that of English law but does not follow recent English law statutory enactments. In
addition, the Companies Law differs from laws applicable to Delaware corporations and their shareholders. Set forth below is a
summary of the significant differences between the provisions of the Companies Law applicable to us and the laws applicable to
Delaware corporations and their shareholders.
Mergers and Similar Arrangements. The Companies Law permits mergers and consolidations between Cayman Islands
companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes:
•
•
a “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property
and liabilities in one of such companies as the surviving company; and
a “consolidation” means the combination of two or more constituent companies into a consolidated company and the
vesting of the undertaking, property and liabilities of such companies to the consolidated company.
76
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM1%nT%.Š
4*
0C
200GaisY$NM1%nT%.
852134 TX 77
HTM
ESS
Page 1 of 1
In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of
merger or consolidation, which must then be authorized by:
•
•
a special resolution of the shareholders of each constituent company; and
such other authorizations, if any, as may be specified in such constituent company’s articles of association.
The plan of merger or consolidation must be filed with the Registrar of Companies together with a declaration as to the
solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking
that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company that
notification of the merger or consolidation will be published in the Cayman Islands Gazette. Dissenting shareholders have the right to
be paid the fair value of their shares if they follow the required procedures, subject to certain exceptions. The fair value of the shares
will be determined by the Cayman Islands court if it cannot be agreed among the parties. Court approval is not required for a merger
or consolidation which is effected in compliance with these statutory procedures.
In addition, there are statutory provisions that facilitate the reconstruction and amalgamation of companies, provided that
the arrangement is approved by a majority in number of each class of shareholders or creditors with whom the arrangement is to be
made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be,
that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the
meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting
shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to
approve the arrangement if it determines that:
•
•
•
•
the statutory provisions as to majority vote have been met;
the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona
fide without coercion of the minority to promote interests adverse to those of the class;
the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in
respect of his interest; and
the arrangement is not one that would more properly be sanctioned under some other provision of the Companies
Law.
When a take-over offer is made and accepted by holders of 90.0% of the shares affected within four months, the offeror
may, within a two month period commencing on the expiration of such four month period, require the holders of the remaining shares
to transfer such shares on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is
unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If the arrangement and reconstruction is thus approved, the dissenting shareholder would have no rights comparable to
appraisal rights, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights
to receive payment in cash for the judicially determined value of the shares.
Shareholders’ Suits. The Cayman Islands courts can be expected to follow English case law precedents. The Cayman
Islands courts can be expected to apply and follow common law principles (namely the rule in Foss v Harbottle and the exceptions
thereto) that permit a minority shareholder to commence a class action against the company or a derivative action in the name of the
company to challenge (1) an act that is outside the company’s corporate powers or that is illegal, (2) an act constituting a fraud against
the minority shareholders where the wrongdoers are themselves in control of the company, and (3) an action requiring a resolution
passed by a qualified or special majority that has not been obtained.
77
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM21SMZ@Š
4*
0C
200GaisY$NM21SMZ@
852134 TX 78
HTM
ESS
Page 1 of 1
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to
the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires
that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under
this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a
significant transaction. The duty of loyalty requires that a director act in a manner he reasonably believes to be in the best interests of
the corporation, he must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director
and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director,
officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have
been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the
corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence
be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the
transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to
the company and therefore it is considered that he owes the following duties to the company — a duty to act in good faith in the best
interests of the company, a duty not to make a personal profit out of his position as director (unless the company permits him to do
so), a duty not to put himself in a position where the interests of the company conflict with his personal interest or his duty to a third
party and a duty to exercise powers for the purpose for which such powers were intended. A director of a Cayman Islands company
owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance
of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However,
there are indications that the English and Commonwealth courts are moving towards an objective standard with regard to the required
skill and care and these authorities are likely to be followed in the Cayman Islands.
Shareholder Action by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the
right of shareholders to act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our articles
of association provide that shareholders may approve corporate matters by way of written resolution signed by or on behalf of each
shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
Shareholder Proposals. Under the Delaware General Corporation Law, a shareholder has the right to put any proposal
before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special
meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders
may be precluded from calling special meetings. Cayman Islands law and our articles of association allow our shareholders holding
not less than 33 per cent of the paid up voting share capital of the company to requisition a shareholder’s meeting.
Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not
permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the
representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which
the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director.
As permitted under Cayman Islands law, our articles of association do not provide for cumulative voting.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation may be removed with the
approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our
articles of association, directors can be removed with or without cause, but only by the vote of a majority of the holders of our shares
voting at a meeting or the unanimous written resolution of all shareholders.
Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination
statute applicable to Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such
statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an
“interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested
shareholder generally is a person or group who or which owns or owned 15% or more of the target’s outstanding voting stock within
the past three years. This has the effect of limiting the ability of a potential acquiror to make a two-tiered bid for the target in which
all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such
shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction
which resulted in the person becoming an interested shareholder. This encourages any potential acquiror of a Delaware public
corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
78
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:48 EST
ˆ200GaisY$NM24WhZ1Š
4*
0C
200GaisY$NM24WhZ1
852134 TX 79
HTM
ESS
Page 1 of 1
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded
by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a
company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of
the company and for a proper purpose and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up. Under the Delaware General Corporation Law, unless the board of directors approves the
proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if
the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares.
Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in
connection with dissolutions initiated by the board. Under the Companies Law, our company may be dissolved, liquidated or wound
up by either an order of the courts of the Cayman Islands or by a special resolution, or by an ordinary resolution on the basis that our
company is unable to pay its debts as they fall due. The court has authority to order winding up in a number of specified
circumstances including where it is, in the opinion of the court, just and equitable to do so.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class
of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides
otherwise. Under our articles of association, if our share capital is divided into more than one class of shares, we may vary the rights
attached to any class only with the written consent of the holders of at least a majority of the shares of such class or with the sanction
of a resolution passed by at least a majority of the holders of such class present in person or by proxy at a separate general meeting of
the holders of the shares of that class.
Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing
documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of
incorporation provides otherwise. As permitted by Cayman Islands law, our memorandum and articles of association may be
amended with the vote of at least two-third holders of our shares at a meeting or the unanimous written resolution of all shareholders.
Anti-Takeover Provisions in Memorandum and Articles of Association. Some provisions of the memorandum and articles
of association may discourage, delay or prevent a change in control of our company or management that shareholders may consider
favorable, including provisions that:
•
•
authorize our board of directors to issue preference shares in one or more series and to designate the price, rights,
preferences, privileges and restrictions of such preference shares without any further vote or action by our
shareholders; and
create a classified board of directors pursuant to which our directors are elected for staggered terms, which means
that shareholders can only elect, or remove, a limited number of directors in any given year.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our
memorandum and articles of association for a proper purpose and for what they believe in good faith to be in the best interests of our
company.
Rights of Non-Resident or Foreign Shareholders. There are no limitations imposed by our memorandum and articles of
association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are
no provisions in our memorandum and articles of association governing the ownership threshold above which shareholder ownership
must be disclosed.
Inspection of Books and Records. Under the Delaware General Corporation Law, any shareholder of a corporation may
for any proper purpose inspect or make copies of the corporation’s stock ledger, list of shareholders and other books and records.
Holders of our shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or
corporate records. However, we will provide our shareholders with annual audited financial statements.
79
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
11.6.14
NCR venkp1dc
HKG
Shareholder Rights Plan
ˆ200GaisY$NWm@v6%AŠ
5*
0C
200GaisY$NWm@v6%A
26-Mar-2015 00:57 EST
852134 TX 80
HTM
ESS
Page 1 of 1
On January 8, 2009, our board of directors declared a dividend of one ordinary share purchase right, or a Right, for each of
our ordinary shares outstanding at the close of business on January 22, 2009. See “Item 14. Material Modifications to the Rights of
Security Holders and Use of Proceeds.”
C.
Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those
described in “Item 4. Information on the Company” or elsewhere in this annual report.
D.
Exchange Controls
China’s government imposes control over the convertibility of the RMB into foreign currencies. The conversion of RMB
into foreign currencies, including U.S. dollars, has been based on rates announced by the PBOC. On July 21, 2005, the PRC
government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the
Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in
policy has resulted in an significant appreciation of the RMB against the U.S. dollar since the introduction of new policy. While the
international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC
government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the
RMB against the U.S. dollar.
Pursuant to the Foreign Exchange Administration Rules issued by the State Council on January 29, 1996, and effective as
of April 1, 1996 (and amended on January 14, 1997 and August 5, 2008) and the Administration Rules of the Settlement, Sale and
Payment of Foreign Exchange which came into effect on July 1, 1996 regarding foreign exchange control, or the Regulations,
conversion of RMB into foreign exchange by foreign investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors of foreign invested enterprises, is typically permissible. Foreign investment enterprises are
permitted to remit foreign exchange from their foreign exchange bank account in China on the basis of, inter alia, the terms of the
relevant joint venture contracts, articles of association, and the board resolutions declaring the distribution of the dividend and
payment of profits. On January 14, 1997, the State Council amended the Foreign Exchange Administration Rules and added, among
other things, an important provision, as Article 5 provides that the state shall not impose restrictions on recurring international current
account payments and transfers. Conversion of RMB into foreign currencies and remittance of foreign currencies for capital account
items, including direct investment, loans and security investment, is still subject to the approval of SAFE, in each such transaction.
Under the Regulations, foreign investment enterprises are required to open and maintain separate foreign exchange
accounts for capital account items (but not for other items). In addition, foreign investment enterprises may only buy, sell and/or remit
foreign currencies at those banks authorized to conduct foreign exchange business upon the production of valid commercial
documents and, in some cases, such as capital account item transactions, document approval from SAFE.
Currently, foreign investment enterprises are required to apply to SAFE for “foreign exchange registration certificates for
foreign investment enterprises” (which are granted to foreign investment enterprises, upon fulfilling specified conditions and which
are subject to review and renewal by SAFE on an annual basis). Usually, with such foreign exchange registration certificates and
required underlying transaction documents, or with approval documents from the SAFE if the transactions are under capital account
(which are obtained on a transaction-by-transaction basis), foreign-invested enterprises may enter into foreign exchange transactions
at banks authorized to conduct foreign exchange business to obtain foreign exchange for their needs.
E.
Taxation
The following summary of the material Cayman Islands and U. S. federal income tax consequences of an investment in our
ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of
which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or
ordinary shares, such as the tax consequences under state, local and other tax laws.
80
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Cayman Islands Taxation
ˆ200GaisY$NM29S&%JŠ
4*
0C
200GaisY$NM29S&%J
25-Mar-2015 17:48 EST
852134 TX 81
HTM
ESS
Page 1 of 1
In the opinion of our Cayman Islands counsel, Maples and Calder, the Cayman Islands currently levies no taxes on
individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax
or estate duty. No Cayman Islands stamp duty will be payable unless an instrument is executed in, brought to, or produced before a
court of the Cayman Islands. The Cayman Islands is not party to any double tax treaties which are applicable to payments made to or
by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
U. S. Federal Income Taxation
The following discussion describes material U.S. federal income tax consequences to U.S. Holders (as defined below)
under current law of an investment in the ADSs or ordinary shares. This discussion applies only to U.S. Holders that hold the ADSs
or ordinary shares as capital assets (generally, property held for investment) and have the U.S. dollar as their functional currency. This
discussion is based on the tax laws of the United States in effect as of the date of this annual report and on U.S. Treasury regulations
in effect or, in some cases, proposed as of the date of this annual report, as well as judicial and administrative interpretations thereof
available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and
could affect the tax consequences described below.
The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax
situations such as:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
banks and other financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
broker-dealers;
traders that elect to use a mark-to-market method of accounting;
U.S. expatriates or entities subject to the U.S. anti-inversion rules;
tax-exempt entities;
persons liable for alternative minimum tax;
persons whose functional currency is other than the United States dollar;
persons holding an ADS or ordinary share as part of a straddle, hedging, conversion or integrated transaction;
persons holding ADSs or ordinary shares through a bank, financial institution or other entity, or a branch thereof,
located, organized or resident outside the United States;
persons that actually or constructively own 10% or more of the total combined voting power of all classes of our
voting stock;
partnerships or other pass-through entities, or persons holding ADSs or ordinary shares through such entities; or
persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option or otherwise
as compensation.
81
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2CM4Z-Š
4*
0C
200GaisY$NM2CM4Z-
852134 TX 82
HTM
ESS
Page 1 of 1
In addition, the discussion below does not address any tax consequences arising out of the 3.8% Medicare tax on “net
investment income.”
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S.
FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, NON-U.S.
AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR
ORDINARY SHARES.
The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply to you if you are a
beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes:
•
•
•
•
an individual who is a citizen or resident of the United States;
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the
laws of the United States, any state thereof or the District of Columbia;
an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
a trust that (1) is subject to the primary supervision of a court within the United States and the control of one or
more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person.
If a partnership (or other entity taxable as a partnership for U.S. federal income tax purposes) is a beneficial owner of our
ADSs or ordinary shares, the tax treatment of a partner in such partnership will depend on the status of such partner and the activities
of such partnership.
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations
in the deposit agreement and any related agreement have been and will be complied with in accordance with their terms. If you hold
ADSs, you should be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S. federal income tax
purposes.
The U.S. Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and
the issuer of the security underlying the ADS may be taking actions that are inconsistent with the beneficial ownership of the
underlying security (for example, pre-releasing ADSs to persons that do not have beneficial ownership of the securities underlying the
ADSs). Accordingly, the creditability of any foreign tax credits or the availability of the reduced tax rate for dividends received by
certain non-corporate U.S. Holders, including individual U.S. Holders (as discussed below), could be affected by actions taken by
intermediaries in the chain of ownership between the holders of ADSs and our company if as a result of such actions the holders of
ADSs are not properly treated as beneficial owners of underlying ordinary shares.
Passive Foreign Investment Company
Based on the market price of our ADSs and the value and composition of our, income, assets and liabilities, although not
free from doubt, we believe we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for the
taxable year ended December 31, 2014.
A non-U.S. corporation will be a PFIC for any taxable year if either:
•
•
at least 75% of its gross income for such year is passive income; or
at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is
attributable to assets that produce passive income or are held for the production of passive income (the “asset test”).
82
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM2FF8%}Š
4*
0C
200GaisY$NM2FF8%}
25-Mar-2015 17:49 EST
852134 TX 83
HTM
ESS
Page 1 of 1
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than certain royalties and
rents derived in the active conduct of a trade or business and not derived from a related person). The classification of certain of our
income as active or passive and certain of our assets as producing active or passive income, and hence whether we expect to be or will
become a PFIC, depends on the interpretation of certain U.S. Treasury Regulations, including certain regulations relating to royalty
income and income from intangible assets, as well as certain Internal Revenue Service, or IRS, guidance relating to the classification
of assets as producing active or passive income and certain IRS guidance relating to the distinction between services income and
royalties for U.S. federal income tax purposes. Such regulations and guidance are potentially subject to different interpretations. If the
percentage of our assets treated as producing passive income increases, we may be more likely to be treated as a PFIC for any taxable
year.
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, at least 25% (by value) of the stock. In applying this rule, however, it is not
clear whether the contractual arrangements between us and our affiliated entities will be treated as ownership of stock. Moreover, it is
not clear whether gain recognized from the sale of stock (or an arrangement treated as ownership of stock for U.S. federal income tax
purposes) in a 25% (by value) or greater owned subsidiary (or VIE) is characterized as passive or as if we had held and sold directly
our proportionate share of our subsidiary’s (or VIE’s) assets. If it were determined, that we are not the owner of our VIEs for United
States federal income tax purposes, the composition of our income and assets would change and we may be more likely to be treated
as a PFIC for any taxable year.
We must make a separate determination after the close of each taxable year as to whether we were a PFIC for that year.
Because the value of our assets for purposes of the asset test generally will be determined by reference to the market price of our
ADSs or ordinary shares, our PFIC status will depend in part on the market price of our ADSs or ordinary shares, which may
fluctuate significantly, and the composition of our assets and liabilities. Based on the market price of our ADSs and the value and
composition of our assets and liabilities during the taxable year ended December 31, 2014, we believe we were a PFIC for such year.
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, we generally will continue to be
treated as a PFIC with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we cease to be a
PFIC and you make a “deemed sale” election with respect to the ADSs or ordinary shares, as applicable. If such election is made, you
will be deemed to have sold the ADSs or ordinary shares you hold at their fair market value and any gain from such deemed sale
would be subject to the rules described in the following two paragraphs. After the deemed sale election, so long as we do not become
a PFIC in a subsequent taxable year, your ADSs or ordinary shares with respect to which such election was made will not be treated
as shares in a PFIC and you will not be subject to the rules described below with respect to any “excess distribution” you receive from
us or any gain from an actual sale or other disposition of the ADSs or ordinary shares. You are strongly urged to consult your tax
advisors as to the possibility and consequences of making a deemed sale election if we cease to be a PFIC and such election
becomes available to you.
For each taxable year that we are treated as a PFIC with respect to you, you will be subject to special tax rules with respect
to any “excess distribution” you receive and any gain you recognize from a sale or other disposition (including a pledge) of the ADSs
or ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that
are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your
holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these special tax rules, if you receive
any excess distribution or recognize any gain from a sale or other disposition of the ADSs or ordinary shares:
•
•
•
the excess distribution or recognized gain will be allocated ratably over your holding period for the ADSs or
ordinary shares;
the amount allocated to the current taxable year, and any taxable years in your holding period prior to the first
taxable year in which we were a PFIC, will be treated as ordinary income; and
the amount allocated to each other taxable year will be subject to tax at the highest tax rate in effect for individuals
or corporations, as applicable, for each such year and the interest charge generally applicable to underpayments of
tax will be imposed on the resulting tax attributable to each such year.
83
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2H=h%Ê
4*
0C
200GaisY$NM2H=h%ˆ
852134 TX 84
HTM
ESS
Page 1 of 1
The tax liability for amounts allocated to years prior to the year of disposition or excess distribution cannot be offset by any
net operating losses for such years, and gains (but not losses) from the sale or other disposition of the ADSs or ordinary shares cannot
be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.
If we are treated as a PFIC with respect to you for any taxable year. to the extent any of our subsidiaries are also PFICs or
we make direct or indirect equity investments in other entities that are PFICs, you will be deemed to own shares in such lower-tier
PFICs that are directly or indirectly owned by us in that proportion that the value of the ADSs or ordinary shares you own bears to the
value of all of our ADSs or ordinary shares, and you may be subject to the rules described in the preceding two paragraphs with
respect to the shares of such lower-tier PFICs that you would be deemed to own. It is likely that one or more of our subsidiaries were
PFICs for the taxable year ending December 31, 2014. You should consult your tax advisors regarding the application of the PFIC
rules to any of our subsidiaries.
A U.S. Holder of marketable stock (as defined below) of a PFIC may make a mark-to-market election for such stock to
elect out of the PFIC rules described above regarding excess distributions and recognized gains. If you make a valid mark-to-market
election for the ADSs or ordinary shares, you will include in income for each year that we are a PFIC an amount equal to the excess,
if any, of the fair market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis in such
ADSs or ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares
over their fair market value as of the close of the taxable year. However, deductions will be allowable only to the extent of any net
mark-to-market gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in your
income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or ordinary shares, will be
treated as ordinary income. Ordinary loss treatment will apply to the deductible portion of any mark-to-market loss on the ADSs or
ordinary shares, as well as to any loss from the actual sale or other disposition of the ADSs or ordinary shares, to the extent that the
amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis
in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. If you make a mark-to-market election,
any distributions that we make generally would be subject to the tax rules discussed below under “—Taxation of Dividends and Other
Distributions on the ADSs or Ordinary Shares,” except that the lower tax rate applicable to qualified dividend income would not
apply.
The mark-to-market election is available only for “marketable stock,” which is stock that is traded in greater 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 U.S. Treasury regulations. The ADSs are currently listed on Nasdaq, which is a qualified exchange or other
market for these purposes. Consequently, if the ADSs remain listed on Nasdaq and are regularly traded, and you are a holder of
ADSs, we expect the mark-to-market election would be available to you if we are a PFIC (as we believe we were for 2014). 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 described above regarding excess distributions and recognized gains with respect to its indirect interest in
any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes. You should consult
your tax advisors as to the availability and desirability of a mark-to-market election, as well as the impact of such election on interests
in any lower-tier PFICs.
Alternatively, a U.S. Holder of stock in a PFIC may make a “qualified electing fund” election with respect to such
corporation to elect out of the PFIC rules described above regarding excess distributions and recognized gains. A U.S. Holder that
makes a qualified electing fund election with respect to a PFIC generally will include in income such holder’s pro rata share of the
corporation’s income on a current basis. However, you may make a qualified electing fund election with respect to your ADSs or
ordinary shares only if we furnish you annually with certain tax information, and we currently do not intend to prepare or provide
such information.
Unless otherwise provided by the U.S. Treasury, each U.S. shareholder of a PFIC is required to file an annual report
containing such information as the U.S. Treasury may require. If we are a PFIC (as we believe we were for 2013), you should consult
your tax advisors regarding any reporting requirements that may apply to you.
YOU ARE STRONGLY URGED TO CONSULT YOUR TAX ADVISORS REGARDING THE IMPACT OF OUR
BEING A PFIC FOR 2014 ON YOUR INVESTMENT IN OUR ADSs AND ORDINARY SHARES AS WELL AS THE
APPLICATION OF THE PFIC RULES AND THE POSSIBILITY OF MAKING A MARK-TO-MARKET OR DEEMED
SALE ELECTION.
84
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2KTmZHŠ
4*
0C
200GaisY$NM2KTmZH
852134 TX 85
HTM
ESS
Page 1 of 1
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the PFIC rules discussed above, the gross amount of any distribution we make to you with respect to the ADSs
or ordinary shares generally will be includible in your gross income as dividend income on the date of receipt by the depositary, in the
case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or
accumulated earnings and profits (as computed under U.S. federal income tax principles). The dividends will not be eligible for the
dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations. To the extent the
amount of the distribution exceeds our current and accumulated earnings and profits, (as computed under U.S. federal income tax
principles) such excess amount will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and then, to
the extent such excess amount exceeds your tax basis, as a capital gain. Because we do not intend to determine our earnings and
profits on the basis of U. S. federal income tax principles, any distribution paid will generally be reported as a “dividend” for U. S.
federal income tax purposes.
With respect to certain non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower
capital gains rate applicable to “qualified dividend income,” provided that (1) the ADSs or ordinary shares, as applicable, are readily
tradable on an established securities market in the United States, or we are eligible for the benefits of a qualifying income tax treaty
with the United States that includes an exchange of information program, (2) we are neither a PFIC nor treated as such with respect to
you for the taxable year in which the dividend was paid and the preceding taxable year, and (3) certain holding period requirements
are met. Under Internal Revenue Service authority, common or ordinary shares, or ADSs representing such shares, are considered for
the purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on
Nasdaq, as are our ADSs (but not our ordinary shares). Based on existing guidance, it is unclear whether the ordinary shares will be
considered to be readily tradable on an established securities market in the United States, because only the ADSs, and not the
underlying ordinary shares, will be listed on a securities market in the United States. We believe, but we cannot assure you, that
dividends we pay on the ordinary shares that are represented by ADSs, but not on the ordinary shares that are not so represented, will,
subject to applicable limitations, be eligible for the reduced rates of taxation. If we are treated as a “resident enterprise” for PRC tax
purposes under the EIT Law (see “Item 3. Key Information—D. Risk Factors—Risks Related to Our Company and Our Industry—
The PRC income tax laws may increase our tax burden or the tax burden on the holders of our shares or ADSs, and tax benefits
available to us may be reduced or repealed, causing the value of your investment in us to suffer”), we may be eligible for the benefits
of the income tax treaty between the United States and the PRC. You should consult your tax advisors regarding the availability of the
lower capital gains rate applicable to qualified dividend income for dividends paid with respect to our ADSs or ordinary shares.
Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as
qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign
tax credit limitation in general will be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to
qualified dividend income and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes
eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with
respect to the ADSs or ordinary shares generally will constitute “passive category income” but could, in the case of certain U.S.
Holders, constitute “general category income.”
If PRC withholding taxes apply to dividends paid to you with respect to our ADSs or ordinary shares (see “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Company and Our Industry— The PRC income tax laws may increase our tax
burden or the tax burden on the holders of our shares or ADSs, and tax benefits available to us may be reduced or repealed, causing
the value of your investment in us to suffer”), subject to certain conditions and limitations, such PRC withholding taxes may be
treated as foreign taxes eligible for credit against your U.S. federal income tax liability. The rules relating to the determination of the
foreign tax credit are complex, and you should consult your tax advisors regarding the availability of a foreign tax credit in your
particular circumstances, including the effects of any applicable income tax treaties.
85
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
Taxation of Disposition of the ADSs or Ordinary Shares
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2MmCZÊ
5*
0C
200GaisY$NM2MmCZˆ
852134 TX 86
HTM
ESS
Page 1 of 1
Subject to the PFIC rules discussed above, you will recognize taxable gain or loss on any sale, exchange or other taxable
disposition of an ADS or ordinary share equal to the difference between the amount realized (in U.S. dollars) for the ADS or ordinary
share and your tax basis (in U.S. dollars) in the ADS or ordinary share. If the consideration you receive for the ADS or ordinary share
is not paid in U.S. dollars, the amount realized will be the U.S. dollar value of the payment received. In general, the U.S. dollar value
of such a payment will be determined on the date of receipt of payment if you are a cash basis taxpayer and on the date of disposition
if you are an accrual basis taxpayer. However, if the ADSs or ordinary shares, as applicable, are treated as traded on an established
securities market and you are either a cash basis taxpayer or an accrual basis taxpayer who has made a special election, you will
determine the U.S. dollar value of the amount realized in a foreign currency by translating the amount received at the spot rate of
exchange on the settlement date of the sale. The gain or loss generally will be a capital gain or loss. If you are a non-corporate U.S.
Holder, including an individual U.S. Holder, that has held the ADS or ordinary share for more than one year, you generally will be
eligible for reduced tax rates. The deductibility of capital losses is subject to limitations.
Any gain or loss that you recognize on a disposition of ADSs or ordinary shares generally will be treated as U.S. source
income or loss for foreign tax credit limitation purposes (in the case of loss, subject to certain limitations). However, if we are treated
as a “resident enterprise” for PRC tax purposes and PRC tax were to be imposed on any gain from the disposition of the ADSs or
ordinary shares (see “Item 3. Key Information — D. Risk Factors — Risks Related to Our Company and Our Industry — The PRC
income tax laws may increase our tax burden or the tax burden on the holders of our shares or ADSs, and tax benefits available to us
may be reduced or repealed, causing the value of your investment in us to suffer”), a U.S. Holder that is eligible for the benefits of the
income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income for foreign tax credit
purposes. You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances,
including the effect of any applicable income tax treaties.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or redemption of ADSs
or ordinary shares generally will be subject to information reporting to the Internal Revenue Service and possible U.S. backup
withholding at a rate of 28%. Backup withholding will not apply, however, to a U.S. Holder that furnishes a correct taxpayer
identification number and makes any other required certification on Internal Revenue Service Form W-9 or that is otherwise exempt
from backup withholding. U.S. Holders that are exempt from backup withholding should still complete Internal Revenue Service
Form W-9 to avoid possible erroneous backup withholding.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S.
federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by
filing an appropriate claim for refund with the Internal Revenue Service and furnishing any required information in a timely manner.
U.S. Holders who are individuals generally will be required to report our name, address and such information relating to an
interest in the ADSs or ordinary shares as is necessary to identify the class or issue of which your ADSs or ordinary shares are a part.
These requirements are subject to exceptions, including an exception for ADSs or ordinary shares held in accounts maintained by
certain financial institutions and an exception applicable if the aggregate value of all “specified foreign financial assets” (as defined in
the Code) does not exceed certain thresholds.
U.S. Holders should consult their tax advisors regarding the application of the information reporting and backup
withholding rules.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
86
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
H.
Documents on Display
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2P%kZCŠ
5*
0C
200GaisY$NM2P%kZC
852134 TX 87
HTM
ESS
Page 1 of 1
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange
Act, we are required to file reports and other information with the SEC. Copies of reports and other information, when so filed, may
be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC. The SEC
also maintains a web site 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. 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.
Our financial statements have been prepared in accordance with U.S. GAAP.
We will furnish our shareholders with annual reports, which will include a review of operations and annual audited
consolidated financial statements prepared in conformity with U.S. GAAP.
I.
Subsidiary Information
For a listing of our subsidiaries, see “Item 4. Information on the Company—C. Organizational Structure.”
Item 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk for changes in interest rates relates primarily to the interest income generated by excess
cash invested in bank deposits. We have not used any derivative financial instruments in our investment portfolio or for cash
management purposes. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed nor do we
anticipate being exposed to material risks due to changes in interest rates. However, our future interest income may fall short of
expectations due to changes in interest rates.
Foreign Exchange Risk
We are exposed to foreign exchange risk arising from various currency exposures. Our payments to overseas developers
and a portion of our financial assets are denominated in U.S. dollars and other foreign currencies while a significant portion of our
revenues are denominated in RMB, the legal currency in China. We have not used any forward contracts or currency borrowings to
hedge our exposure to foreign currency risk. The value of the RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions. The conversion of RMB into foreign currencies,
including U.S. dollars, has been based on rates set by PBOC. On July 21, 2005, the PRC government changed its decade-old policy of
pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and
managed band against a basket of certain foreign currencies. This change in policy has resulted in significant appreciation of the
RMB against the U.S. dollar since the introduction of new policy. While the international reaction to the RMB revaluation has
generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible
currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar.
Any significant revaluation of RMB may adversely affect our cash flows and financial position, and the value of, and any
dividends payable on, our ADSs in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any new
RMB denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for
such purposes. An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated monetary assets into RMB, as the RMB is our functional and
reporting currency.
Foreign exchange transactions under our capital account, including principal payments with respect to foreign currency-
denominated obligations, continue to be subject to significant foreign exchange controls and the approval of SAFE. These limitations
could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital
expenditures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Restrictions on currency
exchange in China limit our ability to utilize our revenues effectively, make dividend payments and meet our foreign currency
denominated obligations.”
87
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2RaNZVŠ
5*
0C
200GaisY$NM2RaNZV
852134 TX 88
HTM
ESS
Page 1 of 1
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
The Bank of New York Mellon, our ADS depositary, collects its fees for delivery and surrender of ADSs directly from
investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The
depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a
portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from
cash distributions, or by directly billing investors, or by charging the book-entry system accounts of participants acting for them. The
depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay:
For:
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
• Issuance of ADSs, including issuances resulting from a
distribution of shares or rights or other property
• Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates
US$0.02 (or less) per ADS
• Any cash distribution to ADS registered holders
A fee equivalent to the fee that would be payable if securities
distributed to you had been shares and the shares had been
deposited for issuance of ADSs
• Distribution of securities distributed to holders of
deposited securities that are distributed by the depositary to
ADS registered holders
US$0.02 (or less) per ADS per calendar year
• Depositary services
Registration or transfer fees
Expenses of the depositary
• Transfer and registration of shares on our share register to
or from the name of the depositary or its agent when you
deposit or withdraw shares
• Cable, telex and facsimile transmissions (when expressly
provided in the deposit agreement)
• Converting foreign currency to U.S. dollars
Taxes and other governmental charges the depositary or the
custodian have to pay on any ADS or share underlying an ADS, for
example, stock transfer taxes, stamp duty or withholding taxes
• As necessary
Any charges incurred by the depositary or its agents for servicing
the deposited securities
• As necessary
88
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM2T1%Z=Š
5*
0C
200GaisY$NM2T1%Z=
25-Mar-2015 17:49 EST
852134 TX 89
HTM
ESS
Page 1 of 1
The depositary has agreed to reimburse us for expenses we incur that are related to the administration and maintenance of
our ADS facility including, but not limited to, investor relations expenses, the annual Nasdaq Stock Market continued listing fees or
any other program related expenses every year. 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. As of
December 31, 2014, we had US$0.2 million reimbursement receivable for the year 2014, after deducting withholding tax, from the
depositary as reimbursement for legal fees and administrative expenses.
Item 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
PART II
Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Shareholder Rights Plan
On January 8, 2009, our board of directors declared a dividend of one ordinary share purchase right, or a Right, for each of
our ordinary shares outstanding at the close of business on January 22, 2009. As long as the Rights are attached to the ordinary shares,
we will issue one Right (subject to adjustment) with each new ordinary share so that all such ordinary shares will have attached
Rights. When exercisable, each Right will entitle the registered holder to purchase from us one ordinary share at a price of US$19.5
per ordinary share, subject to adjustment.
The Rights will expire on January 8, 2019, subject to our right to extend such date and are exercisable only if a person or
group obtains ownership of or announces a tender offer for 15% or more of our voting securities (including our company’s ADSs
representing ordinary shares). Upon exercise, all Rights holders except the potential acquirer will be entitled to acquire our shares or
the acquirer’s shares at a discount. We are entitled to redeem the Rights in whole at any time on or before the acquisition by a person
or group of 15% or more of our voting securities (which for these purposes include ADSs representing ordinary shares), or exchange
the Rights, in whole or in part, at an exchange ratio of one ordinary share, and of other securities, cash or other assets deemed to have
the same value as one ordinary share, per Right, subject to adjustment.
The Rights were not distributed in response to any specific effort to acquire control of our company.
Use of Proceeds
Not Applicable.
Item 15.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of
the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the
period covered by this report, as required by Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our management
has concluded that, as of December 31, 2014, our disclosure controls and procedures were effective in ensuring that the information
required to be disclosed by us in the reports that we file or submit under the Exchange Act was recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms, and that the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
89
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2WNYZ2Š
5*
0C
200GaisY$NM2WNYZ2
852134 TX 90
HTM
ESS
Page 1 of 1
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
item is defined in Rules 13a-15(f) under the Exchange Act, for our company. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial
statements in accordance with U.S. GAAP and includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with
generally accepted accounting principles, and that a company’s receipts and expenditures are being made only in accordance with
authorizations of a company’s management and directors, and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of a company’s assets that could have a material effect on the consolidated
financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance
and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can
be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be
prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known
features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this
risk.
As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management
assessed the effectiveness of the internal control over financial reporting as of December 31, 2014 using criteria established in
“Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, our management concluded that our internal control over financial reporting was effective as
of December 31, 2014 based on the criteria established in “Internal Control—Integrated Framework (2013)” issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Attestation Report of the Registered Public Accounting Firm
This annual report on Form 20-F does not include an attestation report of the company’s registered public accounting firm
because the company is neither an accelerated filer nor a large accelerated filer, as such terms are defined in Rule 12b-2 under the
Exchange Act.
Changes in Internal Control over Financial Reporting
Our management has evaluated, with the participation of our chief executive officer and chief financial officer, whether
any changes in our internal control over financial reporting that occurred during our last fiscal year have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. Based on the evaluation we conducted, our
management has concluded that no such changes occurred during the period covered by this annual report on Form 20-F.
Item 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”
Item 16B.
CODE OF ETHICS
Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including
certain provisions that specifically apply to our chief executive officer, chief financial officer, principal accounting officer, controller,
vice presidents and any other persons who perform similar functions for us. We hereby undertake to provide to any person, without
charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.
90
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2YGb%YŠ
5*
0C
200GaisY$NM2YGb%Y
852134 TX 91
HTM
ESS
Page 1 of 1
Item 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees by categories specified below in connection with certain professional
services rendered by Deloitte Touche Tohmatsu Certified Public Accounts LLP, our principal external auditors for the periods
indicated below.
Audit fees(1)
Audit-related fees(2)
Tax fees(3)
All other fees
2013
RMB
7,655,841
—
181,611
—
2014
RMB
5,275,328
—
4,924
—
US$
850,229
—
794
—
(1)
(2)
(3)
“Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal
auditors for the audit of our annual financial statements.
“Audit-related fees” means the aggregate fees billed in each of the fiscal years listed for assurance and related services by our
principal auditors that are reasonably related to the performance of the audit or review of our financial statements and are not
reported under “Audit fees.”
“Tax fees” means the fees billed for tax compliance services, including the preparation of tax returns and tax consultations.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by our independent registered
public accounting firm, including audit services, audit-related services, tax services and other services as described above, other than
those for de minimus services which are approved by the Audit Committee prior to the completion of the audit.
Item 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
Item 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
Item 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
Item 16G.
CORPORATE GOVERNANCE
We are incorporated in the Cayman Islands and our corporate governance practices are governed by applicable Cayman
Islands law. In addition, because our ADSs are listed on the Nasdaq Global Market, we are subject to corporate governance
requirements of the Nasdaq. However, Nasdaq Marketplace Rule 5615(a)(3) permits foreign private issuers like us to follow “home
country practice” with respect to certain corporate governance matters, and we may decide to follow the “home country practice” on a
case-by-case basis. We are committed to a high standard of corporate governance. As such, we endeavor to comply with most of the
Nasdaq corporate governance practices and believe that we are currently in compliance with the Nasdaq corporate governance
practices.
Item 16H.
MINE SAFETY DISCLOSURE
Not applicable.
91
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
PART III
Item 17.
FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ˆ200GaisY$NM2=8gZÅŠ
5*
0C
200GaisY$NM2=8gZ¯
25-Mar-2015 17:49 EST
852134 TX 92
HTM
ESS
Page 1 of 1
Item 18.
FINANCIAL STATEMENTS
The consolidated financial statements for The9 Limited and its subsidiaries are included at the end of this annual report.
Item 19.
EXHIBITS
Exhibit
Number
1.1
2.1
2.2
2.3
4.1
4.2
4.3
4.4
Document
Amended and Restated Memorandum and Articles of Association of The Registrant as currently in effect (incorporated
by reference to Exhibit 1.1 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on
April 7, 2011)
Specimen American Depositary Receipt of The Registrant (incorporated by reference to Exhibit 4.1 from our Registration
Statement on Form F-1 Amendment No. 2 (file No. 333-120810) filed with the Securities and Exchange Commission on
December 9, 2004)
Specimen Certificate for Ordinary Shares of The Registrant (incorporated by reference to Exhibit 4.2 from our
Registration Statement on Form F-1 (file No. 333-120810) filed with the Securities and Exchange Commission on
November 26, 2004)
Form of Deposit Agreement dated as of December 20, 2004, as amended and restated as of January 16, 2009, as further
amended and restated as of March 20, 2009, and as further amended and restated as of 2010 among The Registrant, The
Bank of New York Mellon as Depositary, and all Owners and Beneficial Owners from time to time of American
Depositary Shares issued thereunder (incorporated by reference to Exhibit 1 of our Post-Effective Amendment No. 2 to
the Registration Statement on Form F-6 (file No. 333-156635) filed with the Securities and Exchange Commission on
November 19, 2010)
Amended 2004 Stock Option Plan (incorporated by reference to Exhibit 10.1 from our Post-Effective Amendment No. 2
to our Registration Statement on Form S-8 (file No. 333-127700) filed with the Securities and Exchange Commission on
December 16, 2010)
Form of Indemnification Agreement with the Registrant’s directors and executive officers (incorporated by reference to
Exhibit 10.2 from our Registration Statement on Form F-1 Amendment No. 1 (file No. 333-120810) filed with the
Securities and Exchange Commission on November 30, 2004)
Form of Employment Agreement between the Registrant and a Senior Executive Officer of the Registrant (incorporated
by reference to Exhibit 10.3 from our Registration Statement on Form F-1 Amendment No. 1 (file No. 333-120810) filed
with the Securities and Exchange Commission on November 30, 2004)
Translation of Exclusive Technical Support Service Agreement, dated January 14, 2004, between Shanghai IT and The9
Computer (incorporated by reference to Exhibit 10.4 from our Registration Statement on Form F-1 (file No. 333-120810)
filed with the Securities and Exchange Commission on November 26, 2004)
92
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM2b2k%/Š
4*
0C
200GaisY$NM2b2k%/
25-Mar-2015 17:49 EST
852134 TX 93
HTM
ESS
Page 1 of 1
Exhibit
Number
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
Document
Translation of Form of Call Option Agreement among The9 Computer, Shanghai IT and other parties therein (incorporated
by reference to Exhibit 10.6 from our Registration Statement on Form F-1 Amendment No.1 (file No. 333-120810) filed
with the Securities and Exchange Commission on November 30, 2004)
Translation of Domain Name License Agreement, dated January 1, 2004, between GameNow.net (Hong Kong) Limited
and Shanghai IT (incorporated by reference to Exhibit 10.9 from our Registration Statement on Form F-1 (file No. 333-
120810) filed with the Securities and Exchange Commission on November 26, 2004)
Joint Venture Agreement, dated September 10, 2002, between Webzen Inc. and GameNow.net (Hong Kong) Limited
(incorporated by reference to Exhibit 10.10 from our Registration Statement on Form F-1 (file No. 000-53051) filed with
the Securities and Exchange Commission on November 26, 2004)
Shareholders’ Agreement, dated April 16, 2004, by and among The Registrant, Object Software Limited and its
shareholders party thereto (incorporated by reference to Exhibit 10.20 from our Registration Statement on Form F-1 (file
No. 333-120810) filed with the Securities and Exchange Commission on November 26, 2004)
Memorandum of Agreement, dated November 9, 2004, between The Registrant and Object Software Limited (incorporated
by reference to Exhibit 10.21 from our Registration Statement on Form F-1 (file No. 333-120810) filed with the Securities
and Exchange Commission on November 26, 2004)
Translation of Shanghai Municipality Property Lease Commodity Housing Pre-lease Contract, dated May 17, 2005,
between The9 Computer and Shanghai Zhangjiang Port of Microelectronics Co. Ltd., with respect to the premises where
the Registrant’s principal executive offices are located (incorporated by reference to Exhibit 4.22 from our Annual Report
on Form 20-F filed with the Securities and Exchange Commission on June 30, 2006)
Addendum to Joint Venture Agreement, dated December 16, 2005, between Webzen Inc. and GameNow.net (Hong Kong)
Limited (incorporated by reference to Exhibit 4.31 from our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 30, 2006)
Translation of Form of Shareholder Voting Proxy Agreement among The9 Computer, Shanghai IT and its shareholders
(incorporated by reference to Exhibit 4.31 from our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on April 7, 2011)
Translation of Equity Transfer Agreement dated October 25, 2011 between Jun Zhu and Wei Ji (incorporated by reference
to Exhibit 4.37 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission on March 22,
2012)
Translation of Equity Pledge Agreement dated November 24, 2011 between Yong Wang and The9 Computer with respect
to Shanghai IT (incorporated by reference to Exhibit 4.38 from our Annual Report on Form 20-F filed with the Securities
and Exchange Commission on March 22, 2012)
Translation of Equity Pledge Agreement dated November 24, 2011 between Wei Ji and The9 Computer with respect to
Shanghai IT (incorporated by reference to Exhibit 4.39 from our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on March 22, 2012)
Translation of Exclusive Call Option Agreement dated November 24, 2011 among Yong Wang, Wei Ji and The9
Computer with respect to Shanghai IT (incorporated by reference to Exhibit 4.40 from our Annual Report on Form 20-F
filed with the Securities and Exchange Commission on March 22, 2012)
93
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$NM2ceN%ÉŠ
4*
0C
200GaisY$NM2ceN%
25-Mar-2015 17:49 EST
852134 TX 94
HTM
ESS
Page 1 of 1
Exhibit
Number
4.17
4.18
4.19
4.20
Document
Translation of Loan Agreement dated November 24, 2011 among Yong Wang, Wei Ji and The9 Computer (incorporated
by reference to Exhibit 4.41 from our Annual Report on Form 20-F filed with the Securities and Exchange Commission
on March 22, 2012)
Translation of Shareholder Voting Proxy Agreement dated November 24, 2011 among Yong Wang, Wei Ji, The9
Computer and Shanghai IT (incorporated by reference to Exhibit 4.42 from our Annual Report on Form 20-F filed with
the Securities and Exchange Commission on March 22, 2012)
Translation of Novation Agreement dated November 25, 2011 among Jun Zhu, Wei Ji, Yong Wang, The9 Computer and
Shanghai IT (incorporated by reference to Exhibit 4.43 from our Annual Report on Form 20-F filed with the Securities
and Exchange Commission on March 22, 2012)
Translation of Exclusive Technical Service Agreement, dated December 15, 2010, between Shanghai IT and The9
Computer (incorporated by reference to Exhibit 4.44 from our Annual Report on Form 20-F filed with the Securities and
Exchange Commission on April 18, 2013)
4.21* Translation of Equity Transfer Agreement dated April 23, 2014 between Yong Wang and Zhimin Lin
4.22*
4.23*
Translation of Equity Pledge Agreement dated April 22, 2014 between Zhimin Lin and The9 Computer with respect to
Shanghai IT
Translation of Exclusive Call Option Agreement dated April 22, 2014 among Zhimin Lin, Wei Ji and The9 Computer
with respect to Shanghai IT
4.24* Translation of Loan Agreement dated April 22, 2014 among Zhimin Lin, Wei Ji and The9 Computer
4.25*
4.26*
Translation of Shareholder Voting Proxy Agreement dated April 22, 2014 among Zhimin Lin, Wei Ji, The9 Computer
and Shanghai IT
Translation of Novation Agreement dated April 22, 2014 among Yong Wang, Zhimin Lin, Wei Ji, The9 Computer and
Shanghai IT
8.1* List of Significant and Other Principal Subsidiaries and Affiliated Entities of the Registrant
11.1
Amended Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 11.1 to our annual
report on Form 20-F filed with the Securities and Exchange Commission on June 30, 2005)
12.1* Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2* Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
94
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2ewt%6Š
5*
0C
200GaisY$NM2ewt%6
852134 TX 95
HTM
ESS
Page 1 of 1
Exhibit
Number
Document
13.1**
Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2**
Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
15.1*
Consent of Maples and Calder
15.2*
Consent of Zhong Lun Law Firm
15.3*
Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP
101*†
Financial information of the registrant for the year ended December 31, 2014 formatted in eXtensible Business
Reporting Language (XBRL):
(i) Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2012, 2013 and
2014; (ii) Consolidated Balance Sheets as of December 31, 2013 and 2014; (iii) Consolidated Statements of Changes in
Equity for the Years ended December 31, 2012, 2013 and 2014; (iv) Consolidated Statements of Cash Flows for the
Years ended December 31, 2012, 2013 and 2014; and (v) Notes to Consolidated Financial Statements for the Years
ended December 31, 2012, 2013 and 2014.
*
**
†
Filed with this Form 20-F.
Furnished with this Form 20-F.
XBRL-related documents are not deemed filed for purposes of section 11 of the Securities Act, or section 18 of the Exchange
Act, or otherwise subject to the liabilities of these sections; are not part of any registration statement to which they relate; are not
deemed incorporated by reference; are subject to all other liability and anti-fraud provisions of these Act; and are deemed filed
for purposes of Item 103 of Regulation S-T.
95
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS13
11.6.14
NCR pf_rend
HKG
SIGNATURES
25-Mar-2015 17:49 EST
ˆ200GaisY$NM2g03Z\Š
4*
0C
200GaisY$NM2g03Z\
852134 TX 96
HTM
ESS
Page 1 of 1
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
The9 Limited
/s/ Jun Zhu
By:
Name: Jun Zhu
Title: Chairman and Chief Executive Officer
Date: March 27, 2015
[Signature Page to 20-F]
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
THE9 LIMITED
20-Mar-2015 18:48 EST
ˆ200GaisY$LmXtp1Z=Š
11*
0C
200GaisY$LmXtp1Z=
852134 FIN 1
HTM
ESS
Page 1 of 1
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations and Comprehensive Loss for the Years ended December 31, 2012, 2013 and 2014
Consolidated Balance Sheets as of December 31, 2013 and 2014
Consolidated Statements of Changes in Equity for the Years ended December 31, 2012, 2013 and 2014
Consolidated Statements of Cash Flows for the Years ended December 31, 2012, 2013 and 2014
Notes to Consolidated Financial Statements for the Years ended December 31, 2012, 2013 and 2014
Page
F-2
F-3
F-5
F-7
F-10
F-12
F-1
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP142
11.6.14
NCR palap0dc
HKG
26-Mar-2015 00:20 EST
ˆ200GaisY$NVr$C$ZÅŠ
9*
0C
200GaisY$NVr$C$Z¯
852134 FIN 2
HTM
ESS
Page 1 of 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of The9 Limited:
We have audited the accompanying consolidated balance sheets of The9 Limited, its subsidiaries and its variable interest entities
(the “Group”) as of December 31, 2013 and 2014, and the related consolidated statements of operations and comprehensive loss,
changes in equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are
the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Group
at December 31, 2013 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shanghai, China
March 27, 2015
F-2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN16
11.6.14
NCR kriss2dc
HKG
ˆ200GaisY$N9yl9L%ÉŠ
13*
0C
200GaisY$N9yl9L%
25-Mar-2015 08:38 EST
852134 FIN 3
HTM
ESS
Page 1 of 1
THE9 LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
2012
RMB
2013
RMB
2014
RMB
2014
US$
(Note 3)
Revenues:
Online game services
Other revenues
Sales taxes
Net revenues
Cost of revenue
Gross profit (loss)
Operating expenses:
157,390,602
6,190,562
163,581,164
(9,147,349)
154,433,815
(69,415,631)
85,018,184
95,131,347 55,417,700 8,931,712
9,421,865 1,518,529
11,495,630
10,450,241
(90,687)
10,359,554
(13,825,640)
(3,466,086)
64,839,565
(562,674)
64,276,891
(85,782,569)
(21,505,678)
106,626,977
(1,850,908)
104,776,069
(107,803,360)
(3,027,291)
Product development
Sales and marketing
General and administrative
Impairment on equipment, intangible assets, other assets and
allowance(reversal of allowance) of long-term receivable
Loss on termination of R&D VIE arrangements
Gain on disposal of subsidiaries
Total operating expenses
Other operating income
Loss from operations
Impairment on available-for-sale investment
Investment income from cost method investment
Interest income, net
Other income (expenses), net
Loss before income tax expense, gain on investment disposal,
impairment loss on investments and share of loss in equity
investments
Income tax expense
Loss before gain on investment disposal, impairment loss on
investments and share of loss in equity investments
Gain on disposal of equity investee and available-for-sale investment
Impairment loss on investments
Share of loss in equity investments
Net loss
Net loss attributable to noncontrolling interest
Net loss attributable to redeemable noncontrolling interest
Net loss attributable to The9 Limited
Accretion on redeemable noncontrolling interest
Net loss attributable to holders of ordinary shares
Net loss
Other comprehensive loss:
Unrealized loss on available-for-sale investment
Currency translation adjustments
Comprehensive loss
Comprehensive loss attributable to noncontrolling interest
Comprehensive loss attributable to redeemable noncontrolling interest
Comprehensive loss attributable to The9 Limited
Accretion on redeemable noncontrolling interest
Comprehensive loss attributable to holders of ordinary shares
(301,471,091)
(187,011,621)
(170,382,896)
(213,243,567)
(116,672,411)
(161,958,423)
(156,253,036)
(51,758,100)
(111,157,250)
(25,183,418)
(8,341,891)
(17,915,298)
(569,139)
(18,093,999)
0
(677,528,746)
120,000
(592,390,562)
0
0
21,785,899
4,643,937
(35,466,122)
0
0
(527,340,523)
120,000
(530,247,814)
(6,268,900)
0
8,376,355
9,301,565
14,371,918
0
165,392,382
(139,404,086)
75,000
(160,834,764)
0
1,142,353
3,414,559
(2,105,478)
2,316,333
0
26,656,413
(22,467,861)
12,088
(25,921,859)
0
184,114
550,327
(339,341)
(565,960,726)
0
(518,838,794)
0
(158,383,330)
0
(25,526,759)
0
(565,960,726)
15,725,792
(3,243,744)
(6,347,447)
(559,826,125)
(45,824,033)
0
(514,002,092)
0
(514,002,092)
(559,826,125)
(56,600)
(979,709)
(560,862,434)
(46,117,427)
0
(514,745,007)
0
(514,745,007)
(518,838,794)
0
(41,701,985)
(2,375,826)
(562,916,605)
(36,655,033)
0
(526,261,572)
0
(526,261,572)
(562,916,605)
(158,383,330)
33,153,452
0
(3,712,530)
(128,942,408)
(21,443,321)
(20,876,617)
(86,622,470)
21,076,744
(107,699,214)
(128,942,408)
(25,526,759)
5,343,366
0
(598,351)
(20,781,744)
(3,456,036)
(3,364,700)
(13,961,008)
3,396,955
(17,357,963)
(20,781,744)
(16,600)
(688,963)
(563,622,168)
(35,084,526)
0
(528,537,642)
0
(528,537,642)
0
(1,203,960)
(130,146,368)
(22,995,718)
(20,876,617)
(86,274,033)
21,076,744
(107,350,777)
0
(194,043)
(20,975,787)
(3,706,237)
(3,364,700)
(13,904,850)
3,396,955
(17,301,805)
F-3
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN02
11.6.14
NCR durap0dc
HKG
24-Mar-2015 13:36 EST
ˆ200GaisY$MtLo1YZEŠ
8*
0C
200GaisY$MtLo1YZE
852134 FIN 4
HTM
ESS
Page 1 of 1
Net loss attributable to holders of ordinary shares per share
—Basic and diluted
Weighted average number of shares outstanding
—Basic and diluted
2012
RMB
2013
RMB
2014
RMB
2014
US$
(Note 3)
(20.98)
(22.71)
(4.65)
(0.75)
24,494,046 23,174,823
23,164,695
23,164,695
The accompanying notes are an integral part of these consolidated financial statements.
F-4
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
11.6.14
NCR seksr0dc
HKG
24-Mar-2015 13:23 EST
ˆ200GaisY$Mt6gy5ZBŠ
7*
0C
200GaisY$Mt6gy5ZB
852134 FIN 5
HTM
ESS
Page 1 of 1
THE9 LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2013 AND 2014
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of 2013: RMB404,711;
156,987,201 181,482,300 29,249,638
December 31,
2013
RMB
December 31,
2014
RMB
December 31,
2014
US$
(Note 3)
2014: RMB480,926
Advances to suppliers, net
Prepayments and other current assets, net
Prepaid royalties
Deferred costs
Amounts due from a related party
Total current assets
Restricted cash
Investments in equity investees
Available-for-sale investment
Property, equipment and software, net
Goodwill
Intangible assets, net
Land use right, net
Other long-lived assets, net
Total assets
LIABILITIES
Current liabilities:
733,339
4,878,579
68,217
0
9,745
5,250,000
19,138,096 11,804,750 1,902,581
118,193
4,525,549
32,464,598 56,573,321 9,117,964
0
1,571
846,146
41,236,093
0
6,321,749
0
5,857,949
1,570,779
15,720,488
11,325,999
1,345,519
83,378,576
255,853,455
0
39,223,925
0
36,346,230
9,746,054
97,539,341
70,273,296
8,348,409
517,330,710
218,062,240
700,000
50,848,141
0
50,439,400
9,710,854
128,643,824
72,194,206
16,080,483
546,679,148
Accounts payable (including accounts payable of the consolidated VIEs without
recourse to the Group of 29,038,215 and 15,458,464 as of December 31, 2013 and
December 31, 2014 respectively)
Other taxes payable (including other taxes payable of the consolidated VIEs without
recourse to the Group of 521,977 and443,467 as of December 31, 2013 and
December 31, 2014 respectively)
Advances from customers (including advances from customers of the consolidated
VIEs without recourse to the Group of 8,550,844 and 7,192,127 as of December 31,
2013 and December 31, 2014 respectively)
Amounts due to related parties (including amounts due to related parties of the
consolidated VIEs without recourse to the Group of 7,886,222 and 6,304,956 as of
December 31, 2013 and December 31, 2014 respectively)
Deferred revenue (including deferred revenue of the consolidated VIEs without
recourse to the Group of 9,566,329 and 4,990,959 as of December 31, 2013 and
December 31, 2014 respectively)
Refund of game points (including refund of game points of the consolidated VIEs
without recourse to the Group of 169,998,682 as of both December 31, 2013 and
December 31, 2014)
Other payables and accruals (including other payables and accruals of the consolidated
VIEs without recourse to the Group of 22,798,639 and 26,346,672 as of
December 31, 2013 and December 31, 2014 respectively)
Total current liabilities
Long-term accounts payables(including Long-term accounts payables of the consolidated
VIEs without recourse to the Group of Nil as of both December 31, 2013 and
December 31, 2014)
Deferred tax liabilities, non-current (including deferred tax liabilities, non-current of the
consolidated VIEs without recourse to the Group of Nil as of both December 31, 2013 and
December 31, 2014)
Total liabilities
Commitments and contingencies (Note 29)
Redeemable noncontrolling interest(Note 28)
F-5
69,376,348
40,213,660
6,481,266
1,238,852
932,431
150,281
18,896,049
16,833,165
2,713,014
4,799,753
6,304,956
1,016,174
20,113,256
20,434,962
3,293,518
169,998,682
169,998,682
27,398,814
45,669,488
330,092,428
41,872,851
296,590,707
6,748,679
47,801,746
21,110,517
18,992,201
3,060,987
5,343,060
356,546,005
5,362,427
320,945,335
864,266
51,726,999
0
131,497,104
21,193,486
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP136
11.6.14
NCR manra0dc
HKG
EQUITY
The9 Limited shareholders’ equity
Ordinary shares (US$0.01 par value; 23,146,859 and 23,201,601 shares issued
and outstanding as of December 31, 2013 and December 31, 2014,
respectively)
Additional paid-in capital
Statutory reserves
Accumulated other comprehensive loss
Accumulated deficit
The9 Limited shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities, redeemable noncontrolling interest and equity
24-Mar-2015 13:31 EST
ˆ200GaisY$MtH8qg%OŠ
11*
0C
200GaisY$MtH8qg%O
852134 FIN 6
HTM
ESS
Page 1 of 1
1,881,784
2,152,320,786
28,071,982
(8,987,041)
1,885,153
2,075,900,461
28,071,982
(8,638,604)
(1,912,569,874) (1,999,192,344)
98,026,648
(33,138,377)
64,888,271
517,330,710
260,717,637
(70,584,494)
190,133,143
546,679,148
303,832
334,574,422
4,524,382
(1,392,290)
(322,211,318)
15,799,028
(5,340,937)
10,458,091
83,378,576
The accompanying notes are an integral part of these consolidated financial statements.
F-6
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
20-Mar-2015 18:48 EST
ˆ200GaisY$LmYCSmZ!Š
6*
0C
200GaisY$LmYCSmZ!
852134 FIN 7
HTM
ESS
Page 1 of 1
F
-
7
2
0
1
2
2
4
,
4
8
4
,
6
3
4
1
,
9
9
7
,
3
9
0
2
,
1
4
8
,
4
1
6
,
1
3
4
2
8
,
0
7
1
,
9
8
2
(
6
,
7
1
0
,
9
7
1
)
(
1
,
3
8
6
,
3
0
8
,
3
0
2
)
7
8
5
,
4
6
6
,
2
3
3
(
3
6
,
2
5
4
,
6
8
9
)
7
4
9
,
2
1
1
,
5
4
4
o
f
s
t
o
c
k
o
p
t
i
o
n
s
I
s
s
u
a
n
c
e
o
f
s
h
a
r
e
s
b
y
a
s
u
b
s
i
d
i
a
r
y
u
p
o
n
e
x
e
r
c
i
s
e
B
a
l
a
n
c
e
a
s
o
f
D
e
c
e
m
b
e
r
3
1
,
V
I
E
s
T
e
r
m
i
n
a
t
i
o
n
o
f
c
o
n
t
r
a
c
t
u
a
l
a
r
r
a
n
g
e
m
e
n
t
s
w
i
t
h
R
&
D
n
o
n
c
o
n
t
r
o
l
l
i
n
g
i
n
t
e
r
e
s
t
a
t
t
r
i
b
u
t
a
b
l
e
t
o
c
o
m
p
e
n
s
a
t
i
o
n
E
m
p
l
o
y
e
e
s
h
a
r
e
b
a
s
e
d
C
h
a
n
g
e
i
n
e
q
u
i
t
y
i
n
t
e
r
e
s
t
o
f
A
D
S
s
R
e
p
u
r
c
h
a
s
e
a
n
d
r
e
t
i
r
e
m
e
n
t
e
x
e
r
c
i
s
e
f
r
o
m
s
t
o
c
k
o
p
t
i
o
n
C
o
m
p
r
e
h
e
n
s
i
v
e
l
o
s
s
I
s
s
u
a
n
c
e
o
f
o
r
d
i
n
a
r
y
s
h
a
r
e
s
N
e
t
l
o
s
s
2
0
1
2
i
n
v
e
s
t
m
e
n
t
a
d
j
u
s
t
m
e
n
t
s
C
u
r
r
e
n
c
y
t
r
a
n
s
l
a
t
i
o
n
U
n
r
e
a
l
i
z
e
d
l
o
s
s
o
n
a
v
a
i
l
a
b
l
e
–
f
o
r
-
s
a
l
e
s
B
a
l
a
n
c
e
a
s
o
f
J
a
n
u
a
r
y
1
,
0
0
0
0
0
0
0
0
3
,
9
3
3
,
2
4
7
3
3
,
4
1
5
,
9
4
1
3
,
2
6
5
0
(
4
0
,
4
9
2
)
(
3
,
3
0
2
)
(
8
3
6
,
2
3
9
)
6
8
,
3
2
1
4
,
3
2
5
9
1
3
,
2
9
7
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(
6
8
6
,
3
1
5
)
(
5
6
,
6
0
0
)
0
2
4
,
4
5
6
,
8
0
5
1
,
9
9
6
,
3
6
7
2
,
1
1
0
,
9
8
6
,
6
2
3
2
8
,
0
7
1
,
9
8
2
(
5
,
9
6
8
,
0
5
6
)
0
0
0
0
0
0
0
0
3
,
9
3
3
,
2
4
7
(
3
,
9
3
3
,
2
4
7
)
0
3
3
,
4
1
5
,
9
4
1
3
,
9
6
2
,
4
3
3
3
7
,
3
7
8
,
3
7
4
(
8
3
9
,
5
4
1
)
9
1
7
,
6
2
2
0
0
(
8
3
9
,
5
4
1
)
9
1
7
,
6
2
2
(
5
1
4
,
7
4
5
,
0
0
7
)
(
4
6
,
1
1
7
,
4
2
7
)
(
5
6
0
,
8
6
2
,
4
3
4
)
(
6
8
6
,
3
1
5
)
(
2
9
3
,
3
9
4
)
(
9
7
9
,
7
0
9
)
(
5
6
,
6
0
0
)
0
(
5
6
,
6
0
0
)
3
,
2
6
5
6
5
8
3
,
9
2
3
0
2
0
,
7
8
2
,
4
3
1
2
0
,
7
8
2
,
4
3
1
(
5
1
4
,
0
0
2
,
0
9
2
)
(
8
7
2
,
3
0
6
,
2
1
0
)
1
,
2
6
2
,
7
8
0
,
7
0
6
(
5
1
4
,
0
0
2
,
0
9
2
)
(
4
5
,
8
2
4
,
0
3
3
)
(
1
0
,
9
4
9
,
5
3
7
)
1
,
2
5
1
,
8
3
1
,
1
6
9
(
5
5
9
,
8
2
6
,
1
2
5
)
s
h
a
r
e
s
N
u
m
b
e
r
o
f
R
M
B
P
a
r
v
a
l
u
e
R
M
B
R
M
B
R
M
B
R
M
B
R
M
B
R
M
B
R
M
B
T
h
e
9
L
m
i
i
t
e
d
s
h
a
r
e
h
o
l
d
e
r
’
s
e
q
u
i
t
y
O
r
d
i
n
a
r
y
s
h
a
r
e
s
(
U
S
$
0
0
1
.
p
a
r
A
d
d
i
t
i
o
n
a
l
p
a
i
d
-
i
n
v
a
l
u
e
)
c
a
p
i
t
a
l
r
e
s
e
r
v
e
s
S
t
a
t
u
t
o
r
y
c
o
m
p
r
e
h
e
n
s
i
v
e
o
t
h
e
r
A
c
c
u
m
u
l
a
t
e
d
l
o
s
s
A
c
c
u
m
u
l
a
t
e
d
d
e
f
i
c
i
t
t
o
T
h
e
9
l
i
m
i
t
e
d
E
q
u
i
t
y
a
t
t
r
i
b
u
t
a
b
l
e
i
n
t
e
r
e
s
t
N
o
n
c
o
n
t
r
o
l
l
i
n
g
T
o
t
a
l
E
q
u
i
t
y
F
O
R
T
H
E
Y
E
A
R
S
E
N
D
E
D
D
E
C
E
M
B
E
R
3
1
,
2
0
1
2
,
2
0
1
3
A
N
D
2
0
1
4
C
O
N
S
O
L
I
D
A
T
E
D
S
T
A
T
E
M
E
N
T
S
O
F
C
H
A
N
G
E
S
I
N
E
Q
U
I
T
Y
T
H
E
9
L
I
M
I
T
E
D
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
ˆ200GaisY$LmYG3f%~Š
6*
0C
200GaisY$LmYG3f%~
20-Mar-2015 18:48 EST
852134 FIN 8
HTM
ESS
Page 1 of 1
B
a
l
a
n
c
e
a
s
o
f
D
e
c
e
m
b
e
r
3
1
,
s
t
o
c
k
o
p
t
i
o
n
s
s
u
b
s
i
d
i
a
r
y
u
p
o
n
e
x
e
r
c
i
s
e
o
f
o
f
A
D
S
s
I
s
s
u
a
n
c
e
o
f
s
h
a
r
e
s
b
y
a
n
o
n
c
o
n
t
r
o
l
l
i
n
g
i
n
t
e
r
e
s
t
a
t
t
r
i
b
u
t
a
b
l
e
t
o
c
o
m
p
e
n
s
a
t
i
o
n
E
m
p
l
o
y
e
e
s
h
a
r
e
b
a
s
e
d
C
h
a
n
g
e
i
n
e
q
u
i
t
y
i
n
t
e
r
e
s
t
R
e
p
u
r
c
h
a
s
e
a
n
d
r
e
t
i
r
e
m
e
n
t
I
s
s
u
a
n
c
e
o
f
o
r
d
i
n
a
r
y
s
h
a
r
e
s
f
r
o
m
s
t
o
c
k
o
p
t
i
o
n
e
x
e
r
c
i
s
e
a
d
j
u
s
t
m
e
n
t
s
C
o
m
p
r
e
h
e
n
s
i
v
e
l
o
s
s
C
u
r
r
e
n
c
y
t
r
a
n
s
l
a
t
i
o
n
f
o
r
-
s
a
l
e
s
i
n
v
e
s
t
m
e
n
t
N
e
t
l
o
s
s
U
n
r
e
a
l
i
z
e
d
l
o
s
s
o
n
a
v
a
i
l
a
b
l
e
–
(
1
,
6
6
8
,
3
0
8
)
(
1
3
5
,
9
1
5
)
(
2
8
,
8
9
4
,
7
8
4
)
3
3
0
,
5
3
3
2
0
,
3
0
9
4
,
2
8
4
,
1
3
8
0
0
0
0
0
0
3
,
0
7
2
,
1
3
3
2
5
,
9
9
2
2
5
,
4
1
7
,
1
7
3
s
h
a
r
e
s
N
u
m
b
e
r
o
f
R
M
B
P
a
r
v
a
l
u
e
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(
2
,
2
5
9
,
4
7
0
)
(
1
6
,
6
0
0
)
2
0
1
3
2
3
,
1
4
6
,
8
5
9
1
,
8
8
1
,
7
8
4
2
,
1
5
2
,
3
2
0
,
7
8
6
2
8
,
0
7
1
,
9
8
2
(
8
,
9
8
7
,
0
4
1
)
(
1
F
-
8
,
9
1
2
,
5
6
9
,
8
7
4
)
2
6
0
,
7
1
7
,
6
3
7
(
7
0
,
5
8
4
,
4
9
4
)
1
9
0
,
1
3
3
,
1
4
3
0
0
0
0
0
0
0
3
,
0
7
2
,
1
3
3
(
3
,
0
7
2
,
1
3
3
)
0
2
5
,
9
9
2
6
,
6
1
1
3
2
,
6
0
3
2
5
,
4
1
7
,
1
7
3
3
,
8
2
0
,
2
4
3
2
9
,
2
3
7
,
4
1
6
(
2
9
,
0
3
0
,
6
9
9
)
4
,
3
0
4
,
4
4
7
0
0
(
2
9
,
0
3
0
,
6
9
9
)
4
,
3
0
4
,
4
4
7
(
5
2
8
,
5
3
7
,
6
4
2
)
(
3
5
,
0
8
4
,
5
2
6
)
(
5
6
3
,
6
2
2
,
1
6
8
)
(
2
,
2
5
9
,
4
7
0
)
1
,
5
7
0
,
5
0
7
(
6
8
8
,
9
6
3
)
(
1
6
,
6
0
0
)
0
(
1
6
,
6
0
0
)
T
h
e
9
L
m
i
i
t
e
d
s
h
a
r
e
h
o
l
d
e
r
’
s
e
q
u
i
t
y
O
r
d
i
n
a
r
y
s
h
a
r
e
s
(
U
S
$
0
.
0
1
p
a
r
A
d
d
i
t
i
o
n
a
l
p
a
i
d
-
i
n
v
a
l
u
e
)
c
a
p
i
t
a
l
r
e
s
e
r
v
e
s
S
t
a
t
u
t
o
r
y
c
o
m
p
r
e
h
e
n
s
i
v
e
o
t
h
e
r
A
c
c
u
m
u
l
a
t
e
d
E
q
u
i
t
y
a
t
t
r
i
b
u
t
a
b
l
e
N
o
n
c
o
n
t
r
o
l
l
i
n
g
l
o
s
s
A
c
c
u
m
u
l
a
t
e
d
d
e
f
i
c
i
t
t
o
T
h
e
9
l
i
m
i
t
e
d
i
n
t
e
r
e
s
t
T
o
t
a
l
E
q
u
i
t
y
R
M
B
R
M
B
R
M
B
R
M
B
R
M
B
R
M
B
R
M
B
0
(
5
2
6
,
2
6
1
,
5
7
2
)
(
5
2
6
,
2
6
1
,
5
7
2
)
(
3
6
,
6
5
5
,
0
3
3
)
(
5
6
2
,
9
1
6
,
6
0
5
)
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN13
11.6.14
NCR radhd0dc
HKG
25-Mar-2015 06:41 EST
ˆ200GaisY$N7mM!cZpŠ
15*
0C
200GaisY$N7mM!cZp
852134 FIN 9
HTM
ESS
Page 1 of 1
F
-
9
T
h
e
a
c
c
o
m
p
a
n
y
i
n
g
n
o
t
e
s
a
r
e
a
n
i
n
t
e
g
r
a
l
p
a
r
t
o
f
t
h
e
s
e
c
o
n
s
o
l
i
d
a
t
e
d
f
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
.
3
)
2
3
,
2
0
1
,
6
0
1
3
0
3
,
8
3
2
3
3
4
,
5
7
4
,
4
2
2
4
,
5
2
4
,
3
8
2
(
1
,
3
9
2
,
2
9
0
)
(
3
2
2
,
2
1
1
,
3
1
8
)
1
5
,
7
9
9
,
0
2
8
(
5
,
3
4
0
,
9
3
7
)
1
0
,
4
5
8
,
0
9
1
(
U
S
$
e
x
c
e
p
t
s
h
a
r
e
d
a
t
a
,
N
o
t
e
B
a
l
a
n
c
e
B
a
l
a
n
c
e
a
s
a
s
o
f
o
f
D
e
c
e
m
b
e
r
D
e
c
e
m
b
e
r
3
1
,
3
1
,
2
0
1
4
2
0
1
4
u
p
o
n
e
x
e
r
c
i
s
e
o
f
s
t
o
c
k
o
p
t
i
o
n
s
I
s
s
u
a
n
c
e
o
f
s
h
a
r
e
s
o
f
a
s
u
b
s
i
d
i
a
r
y
c
o
m
p
e
n
s
a
t
i
o
n
E
m
p
l
o
y
e
e
s
h
a
r
e
-
b
a
s
e
d
R
e
d
5
t
o
e
q
u
i
t
y
(
N
o
t
e
5
)
C
o
n
v
e
r
s
i
o
n
o
f
l
o
a
n
s
d
u
e
f
r
o
m
5
(
N
o
t
e
5
)
E
q
u
i
t
y
c
o
n
t
r
i
b
u
t
i
o
n
f
r
o
m
n
o
n
c
o
n
t
r
o
l
l
i
n
g
i
n
t
e
r
e
s
t
o
f
R
e
d
i
n
t
e
r
e
s
t
i
n
t
e
r
e
s
t
(
N
o
t
e
2
8
)
C
h
a
n
g
e
i
n
e
q
u
i
t
y
i
n
t
e
r
e
s
t
s
t
o
c
k
o
p
t
i
o
n
e
x
e
r
c
i
s
e
r
e
d
e
e
m
a
b
l
e
n
o
n
c
o
n
t
r
o
l
l
i
n
g
A
c
c
r
e
t
i
o
n
i
n
r
e
d
e
m
p
t
i
o
n
v
a
l
u
e
o
f
I
s
s
u
a
n
c
e
o
f
o
r
d
i
n
a
r
y
s
h
a
r
e
s
f
r
o
m
a
t
t
r
i
b
u
t
a
b
l
e
t
o
n
o
n
c
o
n
t
r
o
l
l
i
n
g
a
d
j
u
s
t
m
e
n
t
s
C
o
m
p
r
e
h
e
n
s
i
v
e
l
o
s
s
C
u
r
r
e
n
c
y
t
r
a
n
s
l
a
t
i
o
n
n
o
n
c
o
n
t
r
o
l
l
i
n
g
i
n
t
e
r
e
s
t
N
e
t
l
o
s
s
a
t
t
r
i
b
u
t
a
b
l
e
t
o
t
h
e
h
o
l
d
e
r
s
o
f
o
r
d
i
n
a
r
y
s
h
a
r
e
a
n
d
2
3
,
2
0
1
,
6
0
1
1
,
8
8
5
,
1
5
3
2
,
0
7
5
,
9
0
0
,
4
6
1
2
8
,
0
7
1
,
9
8
2
(
8
,
6
3
8
,
6
0
4
)
(
1
,
9
9
9
,
1
9
2
,
3
4
4
)
0
0
0
0
0
0
0
0
0
0
0
0
(
3
1
2
,
7
0
3
,
,
7
8
4
,
6
8
5
8
5
0
)
1
5
,
0
6
8
,
1
0
3
(
4
2
(
2
1
,
6
9
2
,
,
0
7
6
,
2
1
1
)
7
4
4
)
5
5
2
,
4
2
6
5
4
,
7
4
2
3
,
3
6
9
8
0
9
,
2
6
6
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
3
4
8
,
4
3
7
0
0
0
0
0
0
0
0
0
9
8
,
0
2
6
,
6
4
8
5
5
2
,
4
2
6
(
3
3
,
1
3
8
,
3
7
7
)
6
4
,
2
6
2
6
4
,
8
8
8
,
2
7
1
6
1
6
,
6
8
8
2
,
7
0
3
,
6
8
5
9
6
8
,
6
1
5
3
,
6
7
2
,
3
0
0
(
3
1
,
7
8
4
,
8
5
0
)
3
1
,
7
8
4
,
8
5
0
1
5
,
0
6
8
,
1
0
3
(
1
5
,
0
6
8
,
1
0
3
)
(
4
2
,
6
9
2
,
2
1
1
)
4
2
,
6
9
2
,
2
1
1
0
0
0
(
2
1
,
0
7
6
,
7
4
4
)
—
(
2
1
,
0
7
6
,
7
4
4
)
(
8
6
,
2
7
4
,
0
3
3
)
3
4
8
,
4
3
7
(
2
2
,
9
9
5
,
7
1
8
)
(
1
,
5
5
2
,
3
9
7
)
(
1
0
9
,
2
6
9
,
7
5
1
)
(
1
,
2
0
3
,
9
6
0
)
8
1
2
,
6
3
5
0
8
1
2
,
6
3
5
0
(
8
6
,
6
2
2
,
4
7
0
)
(
8
6
,
6
2
2
,
4
7
0
)
(
2
1
,
4
4
3
,
3
2
1
)
(
1
0
8
,
0
6
5
,
7
9
1
)
T
h
e
9
L
m
i
i
t
e
d
s
h
a
r
e
h
o
l
d
e
r
’
s
e
q
u
i
t
y
s
h
a
r
e
s
N
u
m
b
e
r
o
f
R
M
B
P
a
r
v
a
l
u
e
R
M
B
R
M
B
R
M
B
R
M
B
R
M
B
R
M
B
R
M
B
O
r
d
i
n
a
r
y
s
h
a
r
e
s
(
U
S
$
0
0
1
.
p
a
r
A
d
d
i
t
i
o
n
a
l
p
a
i
d
-
i
n
v
a
l
u
e
)
c
a
p
i
t
a
l
r
e
s
e
r
v
e
s
S
t
a
t
u
t
o
r
y
c
o
m
p
r
e
h
e
n
s
i
v
e
o
t
h
e
r
A
c
c
u
m
u
l
a
t
e
d
l
o
s
s
A
c
c
u
m
u
l
a
t
e
d
d
e
f
i
c
i
t
t
o
T
h
e
9
l
i
m
i
t
e
d
E
q
u
i
t
y
a
t
t
r
i
b
u
t
a
b
l
e
i
n
t
e
r
e
s
t
N
o
n
c
o
n
t
r
o
l
l
i
n
g
T
o
t
a
l
E
q
u
i
t
y
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN08
11.6.14
NCR rajep2dc
HKG
24-Mar-2015 13:24 EST
ˆ200GaisY$Mt7l@1%UŠ
8*
0C
200GaisY$Mt7l@1%U
852134 FIN 10
HTM
ESS
Page 1 of 1
THE9 LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
Cash flows from operating activities:
Net loss
Adjustments for:
(Gain) loss on disposal of property, equipment and software
Gain on disposal of subsidiaries
Employee compensation charge relating to the issuance of
redeemable noncontrolling interest
Impairment on intangible assets
Impairment on investments
Impairment on available-for-sales investment
Impairment on equipment
Impairment on other long-lived assets and allowance(reversal
of allowance) of long-term receivables
Impairment on upfront prepaid royalties and deferred costs
Depreciation and amortization of property, equipment and
software
Amortization of land use right
Amortization of intangible assets
Share of loss in equity investments
Investment income from cost method investment
Gain on disposal of investment in equity investee and
available-for-sales investment
Allowance for doubtful accounts
Impairment on other assets
Loss on termination of R&D VIE arrangements
Exchange loss (gain)
Employee share-based compensation expense
Change in accounts receivable
Change in advance to suppliers
Change in prepayments and other current assets
Change in prepaid royalties
Change in deferred costs
Change in other long-lived assets
Change in accounts payable
Change in amounts due to related party
Change in other taxes payable
Change in advances from customers
Change in deferred revenue
Change in other payables and accruals
Net cash used in operating activities
2012
RMB
2013
RMB
2014
RMB
2014
US$
(Note 3)
(559,826,125)
(562,916,605) (128,942,408) (20,781,744)
(140,163)
0
0
569,139
3,243,744
0
0
13,137
1,346,972
217,092
0 (165,392,382) (26,656,413)
3,825,243
41,701,985
6,268,900
1,899,803
0 13,034,797 2,100,828
0
0
0
0
0
0
0
0
0
865,340
29,741,076 (17,927,763) (2,889,431)
0
13,096,101
0
20,266,129
1,920,911
10,662,892
6,347,447
0
(15,725,792)
26,834
2,045,397
18,093,999
(1,898,715)
37,378,374
(6,903,864)
(151,783)
(11,418,586)
(165,712)
1,002,138
3,263,426
(241,324)
0
(2,996,695)
(3,062,517)
3,908,307
3,747,136
(489,190,063)
19,035,455 15,665,588 2,524,834
309,595
1,920,909
23,015,765 28,854,483 4,650,499
598,351
2,375,826
(184,114)
0
3,712,530
(1,142,353)
1,920,911
377,877
846,548
0
(1,507,157)
29,237,416
(3,894,295)
(3,277,573)
23,085,521
(453,785)
(1,867,820)
13,115,217
8,665,354
4,799,753
(2,735,038)
1,017,996
(142,057)
(4,815,188)
0 (33,153,452) (5,343,366)
12,289
76,246
573,098
3,555,845
0
0
497,470
3,086,602
3,672,300
591,867
7,257,096 1,169,632
—
(284,946)
786,284
9,424
7,732,074 1,246,184
(9,104,630) (1,467,400)
242,594
1,505,203
(49,386)
(306,421)
(332,477)
(2,062,884)
51,850
321,706
(963,244)
(5,976,545)
(43,370,630)
—
(1,767,972)
4,878,579
58,472
(269,097,406)
(357,569,636)
F-10
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN14
11.6.14
NCR vaitp0dc
HKG
25-Mar-2015 06:43 EST
ˆ200GaisY$N7qvXt%.Š
17*
0C
200GaisY$N7qvXt%.
852134 FIN 11
HTM
ESS
Page 1 of 1
2012
RMB
2013
RMB
2014
RMB
2014
US$
Cash flows from investing activities
Decrease (Increase) in restricted cash
Purchase of short term investment
Proceeds from disposal of short term investment
Net cash disposed of upon deconsolidation of VIEs
Proceeds from disposal of subsidiaries
Proceeds from disposal of cost method investee
Proceeds from disposal of equity method investees
Investment income from cost method investment
Proceeds from disposal of available-for-sale investment
Cash paid to acquire equity investees and available-for-sale
investments
Extension of loans receivable
Collection of loans receivable
Proceeds from disposal of property, equipment and software
Proceeds from refund of Investment
Refund of upfront license fees
Refund of long-term receivables
Prepayment and deposits paid for property, equipment and software
Purchase of property, equipment and software
Purchase of intangible assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from stock option exercises
Proceeds from exercises of stock options of a subsidiary
Issuance of redeemable noncontrolling interest
Repurchase of ADSs
Payment for accounts payable related to purchase of intangible assets
Net cash provided by (used in) financing activities
Effect of foreign exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Supplemental disclosure of non-cash investing and financing
activities:
Accrual related to purchase of property, equipment and software
Accrual related to purchase of intangible assets and related
withholding taxes
Receivable on refund of investment in an equity investee
Receivable on loan
Receivable related to the disposition of a subsidiary
(737,959)
(877,350)
0
(6,413,031)
0
10,256,199
0
0
(13,557,840)
(5,250,000)
3,000,000
1,619,951
29,098,880
0
0
(4,295,338)
(27,558,433)
(7,457,601)
(22,172,522)
917,622
3,923
0
(839,541)
(7,166,649)
(7,084,645)
1,000,211
(517,447,019)
1,071,725,828
554,278,809
700,000
0
0
0
112,820
37,959
0
0
0
877,350
0
0
0 163,715,759 26,386,191
0
0 25,040,812 4,035,846
184,114
0 1,142,353
6,274,326 1,011,238
0
5,469,593
7,252,493
0
(9,158,160)
(4,500,000)
(5,250,000)
4,500,000 5,250,000
146,500 1,148,851
0
0 2,000,000
0 2,000,000
0
0
(4,270,284)
(7,057,543)
0
(500,000)
(2,931,808) 197,751,817
0
(846,146)
846,146
185,162
0
322,341
322,341
0
(688,245)
0
31,871,808
4,304,447
32,603
0
812,635
616,688
118,262,180
0
130,973
99,392
19,060,404
(29,030,699)
0
(13,995,293) (19,469,853) (3,137,971)
16,152,798
(38,688,942) 100,221,650
(706,083)
3,947,893
25,301,745
29,249,638
(397,291,608) 24,495,099
156,987,201
554,278,809
181,482,300
156,987,201
(4,380,962)
1,898,778
2,647,168
2,085,286
1,747,081
281,578
72,854,780
7,252,493
0
0
56,109,371
0
0
0
36,775,866
0
4,500,000
12,750,575
5,927,194
0
725,268
2,055,020
The accompanying notes are an integral part of these consolidated financial statements.
F-11
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SERFBU-MWE-XN01
11.6.14
NCR dhraj0dc
HKG
23-Mar-2015 01:39 EST
ˆ200GaisY$MHs66Y%OŠ
10*
0C
200GaisY$MHs66Y%O
852134 FIN 12
HTM
ESS
Page 1 of 1
THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2012, 2013 AND 2014
1. ORGANIZATION AND NATURE OF OPERATIONS
The accompanying consolidated financial statements include the financial statements of The9 Limited (the “Company”), which was
incorporated on December 22, 1999 in the Cayman Islands, its subsidiaries and variable interest entities (“VIE subsidiaries” or
“VIEs”). The Company’s principal subsidiaries and VIE subsidiaries are as follows as of December 31, 2014:
Name of entity
GameNow.net (Hong Kong) Limited (“GameNow Hong
Kong”)
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
Date of
incorporation
Place of
incorporation
Relationship
Direct
Indirect
Interest held
January-00
Hong Kong
Subsidiary 100% —
(“The9 Computer”)
June-00
China The9 Interactive Limited (“C9I”)
October-03
China The9 Interactive (Shanghai) Limited (“C9I Shanghai”) February-05
9Dream Limited (“9Dream”)
China The9 Interactive (Beijing) Limited (“C9I Beijing”)
Jiu Jing Era Information Technology (Beijing) Limited (“Jiu
July-05
March-07
PRC
Hong Kong
PRC
Hong Kong
PRC
100%
Subsidiary —
100%
Subsidiary —
Subsidiary —
100%
Subsidiary 100% —
100%
Subsidiary —
Jing”)
Jiu Tuo (Shanghai) Information Technology Limited (“Jiu
Tuo”)
China Crown Technology Limited (“China Crown
Technology”)
Asian Way Development Limited (“Asian Way”)
New Star International Development Limited (“New Star”)
The9 Development Center Limited (“TDC”)
TDC (Asia) Limited (“TDC Asia”)
April-07
July-07
PRC
PRC
Subsidiary —
100%
Subsidiary —
100%
November-07
November-07
January-08
June-08
April-09
F-12
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Subsidiary 100% —
Subsidiary 100% —
Subsidiary 100% —
Subsidiary 100% —
100%
British Virgin Islands Subsidiary —
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN10
11.6.14
NCR kanns4dc
HKG
23-Mar-2015 23:01 EST
ˆ200GaisY$Mau4nH%9Š
9*
0C
200GaisY$Mau4nH%9
852134 FIN 13
HTM
ESS
Page 1 of 1
Red 5 Studios, Inc. (“Red 5”)
Red 5 Singapore Pte. Ltd. (“Red 5 Singapore”)
The9 Interactive, Inc. (“The9 Interactive”)
The9 Korea Co., Ltd. (“The9 Korea”)
Red 5 Korea LLC. (“Red 5 Korea”)
Shanghai The9 Information Technology Co., Ltd.
(“Shanghai IT”)
Shanghai Jiucheng Advertisement Co., Ltd. (“Shanghai
Jiucheng Advertisement”)
Shanghai Jiushi Interactive Network Technology Co., Ltd.
(“Jiushi”)
Shanghai Mengxiang Hulian Digital Technology Co., Ltd.
(“Mengxiang Hulian”)
Shanghai Fire Wing Information Technology Co., Ltd.
(“Shanghai Fire Wing”)
Shanghai The9 Education Software Technology Co., Ltd.
(“The9 Education”)
Beijing Chuan Yun Interactive Network Technology
Co.,Ltd.(“Chuan Yun”)
Shanghai Jiu Chang Investment Co., Ltd. (“Jiu Chang”)
City Channel Limited (City Channel)
June-05
April-10
June-10
February-11
Novermber-10
USA
Singapore
USA
Korea
Korea
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
—
100%
100%
100%
73% (Note 5)
73% (Note 5)
—
—
—
September-00
PRC
April-07
PRC
July-11
December-11
PRC
PRC
January-12
PRC
May-12
February -14
December -14
June-06
PRC
PRC
PRC
Hong
Kong
VIE subsidiary
Wholly-owned
subsidiary of
Shanghai IT
Wholly-owned
subsidiary of
Shanghai IT
VIE subsidiary
Wholly-owned
subsidiary of
Shanghai IT
Wholly-owned
subsidiary of
Shanghai IT
VIE subsidiary
Wholly-owned
subsidiary of
Shanghai IT
Subsidiary
None (Note 4)
None
None
20% (Note 4)
None
None
None (Note 4)
None
100%
The Company, its subsidiaries and VIE subsidiaries are collectively referred to as the (“Group”). The Group is principally engaged in
the development and operation of online games and internet related businesses, including massively multiplayer online games
(“MMOGs”), web games, social games, mobile games and TV games. The Group launched MMOGs, including Planetside 2, web and
social games including Q Jiang San Guo in mainland China. The Group also started commercial launch on a proprietary game
developed by Red 5, Firefall, a MMOG, in North America and Europe in 2014.
F-13
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN10
11.6.14
NCR kanns4dc
HKG
2. PRINCIPAL ACCOUNTING POLICIES
<1> Basis of presentation
23-Mar-2015 23:17 EST
ˆ200GaisY$Mb6i&3Z)Š
6*
0C
200GaisY$Mb6i&3Z)
852134 FIN 14
HTM
ESS
Page 1 of 1
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”). Significant accounting policies followed by the Group in the preparation of the
accompanying consolidated financial statements are summarized below.
Subsequent to the non-renewal of World of Warcraft (“WoW”) license in 2009, the Group suffered loss and cash outflows from
operations for the year ended December 31, 2012, 2013 and 2014, respectively. During the year of 2014, the Group’s net cash
outflows from operations were RMB269.1 million (US$43.4million). The Group expects to continue to incur product development,
and sales and marketing expenses for licensed and proprietary new games. The Group currently depends on a limited number of
games for substantially all of the Group’s revenues. If any of these games incur any adverse developments or if the Group is unable to
develop, purchase or license additional games that are attractive to users and result in overall revenue growth, the Group’s business,
financial condition and results of operations may be materially and adversely affected. While these factors may raise doubts about the
Company’s ability to continue as a going concern, however, the Group regards the going concern assumption as appropriate as such
concerns are mitigated by the Group’s plans to launch Firefall and other mobile games in China during the year ending December 31,
2015, which are expected to be accretive to the Group’s operating results and cash flows from operations. In addition, management
also has the ability to manage its working capital by obtaining external debt financing and controlling operating expenditure as
follows
Addition external debt financing
In February 2015, China Merchants Bank (“CMB”) issued a commitment letter whereby CMB agrees to grant the Group a credit
facility no exceeding RMB200 million to the Group. The Group will apply to withdraw the funding from CMB should they require
liquidity for their operations.
Cost Control
Management believes the Group has ability to control the level of discretionary spending on product development and sales and
marketing, and believes the Group will be able to satisfy its liabilities in the normal course of business.
As a result, the accompanying consolidated financial statements have been prepared assuming the Group will continue as a going
concern.
F-14
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN13
11.6.14
NCR radhd0dc
HKG
<2> Consolidation
25-Mar-2015 06:42 EST
ˆ200GaisY$N7oGRX%(Š
6*
0C
200GaisY$N7oGRX%(
852134 FIN 15
HTM
ESS
Page 1 of 1
The consolidated financial statements include the financial statements of the Company, its subsidiary and VIEs in which it has a
controlling financial interest. The results of the subsidiary are consolidated from the date on which the Company obtained control and
continue to be consolidated until the date that such control ceases. A controlling financial interest is typically determined when a
company holds a majority of the voting equity interest in an entity. However, if the company demonstrates its ability to control the
VIEs through its rights to all the residual benefits of the VIEs and its obligation to fund losses of the VIEs then the entity is
consolidated. All intercompany balances and transactions between the Company, its subsidiary and VIEs have been eliminated in
consolidation.
PRC laws and regulations currently prohibit or restrict foreign ownership of Internet-related business. In September 2009, the General
Administration of Press and Publication (“GAPP”) further promulgated the Circular Regarding the Implementation of the Department
Reorganization Regulation by State Council and Relevant Interpretation by State Commission Office for Public Sector Reform and
the Further Strengthening of the Administration of Pre-approval on Online Games and Approval on Import Online Games, or the
GAPP Circular. It is not clear that the regulatory authority of the GAPP applies to the regulation of ownership structures of online
game companies based in the PRC. While the GAPP Circular is applicable to the Group and its business in terms of publication and
pre-approval of online games, to date, GAPP has not issued any interpretation of Section 4 of the GAPP Circular to specifically
invalidate VIE agreements and, to the Group’s knowledge, has not taken any enforcement action under Section 4 of the GAPP
Circular against any of the companies that rely on contractual arrangements with VIEs to operate online games in the PRC. Therefore,
the Group believes that its ability to direct the activities of VIEs that most significantly impact their economic performance is not
affected by the GAPP Circular.
<3> Use of estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and
assumptions that affected the reported amount of the assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported revenues and expenses during the reported periods. Significant accounting estimates
reflected in the Group’s consolidated financial statements include the valuation of non-marketable equity investments and
determination of other-than temporary impairment, allowance for doubtful accounts and prepayment, revenue recognition, assessment
of recoverability of long-lived assets and goodwill impairment, assessment of impairment of other long-lived assets, fair value of
redeemable noncontrolling interest, share-based compensation expense, consolidation of VIEs, valuation allowances for deferred tax
assets and contingencies. Such accounting policies are impacted significantly by judgments, assumptions and estimates used in the
preparation of our consolidated financial statements, and actual results could differ materially from these estimates.
F-15
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN08
11.6.14
NCR rajep2dc
HKG
<4> Foreign currency translation
24-Mar-2015 13:26 EST
ˆ200GaisY$Mt9Sj2ZfŠ
6*
0C
200GaisY$Mt9Sj2Zf
852134 FIN 16
HTM
ESS
Page 1 of 1
The Group’s reporting currency is Renminbi (“RMB”). The Group’s functional currency with the exception of its subsidiaries, Red 5,
The9 Interactive, Red 5 Singapore, Red5 Korea and The9 Korea, is the RMB. The functional currency of Red 5, The9 Interactive,
Red 5 Singapore, Red5 Korea and The9 Korea is United States Dollar (“US$”, or “US dollars”), United States Dollar, Singapore
Dollar, Korean Won and Korean Won, respectively. Assets and liabilities of Red 5, The9 Interactive, Red 5 Singapore, Red5 Korea
and The9 Korea are translated at the current exchange rates quoted by the People’s Bank of China (the “PBOC”) in effect at the
balance sheet dates. Equity accounts are translated at historical exchange rates and revenues and expenses are translated at the average
exchange rates in effect during the reporting period to RMB. Gains and losses resulting from foreign currency translation to reporting
currency are recorded in accumulated other comprehensive loss in the consolidated statements of changes in equity for the years
presented.
Transactions denominated in currencies other than functional currencies, are translated into functional currencies at the exchange rates
prevailing at the dates of the transactions. Gains and losses resulting from foreign currency transactions are included in the
consolidated statements of operations and comprehensive loss. The aggregate foreign exchange net gain was RMB1.9 million and
RMB1.5 million for the years ended December 31, 2012 and 2013, respectively. The aggregate foreign exchange net loss was
RMB3.1 million (US$0.5 million) for the year ended December 31 2014. Monetary assets and liabilities denominated in foreign
currencies are translated into functional currencies using the applicable exchange rates at the balance sheet dates. All such exchange
gains and losses are included in other income (expense) in the consolidated statements of operations and comprehensive loss.
<5> Cash and cash equivalents
Cash and cash equivalents represent cash on hand and highly-liquid investments with an original maturity date of three months or
less. At December 31, 2013 and 2014, cash equivalents were comprised primarily of bank deposits. Included in cash and cash
equivalents as of December 31, 2013 and 2014 are amounts denominated in US Dollars totaling US$4.2 million and US$4.9 million,
respectively.
The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the
People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in
central government policies and to international economic and political developments affecting supply and demand in China’s foreign
exchange trading system market. The Company’s aggregate amount of cash and cash equivalents denominated in RMB amounted to
RMB128.7 million and RMB150.5 million (US$24.3 million) as of December 31, 2013 and 2014, respectively.
F-16
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN05
11.6.14
NCR shams0dc
HKG
<6> Allowance for doubtful accounts
25-Mar-2015 06:43 EST
ˆ200GaisY$N7q!VDZGŠ
5*
0C
200GaisY$N7q!VDZG
852134 FIN 17
HTM
ESS
Page 1 of 1
Accounts receivable mainly consist of receivables from prepaid card distributors and third party game platforms, and are recorded net
of allowance for doubtful accounts. The Group determines the allowances for doubtful accounts when facts and circumstances
indicate that the receivable is unlikely to be collected. Allowances for doubtful accounts are charged to general and administrative
expenses. If the financial condition of the Group’s customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. The Company provided allowance for doubtful accounts of RMB0.03 million,
RMB0.38 million and RMB0.08 million (US$0.01 million) in 2012, 2013 and 2014, respectively.
<7> Prepaid royalties and deferred costs
Royalties paid to the licensors of games are initially recognized as prepaid royalties when paid and subsequently recognized as
deferred costs upon the customers’ online registration and activation of their cards or online points. Royalties payable to the licensors
or receivable from collection agents upon customers’ charging their accounts are initially recorded as deferred costs upon the
customers’ online registration and activation of their cards or online points. Deferred costs are then ultimately recognized as cost of
services in the consolidated statements of operations and comprehensive loss based upon the actual consumption of game premium
features or usage of the game playing time by the customers or when the likelihood that the Group would provide further services to
those customers becomes remote.
<8> Restricted cash
Restricted cash mainly represents cash held in a designated bank account for the sole purpose to guarantee the performance of a
service agreement with a third party platform. Due to the contractual terms of the restriction, the balance has been classified as a non-
current asset.
<9> Investments in equity investees and loan to equity investee
Equity investments are comprised of investments in privately held companies. The Group uses the equity method to account for an
equity investment over which it has the ability to exert significant influence but does not otherwise control. The Group records equity
method investments at the cost of acquisition, plus the Group’s share in undistributed earnings and losses since acquisition. For equity
investments over which the Group does not have significant influence or control, the cost method of accounting is used.
The Group has historically provided loans to certain equity investees in order to provide to them financial support.
F-17
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
20-Mar-2015 18:48 EST
ˆ200GaisY$LmYyr$%2Š
4*
0C
200GaisY$LmYyr$%2
852134 FIN 18
HTM
ESS
Page 1 of 1
The Group assesses its equity investments and loans to equity investees for impairment on a periodic basis by considering factors
including, but not limited to, current economic and market conditions, the operating performance of the investees including current
earnings trends, the technological feasibility of the investee’s products and technologies, the general market conditions in the
investee’s industry or geographic area, factors related to the investee’s ability to remain in business, such as the investee’s liquidity,
debt ratios, and cash burn rate and other company-specific information including recent financing rounds. If it has been determined
that the equity investment is less than its related fair value and that this decline is other-than-temporary, the carrying value of the
investment and loan to equity investee is adjusted downward to reflect these declines in value.
<10> Available-for-sale investments
Investments in debt and equity securities are, on initial recognition, classified into the three categories: held-to-maturity securities,
trading securities and available-for-sale securities. Debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity securities and reported at amortized cost. 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 and reported at fair value, with
unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity securities or
trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses recognized
in accumulated other comprehensive income. As of December 31, 2013 and 2014, the Group did not hold trading securities or held-
to-maturity securities.
When there is objective evidence that an available-for-sale investment is impaired, the cumulative losses from declines in fair value
that had been recognized directly in other comprehensive income are removed from equity and recognized in earnings. When the
available-for-sale investment is sold, the cumulative fair value adjustments previously recognized in accumulated other
comprehensive income are recognized in the current period operating results. When the Group determines that the impairment of an
available-for-sale equity security is other-than-temporary, the Group recognizes an impairment loss in earnings equal to the difference
between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made.
When other-than-temporary impairment has occurred for an available-for-sale debt security and the Group intends to sell the security
or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit
loss, an impairment loss is recognized in earnings equal to the difference between the investment’s amortized cost basis and its fair
value at the balance sheet date. The new cost basis will not be changed for subsequent recoveries in fair value. To determine whether
a loss is other-than-temporary, the Group reviews the cause and duration of the impairment, the extent to which fair value is less than
cost, the financial condition and near-term prospects of the issuer, and the Group’s intent and ability to hold the security for a period
of time sufficient to allow for any anticipated recovery of its amortized cost.
F-18
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
<11> Property, equipment and software
20-Mar-2015 18:48 EST
ˆ200GaisY$LmY@4X%-Š
4*
0C
200GaisY$LmY@4X%-
852134 FIN 19
HTM
ESS
Page 1 of 1
Property, equipment and software are stated at cost less accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the following estimated useful lives:
Leasehold improvements
The shorter of respective term of the leases or the estimated useful lives of the leasehold
improvements
Computer and equipment
3 to 4 years
Software
Office furniture and fixtures
Motor vehicles
Office buildings
<12> Goodwill
5 years
3 years
5 years
10 to 20 years
Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of
the Group’s business acquisition. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances
indicate that it might be impaired. In September 2011, the Financial Accounting Standards Board (“FASB”) issued an authoritative
pronouncement related to testing goodwill for impairment. The guidance permits us to first assess qualitative factors to determine
whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to perform the two-step goodwill impairment test. The Company adopted this pronouncement since 2012. If it
is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Group completes a two-step goodwill
impairment test in December of each year. The first step compares the fair value 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 to be 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 goodwill to the carrying value of a reporting unit’s 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.
<13> Intangible assets
Intangible assets consist primarily of acquired game licenses and acquired game development costs from business combinations.
F-19
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
11.6.14
NCR seksr0dc
HKG
24-Mar-2015 13:55 EST
ˆ200GaisY$Mtb4gbZ-Š
6*
0C
200GaisY$Mtb4gbZ-
852134 FIN 20
HTM
ESS
Page 1 of 1
Acquired game licenses are amortized on a straight-line basis over the shorter of the useful economic life of the relevant online game
or license period, which range from two to seven years. Amortization of acquired game licenses commences upon the monetization of
the related online game.
The Group recognizes intangible assets acquired through business acquisitions as assets separate from goodwill. Acquired in-process
research and development costs are initially considered an indefinite-lived asset. Subsequently, they are recorded as acquired game
development cost upon completion of the research and development efforts and are amortized on a straight-line basis over the useful
economic life of the relevant online game. Amortization of acquired game development cost commences upon the monetization of the
related online game
<14> Land use right
Land use right represents operating lease prepayments to the PRC’s land bureau for usage of the parcel of land where the Group’s
office building is located. Amortization is calculated using the straight-line method over the estimated land use right period of 44
years.
<15> Impairment of long-lived assets and allowance on long-term receivables
The Group evaluates its long-lived assets, including finite-lived intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable or that the useful life is shorter than the Group had
originally estimated. The Group assesses the recoverability of the long-lived assets by comparing the carrying amount to the
estimated future undiscounted cash flow expected to result from the use of the assets and their eventual disposition. If the sum of the
expected undiscounted cash flows is less than the carrying amount of the assets, the Group would recognize an impairment loss based
on the fair value of the assets.
Indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate
that the asset might be impaired. The impairment test consists of a comparison of the fair value of the intangible asset to its carrying
amount. If the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess.
The Group determines the allowances on long-term receivables when facts and circumstances indicate that the long-term receivable is
unlikely to be collected. When the collectability of the long-term receivable became likely subsequently, the Group reverses the
allowance
<16>Revenue recognition
Online game services
The Group earns revenue from provision of online game operation services to players on the Group’s game servers and third party
platform and overseas licensing of the online game to other operators. The Group recognizes revenues when persuasive evidence of
an arrangement exists, services are delivered or performed, our price is fixed or determinable and collectability is reasonably assured.
F-20
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP142
11.6.14
NCR thany1dc
HKG
Online game services to players on the Group’s game server
22-Mar-2015 05:31 EST
ˆ200GaisY$M7&Gh5%FŠ
5*
0C
200GaisY$M7&Gh5%F
852134 FIN 21
HTM
ESS
Page 1 of 1
The Group sells its prepaid game cards and prepaid online points for its online game products to distributors who in turn ultimately
sell them to players. The group also sells the points directly to players via certain online payment platforms. The Group adopts virtual
item / service consumption model for the online game services.
Players can access certain games free of charge, but may purchase game points to acquire in-game premium features. The distribution
of points to players is typically made by sales of prepaid game cards and prepaid online points. Fees for prepaid game cards and
prepaid online points are deferred when received. Revenue is recognized over the estimated life of the premium features or as the
premium features are consumed.
For in-game premium features that are immediately consumed, revenue is recognized upon consumption. For premium features with a
stated expiration time, which range from one to 180 days, revenue is recognized ratably over the period starting from when the feature
is first used to the expiration time. For perpetual features with no predetermined expiration, revenue is recognized ratably over the
estimated average lives of the perpetual features, which are typically less than one year. When estimating the average lives of the in-
game perpetual features, the Group considers the average period that players typically play the game, other player behavior patterns,
and factors including the acceptance and popularity of expansion packs, promotional events launched, and market conditions. Future
usage patterns of players may differ from the historical usage patterns on which the virtual item / service consumption revenue
recognition model is based. The Group continually monitors the operational statistics and usage patterns.
Online game operation services over third party platform
Certain social games, TV games, certain web games and certain MMOGS, have adopted the virtual item / service consumption
model, and are launched on the third party game platforms and telecom carriers. Revenue from social and web games operated
through third party game platforms are recognized upon consumption of the in-game premium features with the amount net of
remittance to the third party game platforms as the Group does not set the pricing of the in-game currency of the third party game
platforms.
Revenue from TV games operated through telecom carriers and certain MMOGS operated on the third party game platforms are
recognized upon consumption of the in-game premium features based on the gross amount paid, as the Group is the primary obligor
of the games operation. The remittance to the telecom carrier and third party game platforms is recognized as costs of revenue when
incurred.
Licensing revenue
The Group licenses certain proprietary online games to other game operators and receives license fees and royalty income in
connection with their operation of the games. License fee revenue is recognized over the license period upon the commercialization of
the game in the licensees’ market. Royalty income is recognized when earned, provided that collectability is reasonably assured.
F-21
THE9 LIMITED
FORM 20-F
Other revenues
RR Donnelley ProFile
RRWIN-XENP142
11.6.14
NCR thany1dc
HKG
22-Mar-2015 05:33 EST
ˆ200GaisY$M80vgy%CŠ
5*
0C
200GaisY$M80vgy%C
852134 FIN 22
HTM
ESS
Page 1 of 1
Other revenues mainly include those generated from training and advertisement services.
Training and advertisement
Training and advertisement revenue include revenues generated from providing technical training to college students on mobile
application programming and advertising services on our mobile advertising platform. These revenues are recognized when delivery
of the service and advertisement has occurred or when services have been rendered and the collection of the related fees is reasonably
assured.
<17>Advances from customers and deferred revenue
Online points that have been sold but not activated are recognized as advances from customers. Online points that have been activated
but for which online game services will be rendered in the future are recognized as deferred revenue. Deferred revenue is recognized
as income based upon the actual consumption of in-game premium features by players or when the likelihood that the Group would
provide further online game service to those customers is remote.
The Group licenses proprietary games to operators in other countries and receives license fees and royalty income. License fee
received in advance of the monetization of the game is recorded in advances from operators.
<18>Cost of revenue
Cost of revenue consists primarily of online game royalties, payroll, sharing to third party game platform, telecom carries and other
suppliers, depreciation, maintenance and rental of Internet data center sites, depreciation and amortization of computer equipment and
software, production costs for prepaid game cards, intangible assets amortization and other overhead expenses directly attributable to
the services provided.
<19>Product development costs
For software development costs, including online games, to be sold or marketed to customers, the Group expenses software
development costs incurred prior to reaching technological feasibility. Once a software product has reached technological feasibility,
all subsequent software costs for that product are capitalized until that product is released for marketing. After an online game is
released, the capitalized product development costs are amortized over the estimated product life. To date, the Group has essentially
completed its software development concurrently with the establishment of technological feasibility, and, accordingly, no costs have
been capitalized.
F-22
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
20-Mar-2015 18:48 EST
ˆ200GaisY$LmZ5q2%_Š
4*
0C
200GaisY$LmZ5q2%_
852134 FIN 23
HTM
ESS
Page 1 of 1
For website and internally used software development costs, the Group expenses all costs that are incurred in connection with the
planning and implementation phases of development and costs that are associated with repair or maintenance of the existing websites
and software. Costs incurred in the application and infrastructure development phase are capitalized and amortized over the estimated
product life. Since the inception of the Group, the amount of internally generated costs qualifying for capitalization has been
immaterial and, as a result, all website and internally used software development costs have been expensed as incurred.
Product development costs consist primarily of outsourced research and development expenses, payroll, depreciation charge and other
overhead expenses for the development of the Group’s proprietary games. Other overhead product development costs include costs
incurred by the Group to develop, maintain, monitor, and manage its websites.
<20>Sales and marketing expenses
Sales and marketing expenses consist primarily of advertising and promotional expenses, payroll and other overhead expenses
incurred by the Group’s sales and marketing personnel. Advertising expenses in the amount of RMB85.3 million, RMB52.8 million
and RMB22.5 million (US$3.6 million) for the years ended December 31, 2012, 2013 and 2014, respectively, were expensed as
incurred.
<21>Government grants
Unrestricted government subsidies from local government agencies allowing the Group full discretion to utilize the funds were RMB
0.7 million, RMB1.0 million and RMB1.2 million (US$0.2 million) for the years ended December 31, 2012, 2013 and 2014,
respectively, which were recorded in other income (expense) in the consolidated statements of operations and comprehensive loss.
<22>Share-based compensation
The Group measures the cost of employee services received in exchange for stock-based compensation at the grant date fair value of
the share-based awards. The fair value of the share awards were measured using the fair value of shares, while the fair value of the
options or equity warrants were measured using the Black-Scholes option pricing model with assumptions made regarding expected
term, volatility, risk-free interest rate, and dividend yield. For the options awarded by private subsidiaries of the Group, the fair value
of shares is estimated based on the equity value of the subsidiary. The Group evaluates the fair value of the subsidiary by making
judgments and assumptions about the projected financial and operating results of the subsidiary. Once the equity value of the
subsidiary is determined, it is allocated (as applicable) into the various classes of shares and options using the option-pricing method,
which is one of the generally accepted valuation methodologies.
F-23
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
11.6.14
NCR param0dc
HKG
23-Mar-2015 23:14 EST
ˆ200GaisY$Mb2$he%ÄŠ
5*
0C
200GaisY$Mb2$he%˜
852134 FIN 24
HTM
ESS
Page 1 of 1
The expected term represents the period of time that stock-based awards granted are expected to be outstanding. The expected term of
stock-based awards granted is determined based on historical data on employee exercise and post-vesting employment termination
behavior. Expected volatilities are based on historical volatilities of the Company’s ordinary shares. Risk-free interest rate is based on
United States (“US”) government bonds issued with maturity terms similar to the expected term of the stock-based awards.
The Group recognizes compensation expense, net of estimated forfeitures, on all share-based awards on a straight-line basis over the
requisite service period, which is generally a one-to-four year vesting period. Forfeiture rate is estimated based on historical forfeiture
patterns and adjusted to reflect future changes in circumstances and facts, if any. If actual forfeitures differ from those estimates, the
estimates may need to be revised in subsequent periods. The Group uses historical data to estimate pre-vesting option forfeitures and
record stock-based compensation expense only for those awards that are expected to vest.
<23>Leases
Leases for which substantially all of the risks and rewards of ownership of assets remain with the leasing company are accounted for
as operating leases. Payments made under operating leases net of any incentives received by the Group from the leasing company are
charged to the consolidated statements of operations and comprehensive loss on a straight-line basis over the lease periods.
<24>Income taxes
Current income taxes are provided for in accordance with the laws and regulations applicable to the Group as enacted by the relevant
tax authorities. Income taxes are accounted for under the asset and liability method. Deferred taxes are determined based upon
differences between the financial reporting and tax bases of assets and liabilities at currently enacted statutory tax rates for the years
in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized as income in the
period of change. A valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that such
deferred tax assets will not be realized. The total income tax provision includes current tax expenses under applicable tax regulations
and the change in the balance of deferred tax assets and liabilities.
The Group recognizes the impact of an uncertain income tax position at the largest amount that is more-likely-than not to be sustained
upon audit by the relevant tax authority. Income tax related interest is classified as interest expenses and penalties as income tax
expense.
<25> Redeemable non-controlling interests
Redeemable non-controlling interests are equity interests of our consolidated subsidiary not attribute to the Group that have
redemption features that are not solely within the Group’s control. These interests are classified as temporary equity because their
redemption is considered probable. These interests are measured at the greater of estimated redemption value at the end of each
reporting period or the initial carrying amount of the redeemable non-controlling interests adjusted for cumulative earning(loss)
allocations.
F-24
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
<26> Noncontrolling interest
20-Mar-2015 18:49 EST
ˆ200GaisY$LmZDH5Z^Š
4*
0C
200GaisY$LmZDH5Z^
852134 FIN 25
HTM
ESS
Page 1 of 1
A noncontrolling interest in a subsidiary or VIE of the Group represents the portion of the equity (net assets) in the subsidiary or VIE
not directly or indirectly attributable to the Group. Noncontrolling interests is presented as a separate component of equity in the
consolidated balance sheet and modifies the presentation of net income by requiring earnings and other comprehensive income loss to
be attributed to controlling and noncontrolling interest.
<27> Loss per share
Basic loss per share is computed by dividing net loss attributable to the holders of ordinary shares by the weighted average number of
ordinary shares outstanding during the year. Diluted loss per share is calculated by dividing net income attributable to the holders of
ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary
shares and dilutive ordinary share equivalents outstanding during the period. Ordinary share equivalents of stock options and warrants
are calculated using the treasury stock method. However, ordinary share equivalents are not included in the denominator of the
diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is
recorded.
<28>Segment reporting
The Group has one operating segment whose business is developing and operating online games and related services. The Group’s
chief operating decision maker is the chief executive officer, who reviews consolidated results when making decisions about
allocating resources and assessing performance of the Group. The Group generates its revenues from customers in the PRC, North
America and other areas.
<29> Certain risks and concentration
Financial instruments that potentially subject the Group to significant concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable and prepayments and other current assets. As of December 31, 2013 and 2014, substantially all of the
Group’s cash and cash equivalents were held by major financial institutions, which management believes are of high credit
worthiness.
F-25
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP142
11.6.14
NCR thany1dc
HKG
<30> Fair value measurements
22-Mar-2015 05:36 EST
ˆ200GaisY$M82aVu%#Š
5*
0C
200GaisY$M82aVu%#
852134 FIN 26
HTM
ESS
Page 1 of 1
Fair value is 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 Company considers the principal or most advantageous market in which it would transact
and it considers assumptions that market participants would use when pricing the asset or liability. The fair value measurement
guidance provides 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 as follows:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets that the management has the ability to access at the
measurement date.
Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that
are not active, inputs other than quoted prices that are observable for the asset (i.e., interest rates, yield curves, etc.), and inputs that
are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 inputs include unobservable inputs to the valuation methodology that reflect management’s assumptions about the
assumptions that market participants would use in pricing the asset. The management develops these inputs based on the best
information available, including their own data.
<31>Financial instruments
Financial instruments consist of cash and cash equivalents, restricted cash, short-term investment, accounts receivable, accounts
payable and long-term accounts payable. The carrying value of the Group’s cash and cash equivalents, restricted cash, short-term
investment, accounts receivable and accounts payable approximate their market values due to the short-term nature of these
instruments. The carrying value of long term accounts payable approximates its fair value as the impact to discount the long term
payable with interest rate is insignificant. The Group does not use derivative instruments to manage risks.
<32> Recent accounting pronouncements
In May 2014, the FASB and International Accounting Standards Board (“IASB”) issued their converged standard on revenue
recognition. The objective of the revenue standard ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” is to
provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within
industries, across industries, and across capital markets. The revenue standard contains principles that an entity will apply to
determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize
revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for
those goods or services. For public companies, the revenue standard is effective for the first interim period within annual reporting
periods beginning after December 15, 2016 and early adoption is not permitted. The Group is in the process of evaluating the impact
of the standard on its consolidated financial statements.
F-26
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP142
11.6.14
NCR thany1dc
HKG
22-Mar-2015 05:35 EST
ˆ200GaisY$M82RJy%)Š
5*
0C
200GaisY$M82RJy%)
852134 FIN 27
HTM
ESS
Page 1 of 1
On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how reporting entities must
disclose going-concern uncertainties in their financial statements. The new standard requires management to perform interim and
annual assessments of an entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial
statements (or within one year after the date on which the financial statements are available to be issued, when applicable). Further, an
entity must provide certain disclosures if there is “substantial doubt about the entity’s ability to continue as a going concern.” The
ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted. The
ASU shall be applied at the effective date, and the Group is in the process of evaluating the impact of the standard on its consolidated
financial statements.
In November 2014, the FASB issued a new pronouncement which provides guidance on determining whether the host contract in a
hybrid financial instrument issued in the form of a share is more akin to debt or to equity. The new standard requires management to
determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial
instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. The new
standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early
adoption, including adoption in an interim period, is permitted. The effects of initially adopting the amendments in this Update should
be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning
of the fiscal year for which the amendments are effective. The Group is assessing the effect of adoption of this guidance on the
Group’s consolidated financial states.
3. CONVENIENCE TRANSLATION
The Group, with the exception of its subsidiary, Red 5, The9 Interactive, Red 5 Singapore, Red5 Korea and The9 Korea, maintains its
accounting records and prepares its financial statements in RMB. The United States dollar (“US dollar” or “US$”) amounts disclosed
in the accompanying financial statements are presented solely for the convenience of the readers at the rate of US$1.00 =
RMB6.2046, representing the noon buying rate in the City of New York for cable transfers of RMB, as certified for customs purposes
by the Federal Reserve Bank of New York, on December 31, 2014. Such translations should not be construed as representations that
the RMB amounts represent, or have been or could be converted into, United States dollars at that or any other rate.
F-27
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN12
11.6.14
NCR jayav1dc
HKG
4. VARIABLE INTEREST ENTITIES
22-Mar-2015 07:41 EST
ˆ200GaisY$M8uWGgZkŠ
7*
0C
200GaisY$M8uWGgZk
852134 FIN 28
HTM
ESS
Page 1 of 1
The Group is the primary beneficiary of certain VIEs, including i) Shanghai IT which was designed by the Group to comply with
PRC regulations that prohibit direct foreign ownership of businesses that operate online games in the PRC and ii) Mengxiang Hulian
and Chuan Yun, which are start-up research and development companies (“R&D VIE”) developing games and software funded by the
Group as of December 31, 2014. Due to the weaker than expected performance of the game developed by Mengxiang Hulian, the
Group has stopped funding Mengxiang Hulian and it had become an inactive company as of December 31, 2014.
Shanghai Huopu Cloud Computing Terminal Technology Co., Ltd. (“Huopu Cloud”) was considered as VIE of the Group since its
establishment in 2010. During 2014, for the purpose of disposal (see note 29 ),100% of Huopu Cloud`s shares was acquired by the
Group, and subsequently sold to a third party. In addition, two former R&D VIEs, Hangzhou Fire Rain Network Technology Co.,
Ltd. (“Fire Rain”) and Shenzhen Wanyouyinli Technology Co., Ltd. (“Wanyouyl”) were deconsolidated in 2012.
Shanghai IT
Shanghai IT is VIE of the Group, which was designed by the Group to comply with PRC regulations that prohibit direct foreign
ownership of businesses that operate online and TV games in the PRC.
There are a few key contractual arrangements between The9 Computer (the “WOFE”) and related VIEs that provide the Group with a
controlling financial interest over the VIEs and upon which the Group concluded that it is required to consolidate these entities
pursuant to the guidance in ASC 810.
A summary of the contractual agreements referenced above is as follows:
1)
Loan Agreement. The WOFE entered into loan agreements with each shareholder of the relevant VIEs. Pursuant to the
terms of these loan agreements, the WOFE granted an interest-free loan to each shareholder of the VIEs for the explicit
purpose of making a capital contribution to the VIEs. The loans have an unspecified term and will remain outstanding for
the duration of WOFE or until such time that the WOFE elects to terminate the agreement (which is at the WOFE’s sole
discretion) at which point the loans are payable on demand. The shareholders of the VIEs may not prepay all or any portion
of the loans without the WOFE’s prior written request.
F-28
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN02
11.6.14
NCR durap0dc
HKG
24-Mar-2015 15:10 EST
ˆ200GaisY$MuTqSJZ)Š
7*
0C
200GaisY$MuTqSJZ)
852134 FIN 29
HTM
ESS
Page 1 of 1
2)
Equity Pledge Agreement. The shareholders of the VIEs entered into equity pledge agreements with the WOFE. Under the
equity pledge agreements, the shareholders of the VIEs pledged all of their equity interests in the VIEs to the WOFE as
collateral for all of their payments due to the WOFE and to secure performance of all obligations of the VIEs and their
shareholders under the above loan agreements. In addition, the dividend distributions to the shareholders of VIEs, if any,
will be deposited in an escrow account over which the WOFE has exclusive control. The pledge shall remain effective until
all obligations under such agreements have been fully performed. The shareholder has the obligation to maintain ownership
and effective control over the pledged equity. Under no circumstances, without the prior written consent of the WOFE,
may the shareholder transfer or otherwise encumber any equity interests in the VIEs. If any event of default as provided for
therein occurs, the WOFE, as the pledgee, will be entitled to dispose of the pledged equity interests through transfer or
assignment and use the proceeds to repay the loans or make other payments due under the above loan agreements up to the
loan amounts.
3) Call Option Agreement. The VIEs and their shareholders entered into equity call option agreements with the WOFE.
Pursuant to such agreements, the shareholders of the VIEs grant the WOFE an irrevocable and exclusive option to purchase
the shares of VIEs at a purchase price equal to the amount of the registered capital of the VIE or the loan provided by the
WOFE, permissible by the then-applicable PRC laws and regulations. WOFE may exercise such right at any time during
the term of the agreement. Moreover, under the call option agreements, neither the VIEs nor their shareholders may take
actions that could materially affect the VIEs’ assets, liabilities, operations, equity or other legal rights without the prior
written approval of the WOFE, including, without limitation, declaration and distribution of dividends and profits; sale,
assignment, mortgage or disposition of, or encumbrances on, the VIE’s equity; merger or consolidation; acquisition of and
investment in any third-party entities; creation, assumption, guarantee or incurrence of any indebtedness; entering into
other materials contracts. The agreements shall not expire until such time as the WOFE acquires all equity interests of the
relevant VIEs subject to applicable PRC laws.
4)
5)
Shareholder Voting Proxy Agreement. Each of the VIE’s shareholders executed an irrevocable power of proxy to appoint
the WOFE as the attorney-in-fact to act on his or her behalf on all matters pertaining to the VIEs and to exercise all of his
or her rights as a shareholder of the VIEs, including the right to attend shareholders meetings, to exercise voting rights and
to appoint directors, a general manager, and other senior management of the VIEs. The power of proxy is irrevocable and
may only be terminated at the discretion of the WOFE.
Exclusive Technical Service Agreement. Under the exclusive technical service agreement, the VIEs agreed to engage the
WOFE as their exclusive provider of technology consulting and other services for a service fee equal to 90% of all
operating profit generated by the VIEs. According to the relevant PRC rules and regulations, related party transactions
should be negotiated at the arm’s length basis and apply reasonable transfer pricing methods. However, the determination
of service fees is under the sole discretion of the WOFE. These agreements do not have specific clauses on renewal but do
have an initial term of 20 years (with the earliest expiration date being December 31, 2029). By virtue of the governance
rights the WOFE maintains over the VIEs, through the terms of the other agreements noted above, the Company is able to
unilaterally renew, extend or amend the service agreements at its discretion.
F-29
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
20-Mar-2015 18:49 EST
ˆ200GaisY$LmZW=jZ7Š
4*
0C
200GaisY$LmZW=jZ7
852134 FIN 30
HTM
ESS
Page 1 of 1
The Group shall be deemed to have a controlling financial interest in a VIE if it has both of the following characteristics:
a. The power to direct the activities of a VIE that most significantly impact the VIE’s economic performance; and
b. The obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from
the VIE that could potentially be significant to the VIE.
In determining the Group has “the power to direct the activities of the VIE that most significantly impact the VIEs’ economic
performance,” the Group looked to the specific provisions of the Call Option Agreement and Shareholder Voting Proxy Agreement.
These agreements, as summarized above, provide the WOFE effective control over all of the corporate and operating decisions of the
VIEs, and as such, the Group’s management concluded that the WOFE has the requisite power to direct the activities of the VIEs that
most significantly impact the VIEs’ economic performance. In assessing the Group’s obligation to absorb losses, the Group notes that
it has funded through the loan agreements all of the entities’ share capital and also provides financial support as necessary to the
entities through intercompany transactions. The Group’s rights to receive economic benefits that are significant to the VIEs are
embodied firstly in the Equity Pledge Agreements that secure the equity owners’ obligations under the relevant agreements, and
ascribes to the WOFE all of the economic benefits of the equity interests including rights to any dividends declared. Secondly, the
Exclusive Technical Service Agreement further secures the ability of WOFE to receive substantially all of the economic benefits from
each of the VIEs on behalf of the Group.
In conclusion, because the Group, through its wholly owned subsidiary The9 Computer, has (1) the power to direct the activities of
the VIEs that most significantly affect the VIE’s economic performance and (2) the right to receive benefits from the VIEs that could
potentially be significant to the VIEs, it has been deemed to be the primary beneficiary of the VIEs and has consolidated the
respective VIEs since the date of execution of such agreements.
Shareholders of the VIEs may potentially have conflicts of interest with the Company, and they may breach their contracts with the
PRC subsidiaries or cause such contracts to be amended in a manner contrary to the interests of the Company. As a result, the
Company may have to initiate legal proceedings, which involve significant uncertainty. Such disputes and proceedings may
significantly disrupt the Company’s business operations and adversely affect the Company’s ability to control the VIEs. In light of the
fact that most of the shareholders of the VIEs are directors, officers, shareholders or employees of the Company or the PRC
subsidiaries, management is of the view that the risk that misaligned interests may lead to deconsolidation in the foreseeable future is
remote and insignificant.
F-30
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
20-Mar-2015 18:49 EST
ˆ200GaisY$LmZZBc%#Š
4*
0C
200GaisY$LmZZBc%#
852134 FIN 31
HTM
ESS
Page 1 of 1
PRC laws and regulations currently limit foreign ownership of companies that provide Internet content services, which include
operating online games. In addition, foreign invested enterprises are currently not eligible to apply for the required licenses for
operating online games in the PRC. The Company is incorporated in the Cayman Islands and is considered a foreign entity under the
PRC laws. Due to restrictions on foreign ownership of the provision of online games, the Company is dependent on the licenses held
by Shanghai IT to conduct its online games business through its subsidiary in the PRC. Shanghai IT holds the necessary licenses and
approvals that are essential for the online game business. The9 Computer has entered into contractual arrangements with Shanghai IT
for use of its relevant licenses and websites. Shanghai IT is principally owned by certain shareholder and employee of the Company.
Pursuant to certain other agreements and undertakings, the Company in substance controls Shanghai IT. In the opinion of the
Company’s directors, the Company’s current ownership structures and its contractual arrangements with Shanghai IT, and its equity
owners as well as its operations, are in compliance with all existing PRC laws and regulations. However, there may be changes and
other developments in the PRC laws and regulations or their interpretation. Specifically following the recent promulgation of the
GAPP Circular, it is unclear whether the authorities will deem our VIE structure and contractual arrangements with Shanghai IT as an
“indirect or disguised” way by foreign investors to gain control over or participate in domestic online game operators, and challenge
our VIE structure accordingly. If the Company, its PRC subsidiaries and VIEs are found to be in violation of any existing or future
PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities
would have broad discretion in dealing with such violations, including requiring the Company to undergo a costly and disruptive
restructuring such as forcing the Company to transfer its equity interest in the PRC subsidiaries to a domestic entity or invalidating
the VIE agreements. If the PRC government authorities impose penalties which cause the Company to lose its rights to direct the
activities of and receive economic benefits from the VIEs, the Company may lose the ability to consolidate and reflect in its financial
statements the financial condition, and results of operation of the VIEs.
The Group has concluded that the aforementioned contractual arrangements are legally enforceable and provide the Group with full
control of the VIEs. However, the aforementioned contractual arrangements with the VIEs and their respective shareholders are
subject to risks and uncertainties:
• The VIEs or their shareholders could fail to obtain the proper operating licenses or fail to comply with other regulatory
requirements. As a result, the PRC government could impose fines, new requirements or other penalties on the VIEs or the
Group, mandate a change in ownership structure or operations for the VIEs or the Group, restrict the VIEs or the Group’s use of
financing sources or otherwise restrict the VIEs or the Group’s ability to conduct business.
F-31
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
11.6.14
NCR vaitp0dc
HKG
22-Mar-2015 05:42 EST
ˆ200GaisY$M86!NuZZŠ
5*
0C
200GaisY$M86!NuZZ
852134 FIN 32
HTM
ESS
Page 1 of 1
• The aforementioned contractual agreements may be unenforceable or difficult to enforce. The equity pledge agreements may
be deemed improperly registered or the VIEs or the Group may fail to meet other requirements. Even if the agreements are
enforceable, they may be difficult to enforce given the uncertainties in the PRC legal system.
• The PRC government may declare the aforementioned contractual agreements invalid. They may modify the relevant
regulation, have a different interpretation of such regulations, or otherwise determine that the Group or the VIEs have failed to
comply with the legal obligations required to effectuate such contractual arrangements.
• It may be difficult to finance the VIEs by means of loans or capital contributions. Loans from our offshore parent company to
the VIEs must be approved by the relevant PRC government body and such approval may be difficult or impossible to obtain.
Because the VIEs are domestic PRC enterprises owned by nominee shareholders, the Group is not likely to finance their
activities by means of direct capital contributions either.
If the Company, its PRC subsidiaries and VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail
to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in
dealing with such violations, including requiring the Company to undergo a costly and disruptive restructuring such as forcing the
Company to transfer its equity interest in the PRC subsidiaries to a domestic entity or invalidating the VIE agreements. If the PRC
government authorities impose penalties which cause the Company to lose its rights to direct the activities of and receive economic
benefits from the VIEs, the Company may lose the ability to consolidate and reflect in its financial statements the results of operation
of the VIEs. The Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, the
WFOEs or VIEs.
R&D VIE
Mengxiang Hulian,and Chuan Yun are primarily start-up research and development companies developing games and software
funded by the Group starting from 2011 and 2014, respectively . The group deconsolidated two other VIE companies, Fire Rain and
Wanyouyl, in 2012. Both companies were primarily engaged in the development of MMOs since 2009. The Group had arrangements
with each of Fire Rain, Wanyouyl, Mengxiang Hulian and Chuan Yun (the “R&D” companies) pursuant to which the Group provided
substantial financial support and obtained equity interests in these entities. The Group has acquired or has an option to acquire the
exclusive licenses in Mainland China or worldwide for the games and software under development by these entities. As of
December 31, 2013 and 2014, the Group held equity interest of 58.5% and 62.5% of Fire Rain, nil and nil of Wanyouyl, 20% and
20 % of Mengxiang Hulian and nil and nil of Chuan Yun, respectively.
F-32
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
20-Mar-2015 18:49 EST
ˆ200GaisY$LmZf1&%DŠ
4*
0C
200GaisY$LmZf1&%D
852134 FIN 33
HTM
ESS
Page 1 of 1
Under the above arrangements with the R&D companies, the Group has the power to make decisions that most significantly affect the
entities’ operations and effectively assumed a majority of economic risks associated with these entities, and has the obligation to
absorb losses and the right to receive returns that are significant to these entities. As such, prior to the reconsideration events
discussed below, it was determined that the Group is the primary beneficiary of these entities and has included them in its
consolidated financial statements since their respective dates of incorporation.
In late 2012, due to the weaker than expected performance of the game developed by Fire Rain, the Group decided to terminate
certain contractual arrangements with Fire Rain, which resulted in the return of the game license and the cessation of providing
additional financial support to Fire Rain. Subsequent to this change, the game operations are controlled directly by Fire Rain. As a
result of the change in contractual arrangements, the Group no longer has the power to direct the activities that most significantly
impact Fire Rain’s operations, and as such the Group ceased to be the primary beneficiary of Fire Rain and deconsolidated Fire Rain
on the date the contractual arrangements were terminated. As of the date of deconsolidation, the Group retained its 25% equity
interest and contractual rights to receive repayment of game development expenditures of RMB 17 million (US$ 2.8 million) and a
contractual right to receive 20% of the gross revenues generated by the game. Upon termination of the original VIE arrangements, the
Group concluded that RMB 4.5 million (US$ 0.7 million) out of the RMB 17 million (US$ 2.8 million) in cash previously advanced
to the R&D VIE would be repaid by Fire Rain and considered such amount in the determination of the loss associated with such
termination. The RMB 4.5 million (US$ 0.7 million) was received in January 2013. The Group also determined that the fair value of
the retained 25% equity interest in Fire Rain was approximately nil. The Group measured the fair value of the investment based on a
discounted cash flow approach. The discounted cash flow analysis is a level 3 fair value measurement that requires the use of
significant unobservable inputs, including projected revenue, expenses, capital expenditures and other costs, and discount rates
calculated based on the weighted average cost of capital, which includes various factors, such as risk-free rate, equity risk premium,
size premium, and other risk factors.
The total loss on deconsolidation of Fire Rain was RMB12.4 million, of which RMB 1.3 million (US$ 0.2 million) relates to the loss
from remeasurement of the 25% retained interest. The total loss was recorded in loss on termination of VIE arrangements for the year
ended December 31, 2012. After deconsolidation, Fire Rain remains a VIE and a related party of the Group, however, the Group is
not Fire Rain’s primary beneficiary. Given the Group made a full provision of the remaining receivable due from Fire Rain, the
Group’s maximum loss exposure as a result of the involvement with Fire Rain is nil. In addition, as Fire Rain was incorporated as
limited liability company under the PRC Company Law, creditors of Fire Rain do not have recourse to the general credit of the Group
for any of the liabilities of Fire Rain.
F-33
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP144
11.6.14
NCR ayyar0dc
HKG
23-Mar-2015 23:17 EST
ˆ200GaisY$Mb6f@pZ-Š
8*
0C
200GaisY$Mb6f@pZ-
852134 FIN 34
HTM
ESS
Page 1 of 1
In April 2013, the Group and an individual shareholder entered into an agreement pursuant to which that individual shareholder will
transfer their 33.5% equity interest in Fire Rain to the Group and in return the Group will release them from the personal guarantee
provided in connection with loans advanced by the Group to Fire Rain. In 2014, the Group obtained an additional 4% equity interest
in Fire Rain from an individual shareholder. After these share transfers, the Group owns 62.5% of the equity of Fire Rain. However,
according to the articles of incorporation, there is no change on the decision making mechanism of Fire Rain. Due to continuous weak
performance, Fire Rain had become an inactive company.
In late 2012, in a series of contemplated transactions, the Group terminated the product development and license agreement with
Wanyouyl and sold its entire equity interest in Wanyouyl to a third party for consideration of RMB 3.0 million (US$ 0.5 million). The
Group retained its contractual right to receive 20% of future revenues of a game developed by Wanyouyl, subject to a cap of
RMB10.0 million (US$1.7 million). The Group deconsolidated Wanyouyl as a result of these transactions and recorded a total loss on
deconsolidation of RMB 5.7 million (US$0.9 million), which is recognized in loss on termination of R&D VIE arrangements for the
year ended December 31, 2012. In 2013 and 2014, the Group received RMB2.6 million (US$0.4 million) and nil of shared revenue
from the game developed by Wanyouyl, respectively.
Summary financial information of the VIE subsidiaries included in the accompanying consolidated financial statements with
intercompany balances and transactions eliminated are as follows:
Total assets
Total liabilities
Revenue
Net profit(loss)
December 31, 2013
December 31, 2014
RMB
RMB
181,085,582
248,360,907
130,055,790
231,634,266
December 31, 2014
US$
(Note 3)
20,961,189
37,332,667
December 31, 2012
December 31, 2013
December 31, 2014 December 31, 2014
RMB
146,100,548
(163,422,412)
RMB
86,574,297
(201,412,786)
RMB
42,697,861
101,628,848
US$ (Note 3)
6,881,646
16,379,597
All VIES suffered operating loss for each year ended December 31, 2012, 2013 and 2014, thus no service fee was charged by WOFE
during the year ended December 31, 2012, 2013 and 2014.
F-34
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN10
11.6.14
NCR kanns4dc
HKG
23-Mar-2015 23:33 EST
ˆ200GaisY$MbQq6J%WŠ
6*
0C
200GaisY$MbQq6J%W
852134 FIN 35
HTM
ESS
Page 1 of 1
The VIEs contributed an aggregate of 94.6%, 82.6% and 66.4% of the consolidated net revenues for the year ended December 31,
2012, 2013 and 2014, respectively. The Company’s operations not conducted through contractual arrangements with the VIE
primarily consist of its product development on Firefall in the United States. As of the fiscal years ended December 31, 2013 and
2014, the VIEs accounted for an aggregate of 33.1% and 25.1%, respectively, of the consolidated total assets, and 69.7% and 72.2%,
respectively, of the consolidated total liabilities.
There are no consolidated VIE’s assets that are collateral for the VIE’s obligations and can only be used to settle the VIE’s
obligations.
Relevant PRC laws and regulations restrict the VIE from transferring a portion of its net assets, equivalent to the balance of its
statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 26 for
disclosure of restricted net assets.
5. ACQUISITION
On April 6, 2010, the Group, through New Star, acquired 39,766,589 shares of Series A convertible preferred stock of Red 5, an
online game developer based in the United States for US$ 16.84 million (RMB114.9 million). As a result, the Company owned
approximately 82% of the equity interest of Red 5 on an as-converted basis and became the controlling shareholder of Red 5.
As of the date of acquisition, Red 5 was in the process of fulfilling its obligations under a game development and license agreement
between Red 5 and a third party game publisher to develop Firefall in exchange for cash consideration from the third party operator.
The Group has acquired the game development and license agreement from the third party operator. Please refer to Note 12.
In addition, the Group was contingently liable to pay up to US$3.65 million (RMB24.9 million) if certain former Red 5 employees
fulfill employment contracts with the Company ranging from two to four years. Such amounts were recorded as compensation
expense on a straight line basis over the requisite service period which ended at March 31, 2015.
Subsequent to April 6, 2010, the Group acquired 777,723 and 2,020,601 shares of common stock of Red 5 from the noncontrolling
interest holders for US$0.1 million (RMB0.6 million) and US$0.2 million (RMB1.4 million) cash in 2010 and 2011, respectively. In
September 2012, Red 5 issued restricted common stock to two directors of Red 5, including Mr. Jun Zhu, the Chairman of the Board
and Chief Executive Officer of the Company (Note 23). The equity interest of the Group was diluted to approximately 80% as of
December 31, 2013 due to the vesting of restricted common stock.
F-35
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN10
11.6.14
NCR kanns4dc
HKG
24-Mar-2015 00:05 EST
ˆ200GaisY$Mb@S&aZ2Š
9*
0C
200GaisY$Mb@S&aZ2
852134 FIN 36
HTM
ESS
Page 1 of 1
In August 2014, Red 5 issued 27,438,952 Series B redeemable convertible preferred shares of Red 5 to a new investor (see Note 28).
As the license to publish Firefall belongs to Red 5 Singapore (Note 12), as a condition for the investment by the new investor, the
Group is required to transfer the license to Red 5. As such, in June 2014, the Group transferred its equity interests in Red 5 Singapore,
a wholly owned subsidiary of the Group to Red 5, an 79.2% owned subsidiary, at a nominal price. At the time of transfer, 20.8% of
the accumulated deficit of Red 5 Singapore, amounted to RMB 15,068,103, was attributable to the noncontrolling interest of Red 5
with no consideration, which was recorded as an equity transaction in the Consolidated Statements of Changes in Equity.
In August 2014, the Group converted its convertible loan and certain other loans due from Red 5 with a book value of US$50.0
million (RMB307.6 million), into 63,301,276 common shares of Red 5. The equity of Red 5 increased by RMB307.6 million while
the impact attributable to noncontrolling interest of Red 5 was RMB31,784,850 as a result of the loan conversions.
As of December 31, 2013 and 2014, the Group held approximately 80% and 73% equity interest in Red 5, respectively.
6. PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets are as follows:
Receivable from a former equity method investee (Note 16(ii))
Receivable relating to disposal of a subsidiary (Note 29)
Accrued interest income
Receivable from a supplier (Note 15(iii))
Prepayments and deposits
Others
F-36
December
31, 2013
RMB
December
31, 2014
RMB
0
0
186,593
0
24,074,914
8,203,091
32,464,598
4,500,000
12,750,575
740,586
17,927,763
10,929,101
9,725,296
56,573,321
December
31, 2014
US$
(Note 3)
725,268
2,055,020
119,361
2,889,431
1,761,451
1,567,433
9,117,964
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN05
11.6.14
NCR shams0dc
HKG
7. PREPAID ROYALTIES AND DEFERRED COSTS
25-Mar-2015 06:43 EST
ˆ200GaisY$N7rfzTZLŠ
13*
0C
200GaisY$N7rfzTZL
852134 FIN 37
HTM
ESS
Page 1 of 1
Due to a weaker than expected operating performance of certain games, and the expectation that the net cash flow of these games will
not be sufficient to recover the carrying amount of the prepaid royalties, the Group recognized an impairment loss for prepaid
royalties associated with such games of RMB0.9 million, RMB10.4 million and nil for the year ended December 31, 2012, 2013, and
2014, respectively, and an impairment loss for deferred cost of nil, RMB2.7 million and nil for the year ended December 31, 2012,
2013, and 2014, respectively. The impairment charges of prepaid royalties and deferred cost were included in cost of services in the
consolidated statements of operations and comprehensive loss.
8. INVESTMENTS IN EQUITY INVESTEES
The Group’s investments in equity investees comprise the following:
December
31, 2013
RMB
December
31, 2014
RMB
December
31, 2014
US$
( Note 3)
Share
ownership
as of
December
31,2014
%
Investments accounted for under equity method:
Beijing Linkage Technology Co., Ltd. (“BLT”)(Note 16(i))
Fire Rain (Note 24.2)
Guangzhou Man Cheng Information
Technology Co., Ltd. (“Man Cheng”)(Note 16(i))
ZTE9 network technology co., LTD., wuxi (“ZTE9”)<4>
System Link Limited (“System Link”)<5>
Investments accounted for under cost method:
Shanghai Institute of Visual Art of Fudan University (“SIVA”)
G10 Entertainment Corporation (“G10”)<1>
CrowdStar Inc. (“Crowdstar”)<2>
Tandem Fund II, L.P. (“Tandem Fund”)<3>
Total
0
0
0
0
0
0
0%
62.5%
0
3,779,550
0
0
67,020
0
0
10,802
0
10,000,000 10,000,000 1,611,707
24,892,921 24,892,921 4,012,010
1,627,099 262,241
1,627,099
10,548,571
2,636,885 424,989
50,848,141 39,223,925 6,321,749
10%
30.2%
50%
1.1%
13.7%
0.5%
3.1%
F-37
THE9 LIMITED
FORM 20-F
<1> G10
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
20-Mar-2015 18:49 EST
ˆ200GaisY$LmZuk%Z6Š
4*
0C
200GaisY$LmZuk%Z6
852134 FIN 38
HTM
ESS
Page 1 of 1
In April 2008, the Group, through China Crown Technology, invested US$38.3 million (RMB276.0 million) in cash to subscribe
3,031,232 preferred shares issued by G10, an established Korean online game developer and operator, which accounted for less than
20% of the equity interest in G10 on an as converted basis. The preferred shares are convertible, non-redeemable and with a
liquidation preference. Considering the liquidation preference is substantive and not available to common shares, the preferred shares
are not in substance common shares and equity accounting is not applicable. Further, considering the rights and obligations of these
shares, they are not considered debt securities. Accordingly, the Group accounted for the investment in G10 under the cost method.
The initial investment was US$39.5 million, including US$1.2 million transaction cost. Pursuant to the Series B Preferred Share
Subscription Agreement entered into between G10 and the Group, the purchase price would be reduced by up to US$25.0 million if
G10’s consolidated net income does not reach the predetermined target for the period from July 1, 2009 to June 30, 2010. The target
was not met in the predetermined period, and both parties reached a settlement agreement in November 2010 whereby the purchase
price was reduced by US$10.0 million, payable in 26 equal monthly installments beginning in February 2011. The adjustment to the
purchase price was accounted for as a reduction in the carrying value of the underlying investment at the time of the settlement. The
Group also performed an impairment assessment and recognized an impairment loss of RMB184.9 million for the year ended
December 31, 2010. All the refund of purchase price under the settlement agreement had been received.
In December 2011, pursuant to the agreements between the shareholders of G10 and T3 Entertainment Co., Ltd. (“T3”), a wholly-
owned subsidiary of G10, G10 was spun off and the shareholders of G10 became shareholders of T3 at the same shareholding
percentage. In February 2012, the changes in shareholding structures of G10 and T3 was completed and the Group owned 32,290
ordinary shares of T3, which reflects the same percentage of equity the Group owned in G10 on an as converted basis.
The Group performed an impairment assessment and determined that there is no impairment in the investment as of December 31,
2013 and 2014, respectively.
F-38
THE9 LIMITED
FORM 20-F
<2> CrowdStar
RR Donnelley ProFile
ACXFBU-MWE-XN05
11.6.14
NCR seksr0dc
HKG
24-Mar-2015 13:34 EST
ˆ200GaisY$MtK57f%IŠ
6*
0C
200GaisY$MtK57f%I
852134 FIN 39
HTM
ESS
Page 1 of 1
In May and November 2011, the Group invested US$2.5 million and US$1 million cash, respectively, to subscribe 118,030 and
47,212 Series 2 preferred stocks issued by CrowdStar, a San Francisco-based social and mobile game company, which accounted for
less than 20% of its total outstanding equity on an as converted basis. The preferred stocks are convertible, non-redeemable, have a
liquidation preference and do not have a readily determinable fair value. The group accounted for the investment using cost method.
In May 2013 Series 3 preferred stocks were issued to certain unrelated third-party investors of CrowdStar at a lower price than the
Group’s investment cost. The Group considered this as an indicator of other-than-temporary impairment, and recorded an impairment
loss of RMB21.0 million (US$3.5 million) for the year ended December 31, 2013, which was the difference between book value and
fair value as implied by the issue price of Series 3 preferred stocks. The fair value was estimated based on the issue price of Series 3
preferred stocks and was considered as Level 2 fair value measurement.
The Group performed an impairment assessment and determined that there is no impairment in the investment as of December 31,
2014.
<3> Tandem Fund
In April 2012, the Group invested US$ 1.2 million to Tandem Fund with the total commitment of US$ 4.0 million and became a
Limited Partner (“LP”) of the fund. Tandem Fund is a venture capital focusing on mobile business industry at early stages. By
investing in the Fund, the Group aims to enjoy the development of mobile business and seek opportunity for business cooperation
with the Fund’s investees. The Group is required to record such investment via fair value at each reporting period. In October 2013,
the Group further invested US$0.8 million in the Fund.
In March 2014, the Group entered into a sale and purchase agreement with a third party (“Purchaser”) to dispose 75% of its interest in
Tandem Fund, for an initial consideration of US$1.5 million. If the purchase receives proceeds from Tandem fund for the disposition
of a certain Tandem fund’s investment portfolio within one year from the closing date of this share transfer, 20% of proceeds received
by the purchaser will be paid to the Group. The Group received total consideration of US$1.8 million, including initial consideration
of US$1.5 million and 20% of proceeds received by the purchaser from the disposition of Tandem fund’s investment portfolio of
US$0.3million in March 2014, respectively. After this transaction, the Group owned 3.1% equity interest in Tandem Fund and
believed that it would not have significant impact on the investee, thus, the Group accounted for their investment in Tandem fund
under cost method since the transfer day. During the year ended December 31, 2014, the Group received proceeds from the
disposition of Tandem fund’s investment portfolio of RMB1.1 million (US$0.2 million), and recorded it as investment income from
cost method investment in the consolidated statement of operations and comprehensive loss for the year ended December 31, 2014.
The Group performed an impairment assessment and determined that there is no impairment in the investment as of December 31,
2013 and 2014, respectively.
F-39
THE9 LIMITED
FORM 20-F
<4> ZTE9
RR Donnelley ProFile
SWRFBU-MWE-XN16
11.6.14
NCR kriss2dc
HKG
25-Mar-2015 07:26 EST
ˆ200GaisY$N8y6MP%EŠ
8*
0C
200GaisY$N8y6MP%E
852134 FIN 40
HTM
ESS
Page 1 of 1
In February 2013, the Group established a joint venture with Shanghai Zhongxing Communication Technology Enterprise Co., Ltd.
and Shanghai Ruigao Information Technology Co., Ltd. in Wuxi, Jiangsu Province, for the purpose of developing and operating TV
game platforms, TV games and other related businesses. The Group contributed RMB5.2 million (US$0.9 million) to the joint
venture, which accounted for 51.5% of the registered capital of the joint venture. As contemplated in the initial agreement, in August
2013, the Group transferred 9% of its equity shares of ZTE9 for a consideration of RMB0.9 million (US$0.1 million) to a ZTE9
employee. In addition, based on a separately signed agreement, the Group also transferred 9% common shares of ZTE9 to certain
ZTE9 employees, with recourse provision expiring in three years. This arrangement was in substance share-based compensation, with
3 year vesting requirement. Accordingly, the fair value of these awards was being recognized over the three-year vesting period of the
shares. In February 2014, Guangdong Hongtu Guangdian Investment Limited Company made capital investment of RMB12.5 million
to the ZTE9 to acquire its 10% shares, and the Group`s ownership in ZTE9 was diluted to 30.15% since then.
The Group is able to exert significant influence over the joint venture through its representation on the board, and accounts for this
investment using equity method of accounting. As of December 31, 2014, the Group`s share in ZTE 9 was 30.15% and the investment
was reported as RMB0.07million (US$0.01 million) after recording the Group’s share in losses of ZTE9.
During 2014, the Group lent RMB5.3 million to ZTE9 to fund its operation. The loan was interest-free and due in June 30, 2015.
The Group performed an impairment assessment and determined that there is no impairment in the investment and loan as of
December 31, 2013 and 2014, respectively.
<5> System Link
In July 2014, the Group entered into an agreement to form a joint venture, System Link, with Qihoo 360 Technology Co., Ltd., or
Qihoo 360. Pursuant to the joint venture agreement, Qihoo 360 and the Group will each own 50% equity interest in the joint venture
and share profits based on the equity interest each party holds in the joint venture. System Link, was formed in August 2014. In
August 2014, Red 5 Singapore entered into a license agreement with System Link for publishing and operating Firefall for a five-year
term in mainland China. Under this license agreement, System Link is expected to pay to Red 5 Singapore no less than US$160
million (including license fee and royalties) during the term of the agreement. The Group treated System Link as an equity investee.
The capital contribution of System Link has not been completed as of December 31, 2014.
9. AVAILABLE-FOR-SALE INVESTMENTS
Investment in Youjia Group Limited (“Youjia”)
In November 2011, the Group acquired 925,926 redeemable and convertible preferred shares of Youjia, a mobile social application
developer based in the PRC, for a consideration of US$1.0 million. The Group’s investment represented 6.67% of Youjia’s equity
interest on an as converted basis as of December 31, 2011. The Group recorded the investment in Youjia as an available-for-sale
investment as the redeemable convertible preference share is in substance a debt security. During 2013, based on an evaluation of the
financial results and condition of Youjia, the Group provided full impairment provision of Youjia.
F-40
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP142
11.6.14
NCR thany1dc
HKG
22-Mar-2015 05:40 EST
ˆ200GaisY$M84&xz%1Š
5*
0C
200GaisY$M84&xz%1
852134 FIN 41
HTM
ESS
Page 1 of 1
In April 2014, the Group entered into a sale and purchase agreement with a third party and sold all of shares of Youjia for US$1.0
million (RMB6.3 million) cash receipt as consideration and recognized a gain on investment disposal of RMB6.3 million (US$1.0
million) for the year ended December 31, 2014.
10. PROPERTY, EQUIPMENT AND SOFTWARE, NET
Property, equipment and software and related accumulated depreciation and amortization are as follows:
Office buildings
Computer and equipment
Leasehold improvements
Office furniture and fixtures
Motor vehicles
Software
Less: accumulated depreciation and
amortization
Net book value
December 31, 2013
December 31, 2014
RMB
RMB
67,881,751
152,428,608
16,062,417
13,216,426
10,735,360
18,142,889
67,881,751
123,158,909
12,571,448
10,395,482
11,092,117
18,175,695
December 31, 2014
US$
(Note 3)
10,940,552
19,849,613
2,026,150
1,675,448
1,787,725
2,929,390
(228,028,051)
50,439,400
(206,929,172)
36,346,230
(33,350,929)
5,857,949
Depreciation and amortization charges for the years ended December 31, 2012, 2013 and 2014 amounted to RMB20.3 million,
RMB19.0 million and RMB15.7 million (US$2.5 million), respectively.
The Group recorded impairment of nil, RMB 1.9 million and nil on equipment in 2012, 2013 and 2014, respectively, as detailed at
Note 15.
F-41
THE9 LIMITED
FORM 20-F
11. GOODWILL
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
20-Mar-2015 18:48 EST
ˆ200GaisY$LmY8ns%ÄŠ
6*
0C
200GaisY$LmY8ns%˜
852134 FIN 42
HTM
ESS
Page 1 of 1
The changes in the carrying amount of goodwill for the years ended December 31, 2012, 2013 and 2014 are as follows:
Balance at January 1, 2012
Write-off fully impaired goodwill
Translation difference
Balance at December 31, 2012
Translation difference
Balance at December 31, 2013
Translation difference
Balance at December 31, 2014
Balance at December 31, 2014 US$ (Note 3)
RMB
(24,528)
Net Amount
Gross
Amount
RMB
Accumulated
Impairment
Loss
RMB
40,235,526 (30,199,751) 10,035,775
(30,199,751) 30,199,751
0
(24,528)
0
10,011,247
0
(300,393)
0
9,710,854
0
35,200
0
9,746,054
0
1,570,779
0
10,011,247
(300,393)
9,710,854
35,200
9,746,054
1,570,779
In 2005, the Group recognized goodwill of RMB30.2 million and intangible assets of RMB283.7 million in connection with the
acquisition of equity interest in C9I. There was no change in the carrying amount of goodwill from the initial recognition date to
December 31, 2008. Due to the expiration of WoW license, related goodwill was fully impaired during the year ended December 31,
2009 and was written-off during the year ended December 31, 2012.
In 2010, the Group recognized goodwill of RMB10.9 million in connection with the business combination of Red 5 . The Group
measures the consideration it transfers at fair value, which may be calculated as the sum of the acquisition-date fair values of the
assets transferred, liabilities incurred to former owners of the acquiree, and equity instruments issued. The costs directly attributable
to the acquisition are expensed as incurred. Identifiable assets acquired and liabilities assumed are measured separately at their fair
value as of the acquisition date, irrespective of the extent of any noncontrolling interests. Contingent consideration is measured at fair
value and recorded as a liability. The excess of (i) the total cost of acquisition, fair value of the noncontrolling interests and
acquisition-date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of
the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the
difference would be recognized directly in the consolidated statement of operations and comprehensive loss.
The Group performed annual impairment test on goodwill as of December 31, 2012, 2013 and 2014, respectively, as the fair value
was greater than carrying value of the reporting unit, no impairment was recorded.
F-42
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN03
11.6.14
NCR krisn0dc
HKG
25-Mar-2015 06:43 EST
ˆ200GaisY$N7ryfl%FŠ
7*
0C
200GaisY$N7ryfl%F
852134 FIN 43
HTM
ESS
Page 1 of 1
12. INTANGIBLE ASSETS
Gross carrying amount, accumulated amortization and net book value of the intangible assets as of December 31, 2012, 2013 and
2014 are as follows:
December 31,
2013
RMB
December 31,
2014
RMB
December 31,
2014
US$
(Note 3)
Acquired game licenses
Acquired game development cost
Less: Accumulated amortization
Impairment provision
Translation difference
Net book value of intangible assets subject to amortization
155,465,964 146,925,649 23,680,116
12,285,000 1,979,983
(55,738,585) (8,983,429)
(708,246)
(4,394,381)
(247,936)
(1,538,342)
15,720,488
97,539,341
12,285,000
(33,135,637)
(4,394,381)
(1,577,122)
128,643,824
In 2013 and 2014, nil and RMB1.8 million acquired game licenses were expired, respectively, and were written off from the cost
basis and accumulated amortization.
Since its acquisition by the Group on April 6, 2010, Red 5 has been substantially devoting its operating activities to fulfill its
obligations under a game development and license agreement executed in 2006 and amended in 2009 between Red 5 and a third party
game publisher to develop Firefall in exchange for cash consideration from the third party publisher. Prior to the acquisition, Red 5
received a total of US$24.7 million cash consideration as an advance recoupable against future royalties payable to Red 5. Red 5
retained the ownership of the game and granted the third party publisher an exclusive, non-transferable term license to market and
distributes the game and host the game to customers in specified regions after Red 5 completes the game development. Red 5
continues to perform its obligations under the agreement post-acquisition, including the provision of post-contract customer support
for the hosted version of the game to the third party publisher during the term of the license. The initial term of the agreement is from
February 2006 through the fifth anniversary of the first commercial release of the initial game. Thereafter, the agreement can be
renewed in two-year terms.
In September 2011, Red5 Korea, Red 5 Singapore and Red5 entered into a series of agreements with the third party game publisher.
Pursuant to the agreement, Red 5 Singapore were substituted in full for the third party publisher as a party under the game
development and license agreement between Red 5 and the third party game publisher, including the exclusive , non-transferable term
license to market and distribute the game and host the game to customers in specified regions. Under the agreements, the Group paid
US$10.0 million and guaranteed an additional payment of US$12.7 million to the third party game publisher due within four years. In
addition, the Group is subject to additional contingent payments to be calculated based on certain percentages of the proceeds
received from future game licensing and royalties, if any. The total consideration paid, including the US$10 million and the
guaranteed amount of US$12.7 million, was recorded as acquired game license and the contingent payments will be recorded as cost
of services when incurred. The amount payable which is expected to due on or before December 31, 2015 amounted to US$2.9
million (RMB18.0 million) was recorded in accounts payable under current liabilities. The remaining unpaid amount of US$3.2
million (RMB19.0 million) was recorded in long-term accounts payable.
F-43
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SERFBU-MWE-XN02
11.6.14
NCR balan2dc
HKG
25-Mar-2015 06:42 EST
ˆ200GaisY$N7pQ5L%oŠ
6*
0C
200GaisY$N7pQ5L%o
852134 FIN 44
HTM
ESS
Page 1 of 1
The Group pledged the intellectual property in relation to the game to secure the guaranteed amount. Following this license
acquisition, the previously recognized backlog of US$ 0.4 million in relation to the game development and license agreement
acquired in Red 5 acquisition was reclassified to acquire game licenses as it was considered to be additional cost to acquire the game
license paid in prior year.
Amortization expense related to intangible assets was RMB10.7 million, RMB23.0 million and RMB28.9 million (US$4.7 million)
for the years ended December 31, 2012, 2013 and 2014, respectively. As of December 31, 2014, the estimated aggregate amortization
expense from existing intangible assets for each of the five succeeding fiscal years is as follows:
2015
2016
2017
2018
2019
Total
RMB
21,896,434
21,896,434
21,896,434
21,896,434
9,953,605
97,539,341
US$
(Note 3)
3,529,065
3,529,065
3,529,065
3,529,065
1,604,228
15,720,488
The Group recorded impairment on intangible assets of RMB0.6 million, RMB3.8 million and nil for acquired game licenses in 2012,
2013 and 2014, respectively, which was recorded in the impairment of equipment and intangible assets line item in the consolidated
statements of operations and comprehensive loss.
F-44
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SERFBU-MWE-XN02
11.6.14
NCR balan2dc
HKG
25-Mar-2015 06:44 EST
ˆ200GaisY$N7sQP%%+Š
7*
0C
200GaisY$N7sQP%%+
852134 FIN 45
HTM
ESS
Page 1 of 1
13. LAND USE RIGHT, NET
Gross carrying amount, accumulated amortization and net book value of land use right are as follows:
Land use right
Less: accumulated amortization
Net book value
December 31, 2013
RMB
December 31, 2014
RMB
85,160,343
(12,966,137)
72,194,206
85,160,348
(14,887,052)
70,273,296
December 31, 2014
US$
(Note 3)
13,725,357
(2,399,357)
11,326,000
Amortization charge for the years ended December 31, 2012, 2013 and 2014 amounted to RMB1.9 million, RMB1.9 million and
RMB1.9 million (US$0.3 million), respectively.
14. OTHER LONG-LIVED ASSETS
Other long-lived assets are as follows:
Deferred employee compensation
Receivable from WoW game points
refund agent (Note 19)
Others
Total
December 31, 2013
December 31, 2014
RMB
RMB
338,139
15,280,089
462,255
16,080,483
0
7,894,836
453,573
8,348,409
December 31, 2014
US$
(Note 3)
0
1,272,417
73,102
1,345,519
15. IMPAIRMENT OF LONG-LIVED ASSETS AND ALLOWANCE ON LONG-TERM RECEIVABLES
Impairment on equipment and intangible
assets and other assets(i)
Impairment on prepayment for equipment
(ii)
Allowance (reversal of allowance) of
long-term receivables(iii)
Total
December 31, 2013
December 31, 2014
RMB
RMB
December 31, 2014
US$
(Note 3)
5,725,046
3,555,845
573,098
11,813,313
17,927,763
35,466,122
0
0
(17,927,763)
(14,371,918)
(2,889,431)
(2,316,333)
(i) The operating losses of certain games were considered to be triggering events for long-lived assets, which were then subject to
impairment analyses. The Group determined its long-lived asset groups, which the Group considers to be “held and used” in its
operations, based upon certain factors including assessing the lowest level for which identifiable cash flows are largely
independent of the cash flows of other groups of assets and liabilities. The asset groups consist of the Group’s operating assets
for respective games and entity-wide assets such as the Group’s office building and land use right.
F-45
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
11.6.14
NCR seksr0dc
HKG
24-Mar-2015 14:17 EST
ˆ200GaisY$Mty54tZŠ
10*
0C
200GaisY$Mty54tZ´
852134 FIN 46
HTM
ESS
Page 1 of 1
For asset groups related to games, estimates of future cash flows developed during the revision of the original budgets by taking
into consideration of lower than expected projected operating performance as well as market acceptance of games that have not
been commercially launched and expected future game operations, indicated certain asset groups of the Company may not
recover their carrying value. As a result of the Group’s impairment analysis, asset groups associated with certain games and
licensing fees paid for certain games that the Group has not commercially launched were identified as being impaired.
Accordingly, an impairment provision was recognized equal to the excess of the carrying value over the fair value of the
associated assets. The Group determined the fair value of the assets group using the income approach, a level 3 fair value
measurement. The income approach included the use of a discounted cash flow model, which required assumptions of projected
revenues, expenses, capital expenditures and other costs, as well as a discount rate calculated based on the risk profile of the
Group. The impairment charges were recognized as follows:
Due to weaker than expected operating performance of certain games, the Group recognized impairment provisions on computer
equipment of nil, RMB1.9 million and nil in 2012, 2013, and 2014 respectively. A significant factor for the internally developed
income approach is forecasting performance and revenue from the games. The Group continued to monitor the actual revenue
performance versus forecast revenue. Due to the lower than expected market acceptance of the games and the following content
updates, certain games experienced significantly lower than expected user levels and revenue.
The Group has been monitoring its licensed games that have not commercially launched, including but not limited to their
market acceptance and operational performance in other regions where they are commercially launched and operated by other
operators. The Group incorporates these factors into its continuous evaluation of the forecasted results of the respective games
and taking into account the Group’s expected commercial launch and cash flows in the evaluation of potential impairment of the
carrying value of upfront licensing fees. Based on the Group’s impairment tests, impairment provisions on upfront licensing fees
of RMB0.6 million, RMB3.8 million and RMB3.6 million(US$0.6 million) were recognized in 2012, 2013 and 2014,
respectively.
(ii) The Group prepaid RMB 11.8 million to a supplier for certain asset which was planned to be used in game promotion activity.
In December 2013, the management decided to change the game promotion plans and as a result the asset was no longer
required under the new promotion plan and as such Management decided not to take title to the asset from the supplier and
wrote off the non-refundable prepayment.
F-46
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
11.6.14
NCR param0dc
HKG
23-Mar-2015 23:20 EST
ˆ200GaisY$Mb9VRf%6Š
7*
0C
200GaisY$Mb9VRf%6
852134 FIN 47
HTM
ESS
Page 1 of 1
(iii) The Group prepaid RMB20.0 million to a supplier for purchasing computers and equipment in 2011. Due to game’s
performance being much lower than expectations, the Group cancelled the purchase plan and requested for a refund on the
prepayment from the supplier in 2013. However, the supplier did not have enough funds to return all prepayment which was
deemed a strong indicator that recovery of the refund is doubtful. In February 2014, the Group agreed a repayment schedule
with the supplier, under which the prepayment is required to be refunded in four installments during the next three years, and the
first installment, which was RMB2.0 million, had been received on March, 2014. Due to the significant doubts as to the
collectability of the remaining amount, management provided an allowance for the remaining prepayment receivable of
RMB17.9 million as of December 31, 2013. The Company continued to negotiate with the supplier for the settlement of
remaining receivables. In December 2014, the supplier promised to repay all the remaining RMB17.9 million before March 31,
2015. The Group revaluated the collectability of the receivables and determined the payments can be collected and therefore
reversed the allowance of RMB17.9 million as of December 31, 2014. In March, 2015, the Group received payment of
RMB17.9 million from the supplier.
16. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Group’s assets measured at fair value on a recurring basis consisted of available-for-sale investment in Youjia, which was fully
impaired in 2013 and then sold in 2014 (Note9).
The Group measured the fair value of its investment in Youjia using the income approach based on a weighted average of multiple
discounted cash flow scenarios, which required the use of unobservable inputs (Level 3) including assumptions of projected revenue,
expenses, capital spending, and other costs, as well as a discount rate calculated based on the risk profile of the online game industry
and company-specific risk adjustments.
The following table presents the changes in the available-for-sale investments that were measured at fair value on a recurring basis
using significant Level 3 inputs for the year ended December 31, 2012, and 2013. The Group did not have other assets or liabilities
measured at fair value on a recurring basis using significant Level 3 inputs during the years ended December 31, 2012, 2013 and
2014.
Balance at the beginning of the year
Unrealized loss recognized in other comprehensive income
Impairment losses included in earnings
Balance at the end of the year
F-47
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
2013
RMB
2012
RMB
6,342,100
(56,600)
0
6,285,500
6,285,500
(16,600)
(6,268,900)
2014
RMB
0
0
0
0
0
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
11.6.14
NCR param0dc
HKG
23-Mar-2015 23:15 EST
ˆ200GaisY$Mb5DLW%QŠ
6*
0C
200GaisY$Mb5DLW%Q
852134 FIN 48
HTM
ESS
Page 1 of 1
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
The following table displays assets and liabilities measured at fair value on a non-recurring basis for the years ended December 31,
2013 and 2014, respectively.
Upfront licensing fees (Note 15(i))
Long-term receivables (Note 15(iii)
Loan to BLT(ii)
Total
Investment in Crowdstar (Note 8 <2>)
Investment in Man Cheng (i)
Investment in BLT(i)
Loan to BLT(ii)
Equipment related to a MMOG (Note 15 (i))
Upfront licensing fees (Note 15 (i))
Long-term receivables (Note 15(iii)
Other long-lived assets(Note 15 (ii))
Total
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
0
0
0
0
0
0
0
0
0
17,927,763
4,500,000
22,427,763
Total
Losses(gains)
3,555,845
(17,927,763)
(9,750,000)
(24,121,918)
Fair Value Measurements at Reporting Date Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
RMB
Significant
Other
Observable
Inputs
(Level 2)
RMB
0 1,627,099
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1,627,099
0
Significant
Unobservable
Inputs
(Level 3)
RMB
0
0
0
0
0
2,000,000
2,000,000
0
4,000,000
Total Losses
20,990,141
5,530,277
5,431,566
9,750,000
1,899,803
3,825,243
17,927,763
11,813,313
77,168,106
Year Ended
December 31,
2014
0
17,927,763
4,500,000
22,427,763
Year Ended
December 31,
2013
1,627,099
0
0
0
0
2,000,000
2,000,000
0
5,627,099
F-48
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN16
11.6.14
NCR kriss2dc
HKG
25-Mar-2015 06:46 EST
ˆ200GaisY$N7w3hb%ÄŠ
7*
0C
200GaisY$N7w3hb%˜
852134 FIN 49
HTM
ESS
Page 1 of 1
(ii)
(i) Given the unsatisfying results of Man Cheng and BLT’s research and development activities, the Group tested its investment in
the two equity investees for impairment as of December 31, 2013. The fair value of such investments was measured as nil given
the operations of both investees were substantially discontinued as a result of insufficient cash flow. Thus, the Group deemed the
carrying amounts of the investments were fully impaired and recorded such impairment as impairment loss on investments for
the year ended December 31, 2013. In October, 2014, the Company signed an agreement with a third party and sold all its shares
in BLT at the consideration of RMB14 million(US$2.3 million). The consideration has been fully received as of December 31,
2014.
In April 2012, the Group entered into an agreement with BLT, a 45% equity investee of the Group, to provide a loan which
amounted to RMB6.8 million (US$1.1 million) for its capital injection in a joint venture with 45% equity held by BLT. The loan
is secured by the equity interest in the joint venture owned by BLT. There were RMB5.3 million (US$0.8 million) loans
outstanding as of December 31 2012, In March 2013, the Group entered into an additional loan agreement and provided an
further RMB4.5 million (US$0.7 million)in loans to BLT to support the need for working capital. The loan is secured by the
equity interests in BLT owned by the founders of BLT. Due to the tight cash position and less than satisfactory performance of
BLT, the recoverability of the loan was in question. Thus, the group provided full allowance on the loan receivable from BLT
and recorded such allowance in impairment loss on investment line item in the consolidated statements of operations and
comprehensive loss for the year ended December 31, 2013. As mentioned in above note(i), the Company sold all its shares in
BLT to a third party, and the third party also agreed to support BLT and then BLT can repay all its outstanding loan to the
Company. Thus, the Company reversed the allowance provided in 2013. Among the total loan amount of RMB9.8 million
(US$1.6 million) of loan, RMB5.3 million (US$0.9 million) were received in November 2014, and the remaining amount of
RMB4.5 million (US$0.7 million) was received in January 2015.
17. TAXATION
Cayman Islands and British Virgin Islands
Under the current tax laws of the Cayman Islands and British Virgin Islands, the Company and its subsidiaries are not subject to tax
on their income or capital gains. In addition, upon payment of dividends by the Company to its shareholders, no Cayman Islands
withholding tax will be imposed.
F-49
THE9 LIMITED
FORM 20-F
Hong Kong
RR Donnelley ProFile
ACXFBU-MWE-XN10
11.6.14
NCR kanns4dc
HKG
24-Mar-2015 01:01 EST
ˆ200GaisY$MdK1eP%8Š
7*
0C
200GaisY$MdK1eP%8
852134 FIN 50
HTM
ESS
Page 1 of 1
The Group’s subsidiaries in Hong Kong did not have assessable profits that were derived in Hong Kong during the years ended
December 31, 2012, 2013 and 2014. Therefore, no Hong Kong profit tax has been provided for in the years presented.
Singapore
The Group’s subsidiaries in Singapore did not have assessable profits that were derived in Singapore during the years ended
December 31, 2012, 2013 and 2014. Therefore, no Singapore income tax has been provided for in the years presented.
The PRC
The Group’s subsidiaries and VIE subsidiaries in the PRC are subject to Enterprise Income Tax (“EIT”) on the taxable income as
reported in their respective statutory financial statements adjusted in accordance with the PRC Enterprise Income Tax Law(“EIT
Law”), which went into effect as of January 1, 2008. The Group’s subsidiaries and VIE subsidiaries in the PRC are generally subject
to EIT at a statutory rate of 25%. However, the subsidiaries that are located in the Pudong New District of Shanghai enjoy five-year
transitional EIT rates, which refer to the phase-in rates of 18%, 20%, 22%, 24% and 25% for the 5 years period from 2008 to 2012
and the subsidiaries that hold a “High and New Technology Enterprise” (“HNTE”) qualification are subject to a 15% preferential EIT
rate.
In November 2008, Shanghai IT received approval from certain government authorities to be qualified as a HNTE. This approval
entitles Shanghai IT to enjoy a 15% preferential EIT rate during the period from 2008 to 2010. The HNTE qualification is valid for
three years and every qualified HNTE company is required to re-apply for it in the three years after receiving approval. In October
2014, Shanghai IT renewed its HNTE qualification and obtained approval in 2015, which entitles Shanghai IT to enjoy a preferential
EIT rate of 15% during the period from 2014 to 2016. Total tax savings of Shanghai IT were nil for the years ended December 31,
2012, 2013 and 2014, respectively.
United States
The Group’s subsidiaries in the U.S. are registered in the state of California and are subject to U.S. federal corporate marginal income
tax rate of 34% and state income tax rate of 0.48%, respectively.
Composition of income tax expense
The current and deferred portions of income tax expense included in the consolidated statements of operations and comprehensive
loss are as follows:
F-50
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN08
11.6.14
NCR rajep2dc
HKG
24-Mar-2015 13:44 EST
ˆ200GaisY$MtQlNTZpŠ
9*
0C
200GaisY$MtQlNTZp
852134 FIN 51
HTM
ESS
Page 1 of 1
2012
RMB
For the year ended December 31,
2013
RMB
2014
RMB
2014
US$
(Note 3)
Current income tax expense
China
Other jurisdictions
Deferred taxation
China
Other jurisdictions
Change in valuation allowance
China
Other jurisdictions
Income tax (expense) benefit
0
0
0
0
0
0
0
0
0
0
0
0
135,199,657 134,391,290 (21,011,979) (3,386,516)
70,063,810 (62,051,840) (10,000,941)
64,327,480 41,039,861 6,614,425
(135,199,657) (134,391,290) 21,011,979 3,386,516
(70,063,810) 62,051,840 10,000,941
(64,327,480) (41,039,861) (6,614,425)
0
(62,228,916)
(72,970,741)
62,228,916
72,970,741
0
0
0
Reconciliation of the differences between statutory tax rate and the effective tax rate
Reconciliation between the statutory EIT rate and the Group’s effective tax rate is as follows:
For the year ended
December
31, 2012
For the year ended
December
31, 2013
For the year ended
December
31, 2014
PRC Statutory EIT rate
Effect of different tax rates in
other jurisdictions
Effect of future tax rate change
Change of prior year deferred
tax assets
Change of valuation allowance
(Income) not subject to tax and
non-deductible expenses, net
Effect of expired net operating
loss
Effective EIT rate
Significant components of deferred tax assets
25%
0%
0%
0%
(25%)
0%
0%
0%
Temporary differences related to expenses and accruals
Temporary differences related to provision for advances to suppliers
Temporary differences related to provision for doubtful accounts
Other
Total current deferred tax assets
Less: Valuation allowance
Net current deferred tax assets
Temporary differences related to depreciation, amortization, and
impairment of equipment and intangible assets
Startup expenses and advertising fee
Temporary differences related to research and development credits
Temporary differences related to equity investment
Foreign tax credits
Temporary differences related to provision for prepayment for
equipment
Tax loss carry forwards
Total non-current deferred tax assets
Less: Valuation allowance
Net non-current deferred tax assets
Total deferred tax assets
F-51
25%
(2%)
1%
1%
(24%)
0%
(1%)
0%
25%
10%
(1%)
(0%)
(16%)
2%
(20%)
0%
December 31,
2013
RMB
December 31,
2014
RMB
5,253,922
2,823,625
5,803,170
6,243,042
20,123,759
(20,123,759)
0
1,926,262
1,621,968
191,012
5,609,162
9,348,404
(9,348,404)
0
December 31,
2014
US$
(Note 3)
310,457
261,414
30,785
904,033
1,506,689
(1,506,689)
0
6,858,606
25,529,967
981,601
7,455,610
15,059,343
11,710,677
25,761,300
988,010
1,795,745
15,113,930
1,887,418
4,151,968
159,238
289,422
2,435,923
9,481,941
497,443,970
562,811,038
(562,811,038)
0
0
5,000,000
492,204,751
552,574,413
(552,574,413)
0
0
805,854
79,329,006
89,058,829
(89,058,829)
0
0
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN08
11.6.14
NCR rajep2dc
HKG
Significant components of deferred tax liabilities
Temporary differences related to amortization of intangible
assets
Movement of valuation allowance on deferred tax assets
24-Mar-2015 13:44 EST
ˆ200GaisY$MtQmw3ZeŠ
7*
0C
200GaisY$MtQmw3Ze
852134 FIN 52
HTM
ESS
Page 1 of 1
December 31,
2013
RMB
December 31,
2014
RMB
December 31,
2014
US$
(Note 3)
5,343,060
5,362,427
864,266
For the year ended
December 31, 2013
For the year ended
December 31, 2014
RMB
RMB
Balance at January 1
Increase (decrease) in valuation allowance
Balance at December 31
448,543,507
134,391,290
582,934,797
582,934,797
(21,011,979)
561,922,818
For the year ended
December 31, 2014
US$
(Note 3)
93,952,035
(3,386,516)
90,565,519
For the years ended December 31, 2013 and 2014, additional valuation allowance and a reversal of valuation allowance of
approximately RMB134.4 million and RMB21.0 million (US$3.4 million) was provided respectively. The Group considers positive
and negative evidence to determine whether some portion or all of the deferred tax assets will more likely than not be realized. This
assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the
duration of statutory carry forward periods, the Group’s experience with tax attributes expiring unused and tax planning alternatives.
Valuation allowances have been established for deferred tax assets based on a more-likely-than-not threshold. The Group’s ability to
realize deferred tax assets depends on its ability to generate sufficient taxable income within the carry forward periods provided for in
the tax law.
F-52
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP136
11.6.14
NCR manra0dc
HKG
24-Mar-2015 13:45 EST
ˆ200GaisY$MtRj=y%RŠ
7*
0C
200GaisY$MtRj=y%R
852134 FIN 53
HTM
ESS
Page 1 of 1
As of December 31, 2014, the Group’s PRC subsidiaries had net operating loss carry forwards of RMB934.2 million, of which
RMB220.9 million, RMB155.8 million, RMB308.3 million, RMB190.3 million and RMB58.9 million will expire in 2015, 2016,
2017. 2018 and 2019, respectively. The Group has provided a full valuation allowance as it is not more likely than not that the net
operating losses can be utilized before expiry.
As of December 31, 2014, Red 5 had net operating loss carry forwards for federal and state income tax purposes of approximately
US$110.6 million and US$67.6 million, respectively, which will begin to expire in 2026 and 2016, respectively. Red 5 also had
credits for increasing research activities available to offset future federal and state taxes payable of approximately US$0.1 million and
US$0.1 million, respectively, that will begin to expire in 2026 for federal purposes and which have no expiration for state purposes.
Red 5 had foreign tax credits for federal purposes of approximately US$2.5 million, which begin to expire in 2016. Pursuant to US
tax laws and regulations, the utilization of an acquired entity’s net operation losses and credits are subject to annual limitation
computed based on the fair value of the acquired entity. As a result of the limitation, the Group provided a full valuation allowance as
it is not more likely than not that the net operating losses and credits carried forward can be utilized before expiry.
In accordance with the Enterprise Income Tax Law (“EIT Law”), dividends, which arise from profits of foreign invested enterprises
(“FIEs”) earned after January 1, 2008, are subject to a 10% withholding income tax. In addition, under tax treaty between the PRC
and Hong Kong, if the foreign investor is incorporated in Hong Kong and qualifies as the beneficial owner, the applicable
withholding tax rate is reduced to 5%, if the investor holds at least 25% in the FIE, or 10%, if the investor holds less than 25% in the
FIE. A deferred tax liability should be recognized for the undistributed profits of PRC companies unless the Company has sufficient
evidence to demonstrate that the undistributed dividends will be reinvested and the remittance of the dividends will be postponed
indefinitely. The Group plans to indefinitely reinvest undistributed profits earned after December 31, 2007 from its China subsidiaries
in its operations in the PRC. Therefore, no withholding income taxes for undistributed profits of the Company’s subsidiaries have
been provided as of December 31, 2012, 2013 and 2014.
Under applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to
the excess of financial reporting basis over tax basis in a domestic subsidiary. However, recognition is not required in situations
where the tax law provides a means by which the reported amount of that investment can be recovered tax-free and the enterprise
expects that it will ultimately use that means. The Group has not recorded any such deferred tax liability attributable to the
undistributed earnings of its financial interests in VIEs because these entities do not have any accumulated earnings as of
December 31, 2012, 2013 and 2014.
F-53
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
11.6.14
NCR seksr0dc
HKG
24-Mar-2015 13:39 EST
ˆ200GaisY$MtP8zeZYŠ
7*
0C
200GaisY$MtP8zeZY
852134 FIN 54
HTM
ESS
Page 1 of 1
The Group made its assessment of the level of authority for each tax position (including the potential application of interests and
penalties) based on the tax positions’ technical merits, and measured the unrecognized benefits associated with the tax positions. The
Group did not have any unrecognized tax benefits as of December 31, 2012, 2013 and 2014. The Group does not anticipate that
unrecognized tax benefits will significantly increase or decrease within the next twelve months. For the years ended December 31,
2012, 2013 and 2014, the Group did not have any material interest and penalties associated with its tax positions.
According to PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due
to computational errors made by the taxpayer or withholding agent. The statute of limitations will be extended five years under
special circumstances, which are not clearly defined (but an underpayment of tax liability exceeding RMB 0.1 million is specifically
listed as a special circumstance). In the case of a related party transaction, the statute of limitations is ten years. There is no statute of
limitations in the case of tax evasion. From inception to 2014, the Group is subject to examination of the PRC tax authorities. Red 5’s
federal income tax returns and state income tax returns for 2006 through 2014 are open tax years, subject to examination by the
relevant tax authorities.
18. OTHER PAYABLES AND ACCRUALS
Other payables and accruals are as follows:
Staff cost related payables
Professional services
Product development services
Marketing and promotion
Others
December
31, 2013
RMB
December
31, 2014
RMB
23,370,673
11,383,463
5,817,012
347,147
4,751,193
45,669,488
18,758,212
12,312,998
5,820,394
452,920
4,528,327
41,872,851
December
31, 2014
US$
(Note 3)
3,023,275
1,984,495
938,077
72,997
729,835
6,748,679
F-54
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
19. Refund of WoW game points
20-Mar-2015 18:48 EST
ˆ200GaisY$LmYz@FZgŠ
4*
0C
200GaisY$LmYz@FZg
852134 FIN 55
HTM
ESS
Page 1 of 1
As a result of the loss of the WoW license on June 7, 2009, the Group announced a refund plan in connection with unactivated WoW
game point cards, which the Group recorded as advance from customers. According to the plan, unactivated WoW game point card
holders are eligible to receive a cash refund from the Group. The Group recorded a liability in connection with both unactivated
points cards and activated but unconsumed point cards of approximately RMB200.4 million, of which RMB4.0 million was refunded
in 2009.
Upon the loss of the WoW license, the Group concluded the nature of the obligation substantively changed from deferred revenue, for
which the Group had the ability to satisfy the underlying performance obligation, to an obligation to refund players for their
unconsumed points. The Group has accounted for this refund liability by applying the derecognition guidance specified in ASC 405-
20. In accordance with this guidance, the refund liability associated with these WoW game points, to the extent not refunded, will be
recorded as other operating income after the Group is legally released from the obligation to refund amounts under the applicable
laws. In consultation with its legal counsel, the Group concluded the legal liability relating to the unactivated WoW game point cards
was extinguished in September 2011 on the basis that the legal liability lapsed two years from the date the Group publicly announced
the refund policy that applied to these cards. Accordingly, the associated liability amounting to RMB26.0 million (US$4.2 million)
was recognized as other operating income for the year ended December 31, 2011. With respect to the remaining refund liability,
based on current PRC laws, to the extent not refunded, the Company, in consultation with legal counsel has determined that it will be
legally released from this liability in September 2029, which represents 20 years from the discontinuation of WoW in 2009. However,
if the Group were to publicly announce a refund policy, the Group would be legally released from any remaining liability for these
activated, but unconsumed points that remained two years from the date of such announcement. To date, the Group has determined
not to publicly announce any refund policy with respect to this remaining liability, and no refunds have been claimed. The remaining
refund liability relating to the activated, but unconsumed WoW game points is RMB170.0 million (US$27.4 million) as of
December 31, 2014.
In 2009, the Group engaged an agent to facilitate the refund to game players and provided an advance payment to the agent for
RMB43.3 million for this purpose. In 2012, 2013 and 2014, nil were refunded to game point card holders through the agent,
respectively. In February 2012, the Group entered into an agreement with the agent pursuant to which the agent will refund the
advance to the Group in installments over a five year period after deducting any further refunds paid to game point card holders. As of
December 31, 2014, the balance of the advance payment to the agent was RMB17.2 million (US$2.8 million). The current portion of
RMB8.6 million (US$1.4 million) was recorded in prepayments and other current assets and the present value of the long-term
portion amounting to RMB7.9 million (US$1.3 million) was recorded in other long-lived assets, respectively.
F-55
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP143
11.6.14
NCR param0dc
HKG
23-Mar-2015 23:43 EST
ˆ200GaisY$MbcKZjZŠ
6*
0C
200GaisY$MbcKZjZ´
852134 FIN 56
HTM
ESS
Page 1 of 1
20. SHARE REPURCHASE PROGRAM
In December 2012, the Company’s Board approved share buyback of up to US$10 million of its ADSs over the next 12 months.
Under this share repurchase program, the Company spent an aggregate purchase consideration of approximately US$0.1 million and
repurchased approximately 0.04 million shares of its ADSs during the year ended December 31, 2012. During the year ended
December 31, 2013, the Company spent approximately US$4.6 million and repurchased approximately 1.7 million shares of ADSs.
21. SHAREHOLDER RIGHTS PLAN
On January 8, 2009, the Company adopted a shareholder rights plan. The shareholder rights plan is designed to protect the best
interests of the Company and its shareholders by discouraging third parties from seeking to obtain control of the Company in a tender
offer or similar hostile transaction. The shareholder rights plan was amended on March 9, 2009.
Pursuant to the terms of the shareholder rights plan, as amended, one right was distributed with respect to each ordinary share of the
Company outstanding at the close of business on January 22, 2009. The rights will become exercisable only if a person or group (the
“Acquiring Person”) obtains ownership of 15% or more of the Company’s voting securities (including by acquisition of the
Company’s ADSs representing ordinary shares) (a “Triggering Event”), subject to certain exceptions. In the case of a Triggering
Event, the rights plan entitles shareholders other than the Acquiring Person to purchase, for an exercise price of US$19.50, a number
of shares with a value twice that of the exercise price. The number of shares each such shareholder will be entitled to purchase is
equal to the product of (i) the number of shares then owned by such shareholder and (ii) two times the exercise price divided by the
then current market price per share. The rights plan will continue in effect until January 8, 2019, unless the plan is terminated by the
Company or the rights are redeemed by the Company before the plan expires. The plan has not been exercisable yet.
22. EMPLOYEE BENEFITS
The full-time employees of the Company’s subsidiaries and VIE subsidiaries that are incorporated in the PRC are entitled to staff
welfare benefits, including medical care, welfare subsidies, unemployment insurance and pension benefits through a PRC
government-mandated multi-employer defined contribution plan. These companies are required to accrue for these benefits based on
certain percentages of the employees’ salaries in accordance with the relevant regulations, and to make contributions to the state-
sponsored pension and medical plans out of the amounts accrued for medical and pension benefits. The total amounts charged to the
consolidated statements of operations and comprehensive loss for such employee benefits amounted to RMB33.7 million, RMB15.3
million and RMB19.5 million (US$3.2 million) for the years ended December 31, 2012, 2013 and 2014, respectively. The PRC
government is responsible for the medical benefits and ultimate pension liability to these employees.
F-56
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
23. SHARE-BASED COMPENSATION
23.1 Stock options granted by the Company
20-Mar-2015 18:48 EST
ˆ200GaisY$LmY%aCZ!Š
4*
0C
200GaisY$LmY%aCZ!
852134 FIN 57
HTM
ESS
Page 1 of 1
On December 15, 2004, in connection with its initial public offering, the Company adopted a share option plan (“2004 Option Plan”).
As of December 31 2013, the total number of ordinary shares reserved in the 2004 Option Plan was 6,449,614 shares. The maximum
contractual term of the awards under this plan shall be no more than five years from the date of grant. The options granted under this
plan shall be at the money on the date of grant and typically vest over a three-year period, with one third of the options to vest on the
each of the anniversary after the grant date.
On April 22, 2013, the Company modified the exercise prices of all outstanding options granted to US$2.41 per share, the market
price on the date of modification. The original exercise price of the modified options ranged from US$7.36 to US$4.78. The
Company determined the incremental cost as the excess of the fair value of the modified award over the fair value of the original
award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. As the
options have a graded vesting schedule, RMB3.8 million (US$0.6 million) incremental compensation cost was recorded immediately
upon modification for the vested portion and the remaining RMB0.9 million (US$0.2 million) is being amortized over the remaining
vesting period through 2014.
As of December 31, 2014, options to purchase 3,070,491 ordinary shares were outstanding and options to purchase 1,928,152
ordinary shares were available for future grant under the 2004 Option Plan. The following table summarizes the Company’s share
option activities with its employees and directors:
Outstanding at January 1, 2014
Granted
Exercised
Forfeited
Outstanding at December 31,
2014
Vested and expected to vest at
December 31, 2014
Exercisable at December 31,
2014
Number of
Options
3,297,391
0
(54,742)
(172,158)
3,070,491
3,070,491
2,912,713
Weighted-Average
Exercise Price
US$
US$
US$
US$
US$
US$
2.41
2.41
5.11
2.41
2.41
2.41
Weighted-Average
Remaining
Contractual Term
(years)
2.02
Aggregate Intrinsic
Value
Nil
1.03
1.03
0.90
Nil
Nil
Nil
The options expected to vest are estimated by applying the pre-vesting forfeiture rate assumptions to total unvested options. The total
intrinsic value of options exercised during the year was US$31,563, US$119,624 and US$21,701 for year ended December 31, 2012,
2013 and 2014, respectively.
F-57
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN10
11.6.14
NCR kanns4dc
HKG
23-Mar-2015 23:26 EST
ˆ200GaisY$MbJNxz%;Š
5*
0C
200GaisY$MbJNxz%;
852134 FIN 58
HTM
ESS
Page 1 of 1
The weighted-average grant-date fair value of options granted during the years 2011 and 2013 was US$1.92 and US$0.99,
respectively. The fair value of the share options were measured on the respective grant dates based on the Black-Scholes option
pricing model, with assumptions made regarding expected term and volatility, risk-free interest rate and dividend yield. No options
were granted during 2012 and 2014.
Risk-free interest rate
Expected life (years)
Expected dividend yield
Volatility
Fair value of options at grant date
For the year ended
December 31, 2013
0.35%
3.25
0
59.39%
0.99
US$
The fair value of options, of which exercise prices were modified in April 2013, were measured on the modification date based on the
Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate
Expected remaining life (years)
Expected dividend yield
Volatility
Fair value of incremental cost
For the year
ended December 31, 2013
0.09%-0.24%
0.57-2.20
0
36%-65%
US$0.16-US$0.43
For the years ended December 31, 2012, 2013 and 2014, the Company recorded share-based compensation of RMB16.3 million,
RMB16.7 million and RMB0.1 million (US$0.01 million), respectively, for options granted to the Company’s employees and
directors, including incremental compensation cost due to the modification of the option exercise prices in April 2013.
As of December 31, 2014, there was approximately RMB1.0 million (US$0.2 million) unrecognized compensation cost, adjusted for
estimated forfeitures, related to non-vested options. This cost is expected to be recognized over a weighted-average period of 1.31
years. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures.
F-58
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
23.2 Ordinary shares granted to Incsight Limited (“Incsight”)
20-Mar-2015 18:48 EST
ˆ200GaisY$LmZ6zLZÉŠ
4*
0C
200GaisY$LmZ6zLZ
852134 FIN 59
HTM
ESS
Page 1 of 1
Incsight is a company incorporated in the British Virgin Islands and wholly owned by Mr. Jun Zhu. On December 8, 2010, as
approved by the Board of Directors, the Company granted 1,500,000 ordinary shares to Incsight, subject to performance conditions,
of which 500,000 shares granted will vest when the Group achieves breakeven and 1,000,000 shares will vest when the Group’s
cumulative profit reaches US$5 million in a quarter subsequent to the quarter in which the Group breaks even. The ordinary shares
granted are not entitled to receive dividends until vested. The Board considered the grant of ordinary shares as an incentive to retain
Mr. Zhu’s services with the Group. The awarded nonvested shares would be valid for five years from December 8, 2010. For the
quarter ended September 30, 2014, the Group achieved breakeven. It is considered probable the performance targets will be met for
the total of 1,500,000 ordinary shares. The fair value of the granted nonvested shares was US$6.48 per share, the market price on the
date of grant. The Group recorded share-based compensation of RMB14.5 million, RMB7.6 million and RMB2.2 million (US$0.4
million) for the years ended December 31, 2012, 2013 and 2014, respectively.
23.3 Ordinary shares granted to non-executive directors
In May 2011, the Board of Directors granted 30,000 ordinary shares to each of the Group’s four non-executive directors, which
10,000 ordinary shares vest for each director on July 1 of each year from 2011 to 2013 so long as such directors continue their
services during the period. An aggregate of 40,000 ordinary shares vested in July 2011, 2012 and 2013, respectively. The fair value of
the shares granted was US$6.03 per share, being the market price on the date of the grant. The Group recorded share-based
compensation of RMB1.9 million, RMB0.4 million and Nil for the year ended December 31, 2012, 2013 and 2014, respectively.
23.4 Stock options granted by TDC
In September 2008, TDC, a wholly-owned subsidiary of the Group, approved its 2008 Stock Option Plan (“TDC Option Plan”) that
provides for the issuance of up to 30,000 ordinary shares. The share option plan has a term of eight years unless terminated earlier by
its shareholders and Board of Directors. On October 1, 2008, TDC granted 18,961,000 options to Mr. Zhu and certain employees of
TDC to purchase 18,961 ordinary shares of TDC. Those options will vest over four years commencing from January 1, 2008. The
exercise price of the options is HK$0.1 per option. The options will expire on December 31, 2015.
The following table summarizes the TDC’s share option activities with Mr. Zhu and TDC employees:
Outstanding at January 1, 2014
Forfeited
Outstanding at December 31, 2014
Vested and expected to vest at
December 31, 2014
Exercisable at December 31, 2014
Number of
Options
15,000,000
0
15,000,000
15,000,000
15,000,000
Weighted-Average
Exercise Price
per Option
Weighted-Average
Remaining
Contractual Term
(years)
0.10
0.10
0.10
0.10
HK$
HK$
HK$
HK$
F-59
2.0
1.0
1.0
1.0
Aggregate
Intrinsic Value
Nil
Nil
Nil
Nil
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN12
11.6.14
NCR jayav1dc
HKG
22-Mar-2015 07:15 EST
ˆ200GaisY$M8lB2o%+Š
7*
0C
200GaisY$M8lB2o%+
852134 FIN 60
HTM
ESS
Page 1 of 1
The options expected to vest are estimated by applying the pre-vesting forfeiture rate assumptions to total unvested options. The
intrinsic value as of December 31, 2013 is calculated as the difference between the estimated fair value at December 31, 2013 and the
exercise price of the shares.
TDC recorded share-based compensation of Nil for options granted for the years ended December 31, 2012, 2013 and 2014. The
share-based compensation was recorded as a component of noncontrolling interest in the consolidated financial statements.
23.5 Stock options and ordinary shares granted by Red 5
In February 2006, Red 5 adopted a Stock Incentive Plan (“Red 5 Stock Incentive Plan”) under which Red 5 may grant to its
employees, director and consultants stock option to purchase common stock or restricted stock. As of December 31, 2010, 13,626,955
shares were reserved under Red 5 Stock Incentive Plan. In September, 2011, Red 5 further increased the number of common stocks
reserved to 22,855,591 shares. If an option shall expire or terminate for any reason without having been exercised in full, the reserved
shares subject to such option shall again be available for subsequent option grants under the plan. From the inception of this plan to
December 31, 2013, Red 5 granted a total of 28,963,258 options to its employees and directors at the exercise price ranging from
US$0.0001 to US$0.2450 per share, which vest over four years commencing from grant date. Options expire within a period of not
more than ten years from the grant date. An option granted to a person who is a greater than 10% shareholder on the date of grant may
not be exercisable more than five years after the grant date. As of December 31, 2014, option to purchase 5,550,357 shares of
common stock were outstanding and options to purchase 15,400,980 shares of common stock were available for future grant.
The following table summarizes the Red 5’s share option activities with its employees and directors:
Outstanding at January 1, 2014
Exercised
Forfeited
Outstanding at December 31,
2014
Vested and expected to vest at
December 31, 2014
Exercisable at December 31,
2014
Number of
Options
21,168,682
(805,251)
(14,813,074)
5,550,357
Weighted-Average
Exercise Price
per Option
US$
US$
US$
US$
0.128
0.124
0.130
0.122
Weighted-Average
Remaining
Contractual Term
(years)
1.31
Aggregate Intrinsic
Value
US$ 12,122,636
162,279
US$
2.61
US$ 1,133,349
5,537,716
US$
0.122
2.61
US$ 1,130,746
3,644,789
US$
0.123
2.26
US$
740,881
F-60
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN10
11.6.14
NCR kanns4dc
HKG
23-Mar-2015 23:23 EST
ˆ200GaisY$MbFKdz%hŠ
8*
0C
200GaisY$MbFKdz%h
852134 FIN 61
HTM
ESS
Page 1 of 1
The option’s intrinsic value was calculated by the excess of the estimated fair value of Red 5’s common shares, which was
determined by the company with the assistance of an independent valuation firm.
The options expected to vest are estimated by applying the pre-vesting forfeiture rate assumptions to total unvested options. The total
intrinsic value of options exercised for the year ended December 31, 2012, 2013 and 2014 were Nil, US$14,762 and US$162,279,
respectively.
The fair value of options granted ranged from US$0.012 to US$0.149, measured on the grant date based on the Black-Scholes option
pricing model with assumptions made regarding expected term and volatility, risk-free interest rate and dividend yield:
Risk-free interest rate
Expected life (years)
Expected dividend yield
Volatility
1.10%-5.00%
5.00-6.00
0
38.89%-69.36%
In September 2012, Red 5 granted 6,122,435 shares of restricted common stock to two directors of Red 5 including Mr. Zhu for their
services to Red 5. Of these shares, 60% were vested on the grant date. The remaining shares shall become vested in a series of 36
successive equal monthly installments upon grantees’ completion of each month of service to Red 5 over the 36-month period
measured from the grant date.
Red 5 recorded share-based compensation of RMB4.0 million, RMB3.8 million and RMB1.0 million (US$0.2million) for options and
shares of restricted common stock granted for the year ended December 31, 2012, 2013 and 2014, respectively. The share-based
payment awards were recorded as a component of noncontrolling interest in the consolidated financial statements.
As of December 31, 2014, there was approximately RMB0.8 million (US$0.1million) of unrecognized compensation cost, adjusted
for estimated forfeitures, related to non-vested share-based awards granted to Red 5 grantees. This cost is expected to be recognized
over 1.3 years. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures.
23.6 Nonvested equity interest of Jiushi granted to employees
In July 2011, the Group granted 20% equity interest of the newly established Jiushi to two employees as an incentive to retain these
two employees’ services, which they will earn over three-year period. The fair value of the granted equity interest was estimated to be
RMB2.2 million. The Group recorded share-based compensation of RMB0.7 million, RMB0.7 million and RMB0.4 million (US$0.06
million) for the years ended December 31, 2012, 2013 and 2014, respectively.
F-61
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP137
11.6.14
NCR param0dc
HKG
23-Mar-2015 00:59 EST
ˆ200GaisY$MH=doo%Ê
5*
0C
200GaisY$MH=doo%ˆ
852134 FIN 62
HTM
ESS
Page 1 of 1
24. RELATED PARTY TRANSACTIONS AND BALANCES
24.1 Transaction with Shanghai Shenhua Liansheng Football Club Co., Ltd. (“Shenhua”) and its players
In January 2012, the Group entered into a cooperative agreement with Shenhua, for endorsing and promoting Firefall and other games
as designated by the Group (the “Games”) for a term of two years. Shenhua is a long-established leading soccer team in the Chinese
Super League, the highest tier of professional soccer association in China. Under the agreement, Shenhua players shall wear jerseys
bearing the name and logo of the Games in all domestic and international soccer games as well as make appearances at press
conferences, product promotion, sales initiatives for the Games, and participate in other activities for promoting the Games as
requested by the Group. The Group has paid Shenhua RMB32.0 million (US$5.2 million) for the promotional services. The Group
amortized the prepayment on a straight line basis over the contract period from 2012 to 2013.
In January 2012, the Group entered into endorsement agreements with Nicolas Anelka (“Anelka”), a globally famous soccer player
who played for Shenhua at that time. The agreement was for endorsement and promotion of Firefall for a consideration of EUR2.7
million (RMB21.9 million). In August 2012, the Group entered into another endorsement agreement with Didier Drogba (“Drogba”),
also a famous soccer player who played for Shenhua at the time, for endorsement and promotion of Planetside 2, a MMOG game, for
consideration of EUR3.1 million (RMB24.3 million). The Group paid the agreed consideration to Anelka and Drogba in January and
August 2012, respectively. The Group amortized the prepayment on a straight line basis over the contract period and there was no
remaining balance as of December 31, 2013.
During these endorsement periods, Mr. Zhu, the Chairman and chief executive officer of the Company and a major shareholder of the
Company, was also a major shareholder of Shenhua, and accordingly, the endorsement and promotion transactions with Shenhua,
Anelka and Drogba constituted related party transactions.
24.2 Transaction with former equity investee
According to the amended agreement with Fire Rain, the Group returned the acquired game license and no longer has the power to
direct the activities that most significantly impact Fire Rain’s operations. The Group has retained a contractual right to 20% of the
revenue generated from the game. From the date of deconsolidation to December 31, 2012 and during the year of 2013, the Group
received RMB0.8 million and RMB2.2 million as its share of revenue from its Fire Rain’s game operation. In addition, in early of
2013, the Group received RMB 4.5 million in repayment of the game development proceeds provided by the Group. Due to due to
continuous weak performance , Fire Rain`s management has planned to go liquidation, and Fire Rain has been an inactive company as
of December 31, 2014 and the Group no longer shares revenue with Fire Rain in 2014.
F-62
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN05
11.6.14
NCR seksr0dc
HKG
24-Mar-2015 14:15 EST
ˆ200GaisY$Mtvru%Z?Š
13*
0C
200GaisY$Mtvru%Z?
852134 FIN 63
HTM
ESS
Page 1 of 1
In 2013, the Group entered into an agreement with ZTE9, an equity investee of the Group, to jointly operate IPTV games in China
jointly. According to the agreement, the group pays ZTE9 a royalty fee for providing game contents on IPTV. Net royalty charged by
ZTE9 to the Group amounted to RMB6.0 million and RMB6.8 million (US$1.1 million) for year ended December 31, 2013 and 2014
respectively. The amount due to ZTE9 amounted to.RMB4.8 million and RMB6.3 million (US$1.0 million) as of December 31, 2013
and 2014 respectively. In 2014, the Group lent RMB5.3 million (US$0.9 million) to ZTE9 to fund its operation. The loan was
interest-free and due in June 30, 2015. Total amount due from ZTE9 was nil and RMB5.3 million (US$0.9 million) as of
December 31, 2013 and 2014 respectively.
25. LOSS PER SHARE
Loss per share is calculated as follows:
Numerator:
Net loss attributable to ordinary shareholders
before accretion on redeemable
noncontrolling interest
Accretion on redeemable noncontrolling
interest
Net loss attributable to ordinary shareholders
Denominator:
Denominator for basic and diluted loss per
For the year
ended December
31, 2012
For the year
ended December
31, 2013
For the year
ended December
31, 2014
RMB
RMB
RMB
For the year
ended December
31, 2014
US$
(Note 3)
(514,002,092)
(526,261,572)
(86,622,470)
(13,961,007)
0
(514,002,092)
0
(526,261,572)
(21,076,744)
(107,699,214)
(3,396,955)
(17,357,962)
share – weighted-average shares outstanding
24,494,046
23,174,823
23,164,695
23,164,695
Loss per share
- Basic and diluted
(20.98)
(22.71)
(4.65)
(0.75)
The Company had 4,915,741, 4,797,391 and 4,570,491 stock options, warrants and nonvested shares outstanding as of December 31,
2012, 2013 and 2014, respectively, which were excluded in the computation of diluted loss per share in the periods presented, as their
effect would have been anti-dilutive due to the net loss reported in such periods.
26. RESTRICTED NET ASSETS
In accordance with the regulations in the PRC and their respective articles of association, The9 Computer, C9I Shanghai, C9I Beijing,
Jiu Tuo, Jiu Jing (as foreign invested enterprises) and the Group’s domestic VIE subsidiaries incorporated in the PRC are required to
make an appropriation of statutory reserve from retained earnings equal to at least 10% of their respective after-tax profits, calculated
in accordance with the PRC accounting standards and regulations. Appropriations are classified in the consolidated balance sheet as
statutory reserves and are recorded upon board resolution on the appropriations. Appropriations to these reserves are not required
after these reserves have reached 50% of the registered capital of the respective companies.
F-63
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP144
11.6.14
NCR ayyar0dc
HKG
23-Mar-2015 23:28 EST
ˆ200GaisY$MbKYQe%JŠ
6*
0C
200GaisY$MbKYQe%J
852134 FIN 64
HTM
ESS
Page 1 of 1
In addition, at the discretion of the respective boards of directors: (1) The9 Computer, C9I Shanghai, C9I Beijing, Jiu Tuo and Jiu
Jing may allocate a portion of their after-tax profit to the enterprise expansion fund or staff welfare and bonus reserve, and (2) the
above VIE subsidiaries may allocate a portion of their respective after-tax profits to discretionary surplus reserve. The use of staff
welfare and bonus reserve is restricted to employee welfare benefits and is not available for distribution to equity owners except in
liquidation. Appropriations to the staff welfare and bonus reserve are charged to income as general and administrative expense, and
any unutilized balance is included in current liabilities.
These statutory reserves are not transferable to the Company in the form of dividends, advances, or loans. There are no legal
requirements in the PRC to fund these reserves by transfer of cash to any restricted accounts, and the Group does not do so. PRC
regulations currently permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting
standards and regulations. The9 Computer, C9I Shanghai, C9I Beijing, Jiu Tuo and Jiu Jing and the Company’s VIE subsidiaries can
only distribute dividends after they have met the PRC requirements for appropriation to statutory reserves. Additionally, as the
Company does not have any direct ownership in the VIE subsidiaries, the VIE subsidiaries cannot directly distribute dividends to the
Company. In 2012, 2013 and 2014, there was no appropriation of statutory reserves.
As of December 31, 2014, the restricted net assets amounted to RMB23.7 million (US$3.8 million).
27. Noncontrolling interest
As of December 31, 2014, the Group’s non-controlling interest mainly included equity interests in Red 5 and Mengxiang Hulian and
equity awards granted as compensation by the Group’s subsidiaries. The following schedule shows the effects of changes in the
ownership interest of The9 Limited in its subsidiaries on equity attributed to The9 Limited for the years ended December 31, 2012,
2013 and 2014.
F-64
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN16
11.6.14
NCR kriss2dc
HKG
25-Mar-2015 08:40 EST
ˆ200GaisY$N9z=sW%cŠ
14*
0C
200GaisY$N9z=sW%c
852134 FIN 65
HTM
ESS
Page 1 of 1
Net loss attributable to The9 Limited
Transfers (to) from the noncontrolling interest
Increase in The9 Limited’s additional paid-in capital for issuance
of shares by Red 5 upon stock option exercise
Increase in The9 Limited’s additional paid-in capital for Equity
contribution from noncontrolling interest of Red 5
Change in The9 Limited’s additional paid-in capital for
adjustment on noncontrolling interest due to change in
ownership interest*
Change from net loss attributable to The9 Limited and transfers (to)
December 31,
2012
RMB
December 31,
2013
RMB
December 31,
2014
RMB
(514,002,092)
(526,261,572) (86,622,470)
3,265
25,992
552,426
0
0 15,068,103
3,933,247
3,072,133 (74,477,061)
from noncontrolling interests
(510,065,580)
(523,163,447)
(145,479,002)
*
The change in ownership interest is primarily due to the vesting of restricted stock by noncontrolling interest holders and the
conversion of loans to common shares by the Group in 2014 (Note 5).
28. Redeemable Non-controlling interest
In January 2014, Red5 issued 27,438,952 Series B redeemable convertible preferred shares (“SBPS”) to a third party investor,
Shanghai Oriental Pearl Culture Development Co., Ltd., (“Oriental Pearl”), for an aggregate consideration of RMB118.3 million
(US$19.2 million). In conjunction with the issuance of SBPS, Oriental Pearl also purchased 5,948,488 common shares of Red 5 from
two executives of Red 5 at the same per share price as the per share price of SBPS for an aggregate consideration of RMB25.6 million
(US$4.2 million). The purchase price for these common shares was determined to be less than fair value as the transaction as
contemplated in conjunction with the issuance of the SPBS. The difference between the purchase price and fair value of SBPS as
determined by the Company with the assistance of independent valuation firm, which amounted to RMB131.3 million (US$21.2
million), was recognized as a compensation paid to the two executives in the amount of RMB13.0 million (US$2.1 million).
As of December 31, 2014, the Group considered the redemption of the SBPS to be possible. The Group accreted the carrying value of
SBPS to redemption value using the effective interest rate method over the period from the issuance date to the Redemption Date.
The key terms of the SBPS are as follows:
Conversion
Each SBPS may be converted at any time into common shares at the then applicable conversion price. The initial conversion ratio is
1:1, subject to adjustment in the event of (i) share splits, share combinations, share dividends or distribution, other dividends,
recapitalizations and similar events, or (ii) issuance of common shares at a price per share less than the conversion price in effect on
the date of or immediately prior to such issuance. In that case, the conversion price shall be reduced concurrently to the subscription
price of such issuance.
F-65
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN16
11.6.14
NCR kriss2dc
HKG
25-Mar-2015 07:24 EST
ˆ200GaisY$N8vzB8%^Š
6*
0C
200GaisY$N8vzB8%^
852134 FIN 66
HTM
ESS
Page 1 of 1
The SBPS shall be automatically converted into common shares immediately prior to the consummation of a public offering of Red
5’s shares wherein gross proceeds are at least US$30,000,000, immediately following the public offering (the “Qualifying IPO”).
The conversion option can only be settled by issuance of common shares except that fractional shares may be settled in cash.
Dividends
The holder of each share of SBPS shall be entitled to receive dividends at the rate per share of $0.038237 per annum if and when a
dividend is declared. The Preferred Shares participate in dividends on an as-converted basis and must be paid prior to any payment on
common shares.
Upon conversion, any declared or accrued but unpaid dividends will be converted into common shares at the same applicable
conversion price.
Redemption
At any time on or after April 1, 2017, if requested by at least 50% of the holders of SBPS then outstanding , Red 5 shall redeem all of
the outstanding SBPS at a redemption price equal to 200% of the issuance price in three equal annual installments. The full amount of
the redemption price due but not paid shall accrue interest daily at a rate of 10% per annum from the issuance date of SBPS.
Voting
Each SBPS has voting rights equivalent to the number of common shares to which it is convertible at the record date. The holders of
SBPS shall vote together with the common shareholders, and not as a separate class or series, on all matters put before the
shareholders.
Liquidation
The holders of Preferred Shares have preference over holders of common shares with respect to distribution of assets upon voluntary
or involuntary liquidation of the Company. The holders of Preferred Shares shall be entitled to receive 100% of the original issue
price(“preferred liquidation”). The holders of Preferred Shares are also entitled to distribution of remaining assets from preferred
liquidation, along with other shareholders, while the total distribution entitled to the holders of Preferred Shares should not exceed
200% of the original issue price.
F-66
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN02
11.6.14
NCR durap0dc
HKG
A reconciliation of Redeemable noncontrolling interest is as follows:
24-Mar-2015 13:46 EST
ˆ200GaisY$MtSmiq%rŠ
9*
0C
200GaisY$MtSmiq%r
852134 FIN 67
HTM
ESS
Page 1 of 1
Redeemable noncontrolling interest opening balance
Issuance of Redeemable noncontrolling interest
Net loss attributable to redeemable noncontrolling
interest
Accretion on Redeemable noncontrolling interest
Redeemable noncontrolling interest ending balance
Year ended December 31,
2014
—
131,296,977
(20,876,617)
21,076,744
131,497,104
29. DISPOSAL OF SUBSIDIARIES
(i)
In July 2014, the Group entered into an agreement to sell its VIE, Huopu Cloud, for a total consideration of RMB200 million
(US$32.2 million) to a third-party purchaser. Pursuant to the agreement, the Group paid RMB30 million (US$4.8 million) to
Huopu Cloud’s development team to retain them in Huopu Cloud and undertook Huopu Cloud`s operating costs and expenses
from the date of disposal to December 31, 2014 in the amount of RMB19 million (US$3.1million). Huopu Cloud developed and
held a web game QiJiGuiLai. As of the transfer date, the net assets held by Huopu Cloud amounted to RMB11 million (US$1.8
million).
The Group recognized a net gain of RMB 140 million (US$22.5 million) upon the disposal of Huopu Cloud in 2014.
(ii) In 2014, the Group established a subsidiary with two individual shareholders, Shanghai Kaiyue Information and technology
Co, Ltd. (“KaiYue”), while the Group owned 85% equity interest of Kai Yue. Kai Yue developed and held a mobile application
named KingReader for online reading. In December 2014, the Company sold their 85% equity interest of Kaiyue to a third-party
investor for an aggregate consideration of RMB 25.5 million (US$4.1 million), and recognized a net gain of RMB 25.5 million
(US$4.1 million) upon the disposal of the subsidiary in 2014.
F-67
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN02
11.6.14
NCR durap0dc
HKG
30. COMMITMENTS AND CONTINGENCIES
30.1 Operating lease commitments
24-Mar-2015 13:48 EST
ˆ200GaisY$MtVmty%sŠ
8*
0C
200GaisY$MtVmty%s
852134 FIN 68
HTM
ESS
Page 1 of 1
The Group has entered into operating lease arrangements relating to the use of certain premises and internet data centers. Future
minimum lease payments for non-cancellable operating leases as of December 31, 2014 are as follows:
2015
2016
2017
2018
2019
2020
RMB
6,321,152
6,241,753
6,223,747
6,223,747
6,223,747
5,186,456
36,420,602
US$
(Note 3)
1,018,785
1,005,988
1,003,086
1,003,086
1,003,086
835,905
5,869,936
Total rental expenses amounted to RMB25.6 million, RMB38.2 million and RMB22.2 million (US$3.6 million) for the years ended
December 31, 2012, 2013 and 2014, respectively.
30.2 Capital obligations
In July 2014, Qihoo 360 Technology Co., Ltd. and the Group established System Link Corporation Limited, a 50-50 joint venture
(“JV”) in Hong Kong for the operation of Firefall and other games in China. According to the JV agreement, the Group injected
US$6.0 million cash into the JV in January 2015 as the first capital contribution. In addition, the Group is obligated to further inject
US$4.0 million in cash to the JV as the Board of the JV calls for within two years of the formation of the JV.
30.3 Contingencies
The Group may be subject to other legal or administrative proceedings in the ordinary course of business. The Group does not believe
that any currently pending legal or administrative proceeding to which the Group is a party will have a material adverse effect on the
business or financial condition.
F-68
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN16
11.6.14
NCR kriss2dc
HKG
25-Mar-2015 06:51 EST
ˆ200GaisY$N7@V#C%%Š
12*
0C
200GaisY$N7@V#C%%
852134 FIN 69
HTM
ESS
Page 1 of 1
31. SEGMENT REPORTING
The following geographic area information includes revenue based on location of players for the years ended December 31, 2012,
2013 and 2014:
PRC
North America
Other areas
Total
2013
RMB
2012
RMB
144,311,839
752,373
9,369,603
2014
RMB
85,483,458 41,969,350 6,764,231
13,135,914 14,906,530 2,402,497
6,156,697 7,401,011 1,192,826
154,433,815 104,776,069 64,276,891 10,359,554
US$(Note 3)
2014
F-69
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS14
11.6.14
NCR pf_rend
HKG
24-Mar-2015 23:26 EST
ˆ200GaisY$M#K5%CZMŠ
3*
0C
852134 EX4_21 1
HTM
ESS
Page 1 of 1
200GaisY$M#K5%CZM
Exhibit 4.21
This is an English Translation
Equity Transfer Agreement
This agreement is signed by each of the following parties in the company’s conference room on April 23, 2014.
Transferor: WANG YONG (hereinafter “Party A”); Identity Card Number:
Transferee: LIN ZHIMIN (hereinafter “Party B”); Identity Card Number:
Shanghai The9 Information Technology Co., Ltd. (the “Target Company”) has a registered capital of RMB23 million, to which
Ji Wei has contributed RMB14.72 million, accounting for 64% thereof, and Wang Yong has contributed RMB8.28 million,
accounting for 36% thereof. According to the relevant laws and regulations, Party A and Party B have reached the following
agreement after friendly consultation:
ARTICLE ONE TRANSFER TARGET AND TRANSFER PRICE
1. Party A shall transfer its 36% equity interest in the Target Company to Party B with a consideration of RMB0.
2. Other rights affiliated to the equity interests shall be transferred together with the transfer of such equity interests.
ARTICLE TWO UNDERTAKING AND WARRANTY
Transferor warrants that the equity interests to be transferred to Transferee under Article One hereof are legally owned by
Transferor. Transferor has the full and effective right to dispose of such equity interests. Transferor warrants that the equity interests
to be transferred are free from any pledge or other security right and from any recourse by a third party.
ARTICLE THREE DEFAULT LIABILITY
In case either party breaches this Agreement, the breaching party shall pay to the non-breaching party RMB10,000 as liquidated
damages.
ARTICLE FOUR DISPUTE RESOLUTION
This Agreement shall be governed by and construed in accordance with the relevant PRC laws.
Any dispute arising from or in connection with this Agreement shall be resolved through friendly consultation between both
parties. If such dispute cannot be resolved through consultation, it shall be submitted to the Shanghai Arbitration Commission for
arbitration.
ARTICLE FIVE MISCELLANEOUS
1. This Agreement shall have four original sets, with each party hereto holding one set and the Target Company holding two sets
for the purpose of handling relevant formalities.
2. This Agreement shall take effect upon the execution of both parties.
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS14
11.6.14
NCR pf_rend
HKG
24-Mar-2015 23:26 EST
ˆ200GaisY$M#K8JkZeŠ
4*
0C
852134 EX4_21 2
HTM
ESS
Page 1 of 1
200GaisY$M#K8JkZe
Party A (Signature)
/s/ WANG YONG
Party B (Signature)
/s/ LIN ZHIMIN
April 23, 2014
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN03
11.6.14
NCR andvk0dc
HKG
25-Mar-2015 00:55 EST
ˆ200GaisY$M$!3KT%sŠ
3*
0C
852134 EX4_22 1
HTM
ESS
Page 1 of 1
200GaisY$M$!3KT%s
Exhibit 4.22
This is an English Translation
April 22, 2014
Equity Pledge Agreement
by and between
Lin Zhimin
and
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
Regarding
Shanghai The9 Information Technology Co., Ltd.
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN03
11.6.14
NCR andvk0dc
HKG
25-Mar-2015 00:56 EST
ˆ200GaisY$M$@!Lf%}Š
3*
0C
852134 EX4_22 2
HTM
ESS
Page 1 of 1
200GaisY$M$@!Lf%}
Equity Pledge Agreement
This Equity Pledge Agreement (hereinafter this “Agreement”) is entered into in Shanghai, the People’s Republic of China
(hereinafter “PRC”) as of April 22, 2014 by and between the following Parties:
(1)
(2)
Lin Zhimin, a PRC citizen with his identity card number: and his domicile address at Room 503, No. 140,
Gongnong No. 3 Village, Yangpu District, Shanghai (hereinafter the “Pledgor”);
The9 Computer Technology Consulting (Shanghai) Co., Ltd., a company with limited liability incorporated in Shanghai,
the PRC with its registered address at Room 103, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai, PRC
(hereinafter the “Pledgee”).
(In this Agreement, both parties mentioned above are referred to individually as a “Party” and collectively as the “Parties”)
WHEREAS:
(1)
(2)
(3)
(4)
(5)
The Pledgor is the shareholder of Shanghai The9 Information Technology Co., Ltd. (a company with limited liability
established and validly existing under the PRC Laws, hereinafter the “Company”) whose name appears on the register of
members of the Company, legally holding 36% equity interests of the Company (hereinafter the “Company’s Equity”), and
the capital contribution and equity ratio of the Pledgor in the registered capital of the Company as of the date of this Agreement
is set out in Appendix I hereto.
The Parties hereto entered into the Exclusive Call Option Agreement dated April 22, 2014 (hereinafter the “Call Option
Agreement”), pursuant to which the Pledgor shall, to the extent permitted by the PRC Laws, transfer at the request of the
Pledgee all or part of its equity interests in the Company to the Pledgee and/or any other entities or persons designated by it.
The Parties hereto entered into the Shareholder Voting Proxy Agreement dated April 22, 2014 (hereinafter the “Voting Proxy
Agreement”), pursuant to which the Pledgor shall irrevocably entrust any person then designated by the Pledgee with full
power to exercise on its behalf all of its shareholder’s voting rights in the Company.
Pursuant to the Loan Agreement dated April 22, 2014 between the Pledgee and the Pledgor (hereinafter the “Loan
Agreement”), the Pledgee has already provided the Pledgor with a loan totaling Eight Million Two Hundred and Eighty
Thousand Renminbi (RMB8,280,000), which shall be repaid, in the sole discretion of the Pledgee, by the Pledgor immediately
when the Pledgee makes a repayment request to the Pledgor in written.
As the guarantee by the Pledgor for the performance of its Contractual Obligations (as defined below) and repayment of its
Guaranteed Liabilities (as defined below), the Pledgor agrees to pledge all the 36% Company’s Equity owned by it to the
Pledgee, and grants herewith to the Pledgee the right of first priority in the pledge.
Therefore,the Parties have reached the following agreement upon mutual consultations:
2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS10
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:07 EST
ˆ200GaisY$MnuYP=ZxŠ
2*
0C
852134 EX4_22 3
HTM
ESS
Page 1 of 1
200GaisY$MnuYP=Zx
1.1 Except as otherwise construed in the context, the following terms in this Agreement shall be interpreted to have the following
meanings:
Article 1 — Definition
“Contractual Obligations” shall mean all contractual obligations of the Pledgor under this Agreement, the Loan Agreement,
Call Option Agreement and Voting Proxy Agreement; all contractual obligations of the Company under Voting Proxy
Agreement.
“Guaranteed Liabilities” shall mean all direct, indirect and derivative losses and loss of foreseeable profits suffered by the
Pledgee due to any Event of Default (as defined below) of the Pledgor and/or the Company, the amount of which shall be
determined by the Pledgee in its absolute sole discretion and by which the Pledgor shall be fully bound; and all costs incurred
by the Pledgee for its enforcement of the Contractual Obligations of the Pledgor.
“Transaction Agreements” shall mean the Loan Agreement, Call Option Agreement and Voting Proxy Agreement.
“Event of Default” shall mean any breach by the Pledgor of its Contractual Obligations under the Loan Agreement, Call
Option Agreement, Voting Proxy Agreement and/or this Agreement, and any breach by the Company of its Contractual
Obligations under the Voting Proxy Agreement.
“Pledged Property” shall mean all of the Company’s Equity legally owned by the Pledgor when this Agreement becomes
effective and which will be pledged to the Pledgee according to the provisions hereof as the guarantee for the performance by
the Pledgor and the Company of their Contractual Obligations (please see Appendix I hereto for the specific equity pledged by
the Pledgor), and the increased capital contributions and dividends described under Articles 2.6 and 2.7 hereof.
“PRC Laws” shall mean the laws, administrative regulations, administrative rules, local regulations, judicial interpretations
and other binding regulatory documents of the People’s Republic of China then in effect.
1.2 Any reference to the PRC Laws herein shall be deemed (1) to include the references to the amendments, changes, supplements
and reenactments of such law, irrespective of whether they take effect before or after the formation of this Agreement; and
(2) to include the references to other decisions, notices and regulations enacted in accordance therewith or effective as a result
thereof.
1.3
Except as otherwise stated in the context herein, all references to an article, clause, item or paragraph shall refer to the relevant
part of this Agreement.
2.1
The Pledgor hereby agrees to pledge the Pledged Property which it legally owns and has the right to dispose of to the Pledgee
according to the provisions hereof as the guarantee for the performance of its Contractual Obligations and repayment of its
Guaranteed Liabilities.
Article 2 — Equity Pledge
3
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS10
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:07 EST
ˆ200GaisY$Mnu=h%Z)Š
2*
0C
852134 EX4_22 4
HTM
ESS
Page 1 of 1
200GaisY$Mnu=h%Z)
2.2
The Pledgor hereby undertakes that it will be responsible for, on the date hereof, recording the arrangement of the equity
pledge hereunder (hereinafter the “Equity Pledge”) on the register of members of the Company. The Parties shall, immediately
after the execution hereof, make their best efforts to complete all formalities in relation to the Equity Pledge with the industrial
and commercial registration authority to which the Company relates as soon as possible.
2.3 During the term of this Agreement, except for the willful material negligence of the Pledgee or that such negligence is directly
related as cause/result to the consequence, the Pledgee shall not be liable in any way to, nor shall the Pledgor have any right to
claim in any way or propose any demands on the Pledgee, in respect of the reduction in value of the Pledged Property.
2.4
2.5
2.6
2.7
2.8
Subject to compliance with Article 2.3 above, in case of any possibility of obvious reduction in value of the Pledged Property
which is sufficient to jeopardize the Pledgee’s rights, the Pledgee may demand the Pledgor to provide corresponding guarantee
as supplements. Where the Pledgor fails to do so, the Pledgee may at any time auction or sell off the Pledged Property on
behalf of the Pledgor, and discuss with the Pledgor to use the proceeds from such auction or sale-off as pre-repayment of the
Guaranteed Liabilities, or may submit such proceeds to the local notary institution where the Pledgee is domiciled (any costs
incurred in relation thereto shall be borne by the Pledgor).
In case of any Event of Default, the Pledgee shall have the right to dispose of the Pledged Property in the manner as set out in
Article 4 hereof.
The Pledgor shall not increase the capital of the Company unless with the prior consent of the Pledgee. The increased capital
contribution of the Pledgor in the registered capital of the Company due to the capital increase made by it shall also be deemed
as part of the Pledged Property.
The Pledgor shall not receive dividends or bonus from the Pledged Property unless with the prior consent of the Pledgee. Any
dividends received by the Pledgor in connection with the Pledged Property shall be deposited by the Company into the bank
account designated by the Pledgee, subject to the supervision of the Pledgee and used as the Pledged Property to first repay the
Guaranteed Liabilities.
The Pledgor agrees that they will be jointly and severally liable to the Pledgee for any Event of Default of the other Pledgor.
Upon the occurrence of the Event of Default, the Pledgee shall have the right to dispose of any Pledged Property of any of the
Pledgor pursuant to this Agreement.
Article 3 — Release of Pledge
3.1 After the Pledgor and the Company have fully and completely performed all Contractual Obligations and repaid all Guaranteed
Liabilities, the Pledgee shall, at the request of the Pledgor, release the Equity Pledge hereunder, and shall cooperate with the
Pledgor to cancel the record of the Equity Pledge in the register of members of the Company and the registration thereof with
the industrial and commercial registration authority to which the Company relates. All reasonable costs incurred by the release
of the pledge shall be borne by the Pledgee.
Article 4 — Disposal of the Pledged Property
4.1
The Parties hereby agree that, in case of any Event of Default, the Pledgee shall have the right to exercise, upon giving written
notice to the Pledgor, all remedies, rights and powers for breach available to it under the PRC Laws, Transaction Agreements
and the terms hereof, including (but not limited to) repayment in priority with proceeds from auctions or sale-offs of the
Pledged Property. The Pledgee shall not be liable for any loss arising from its reasonable exercise of such rights and powers.
4
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS10
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:07 EST
ˆ200GaisY$MnucLx%ÄŠ
2*
0C
852134 EX4_22 5
HTM
ESS
Page 1 of 1
200GaisY$MnucLx%˜
4.2
The Pledgee shall have the right to designate in written its legal counsel or other agents to exercise on its behalf any and all
rights and powers set out above, and the Pledgor shall not oppose thereto.
4.3 With regard to the reasonable costs incurred by the Pledgee in connection with its exercise of any or all of the rights and
powers set out above, the Pledgee shall have the right to deduct such costs in exact amount from the proceeds it acquires from
the exercise of such rights and powers.
4.4
The proceeds the Pledgee acquires from the exercise of its rights and powers shall be used in the following order:
First, to pay any reasonable costs incurred in connection with the disposal of the Pledged Property and the exercise by the
Pledgee of its rights and powers (including remuneration paid to its legal counsel and agents);
Second, to pay any taxes payable for the disposal of the Pledged Property; and
Third, to repay the Guaranteed Liabilities to the Pledgee.
In case of any balance after payment of the above amounts, the Pledgee shall return the same to the Pledgor or other persons
entitled thereto according to the relevant laws and regulations, or submit the same to the local notary institution where the
Pledgee is domiciled (any costs incurred in relation thereto shall be borne by the Pledgor).
4.5
The Pledgee shall have the option to exercise, simultaneously or in certain sequence, any of the remedies for breach to which it
is entitled; the Pledgee shall not be required to exercise other remedies for breach before its exercise of the right to the auctions
or sale-offs of the Pledged Property hereunder.
5.1 All actual expenses in connection with the creation of the Equity Pledge hereunder, including (but not limited to) stamp duties,
any other taxes and all legal fees, etc shall be borne by the Pledgor and the Pledgee on their own.
Article 5 — Costs and Expenses
Article 6 — Continuity and No Waiver
6.1
The Equity Pledge hereunder is a continuous guarantee, the validity of which shall continue until the full performance of the
Contractual Obligations or the full repayment of the Guaranteed Liabilities. Any exemption or grace period granted by the
Pledgee in respect of any breach of the Pledgor, or delay by the Pledgee in exercising any of its rights under the Transaction
Agreements and this Agreement shall not affect the rights of the Pledgee under this Agreement, the relevant PRC Laws and the
Transaction Agreements to demand, at any time thereafter, the strict performance of the Transaction Agreements and this
Agreement by the Pledgor or the rights to which the Pledgee may be entitled due to any subsequent breach by the Pledgor of
the Transaction Agreements and/or this Agreement.
The Pledgor jointly and severally represents and warrants to the Pledgee as follows:
Article 7 — Representations and Warranties
7.1
The Pledgor is a PRC citizen with full capacity, and has the legal right and capacity to execute this Agreement and to bear legal
obligations hereunder.
5
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS09
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:35 EST
ˆ200GaisY$MprbPQZoŠ
4*
0C
852134 EX4_22 6
HTM
ESS
Page 1 of 1
200GaisY$MprbPQZo
7.2 All reports, documents and information concerning all issues of the Pledgor and as required by this Agreement that are
provided by the Pledgor to the Pledgee prior to the effective date of this Agreement are true and correct in all material aspects
as of the effective date hereof.
7.3 All reports, documents and information concerning all issues of the Pledgor and as required by this Agreement that are
provided by the Pledgor to the Pledgee after the effective date of this Agreement are true and valid in all material aspects at the
time of their provisions.
7.4 At the time of the effectiveness of this Agreement, the Pledgor are the sole legal owner of the Pledged Property, with no
existing dispute whatever concerning the ownership of the Pledged Property. The Pledgor has the right to dispose of the
Pledged Property or any part thereof.
7.5
7.6
Except for the encumbrance set on the Pledged Property hereunder and the rights set under the Transaction Agreements, there
is no other encumbrance or third party interest set on the Pledged Property.
The Pledged Property is capable of being pledged or transferred according to the laws, and the Pledgor has the full right and
power to pledge the Pledged Property to the Pledgee according to this Agreement.
7.7
This Agreement constitutes the legal, valid and binding obligations on the Pledgor when it is duly executed by the Pledgor.
7.8 Any consent, permission, waiver or authorization by any third person, or any approval, permission or exemption by any
government authority, or any registration or filing formalities (if required by laws) with any government authority to be
handled or obtained in respect of the execution and performance hereof and the Equity Pledge hereunder have already been
handled or obtained (subject to Article 2.2), and will be fully effective during the term of this Agreement.
7.9
The execution and performance by the Pledgor of this Agreement are not in violation of or conflict with any laws applicable to
it, or any agreement to which it is a party or which has binding effect on its assets, any court judgment, any arbitration award,
or any administration authority decision.
7.10 The pledge hereunder constitutes the encumbrance of first order in priority on the Pledged Property.
7.11 All taxes and costs payable in connection with acquisition of the Pledged Property have already been paid in full by the
Pledgor.
7.12 There is no pending or, to the knowledge of the Pledgor, threatened litigation, legal proceeding or demand by any court or any
arbitral tribunal against the Pledgor, or its property, or the Pledged Property, nor is there any pending or, to the knowledge of
the Pledgor, threatened litigation, legal proceeding or demand by any government authority or any administration authority
against the Pledgor, or its property, or the Pledged Property, which is of material or detrimental effect on the economic status
of the Pledgor or its capability to perform the guarantee obligations and the obligations hereunder .
7.13 The Pledgor hereby warrants to the Pledgee that the above representations and warranties will be true and correct and fully
performed in all circumstances at any time before the Contractual Obligations are fully performed or the Guaranteed Liabilities
are fully repaid.
Article 8 — Undertakings by Pledgor
The Pledgor hereby severally and jointly undertakes to the Pledgee as follows:
8.1
In case that the value of the Pledged Property is detrimentally affected due to any cause not attributable to the Pledgee, the
Pledgor shall, at the request of the Pledgee, provide the Pledgee with further guarantee in the way and on the terms acceptable
to the Pledgee so as to supplement or replace the Pledged Property fully.
6
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS10
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$Mnugxv%-Š
2*
0C
852134 EX4_22 7
HTM
ESS
Page 1 of 1
200GaisY$Mnugxv%-
8.2 Without the prior written consent of the Pledgee, the Pledgor shall not further create or permit the creation of any new pledge
or any other encumbrance on the Pledged Property; any pledge or other encumbrance on the whole or part of the Pledged
Property created without the prior written consent by the Pledgee shall be null and void.
8.3 Without first giving written notice to the Pledgee and having the Pledgee’s prior written consent, the Pledgor shall not transfer
the Pledged Property, and any attempt by the Pledgor to transfer the Pledged Property shall be null and void. The proceeds
from any transfer of the Pledged Property by the Pledgor shall be used to repay to the Pledgee in advance the Guaranteed
Liabilities or submit the same to the third party as agreed with the Pledgee.
8.4
8.5
8.6
8.7
8.8
8.9
In case of any litigation, arbitration or other demand which may affect detrimentally the interest of the Pledgor or the Pledgee
under the Transaction Agreements and hereunder or the Pledged Property, the Pledgor undertakes to notify the Pledgee thereof
in written as soon as possible and promptly and shall take, at the reasonable request of the Pledgee, all necessary measures to
ensure the pledged interest of the Pledgee in the Pledged Property.
The Pledgor shall not carry on or permit any act or action which may affect detrimentally the interest of the Pledgee under the
Transaction Agreements and hereunder or the Pledged Property. The Pledgor shall give up the preemptive right to which they
may be entitled when the Pledgee realizes its right to the pledge.
The Pledgor shall, during the first month of each calendar quarter, provide the Pledgee with the financial statement of the
Company for the preceding calendar quarter, including (but not limited to) its balance sheet, profit and loss statement and cash
flow statement.
The Pledgor shall, after the execution hereof, make their best effort and take all necessary means to complete the registration of
the Equity Pledge hereunder with the relevant industrial and commercial administration departments as soon as possible.
Moreover, the Pledgor guarantees that it shall, at the reasonable request of the Pledgee, take all necessary measures and execute
all necessary documents (including but not limited to supplementary agreement hereof) so as to ensure the pledged interest of
Pledgee in the Pledged Property and the exercise and realization of the rights thereof.
In case of assignment of any Pledged Property as a result of the exercise of the right to the pledge hereunder, the Pledgor
guarantees that it will take all necessary measures to realize such assignment.
The Pledgor shall ensure that the procedures for convening shareholders’ meetings and board meetings of the Company for the
purposes of executing this Agreement, creating the pledge and exercising the right of pledge thereto, as well as the method of
voting and matters put for voting shall not be in violation of laws, administrative regulations or the articles of association of the
Company.
Article 9 — Change of Circumstances
9.1 As supplement and without conflicting with other terms of the Transaction Agreements and this Agreement, in case that at any
time the promulgation or change of any PRC Laws, regulations or rules, or change in interpretation or application of such laws,
regulations and rules, or the change of the relevant registration procedures enables the Pledgee to believe that it will be illegal
or in conflict with such laws, regulations or rules to further maintain the effectiveness of this Agreement and/or dispose of the
Pledged Property in the way provided herein, the Pledgor shall, at the written direction of the Pledgee and in accordance with
its reasonable request, promptly take any action and/or execute any agreement or other document, in order to:
(1)
keep this Agreement and the right to the pledge hereunder remain in effect;
7
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS10
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$Mnuir!ZKŠ
2*
0C
852134 EX4_22 8
HTM
ESS
Page 1 of 1
200GaisY$Mnuir!ZK
(2)
(3)
facilitate the disposal of the Pledged Property in the way as provided herein; and/or
maintain or realize the guarantee established or intended to establish hereunder.
Article 10 — Effectiveness and Term of This Agreement
10.1 This Agreement shall become effective upon the satisfaction of all of the following conditions:
(1)
(2)
this Agreement is duly executed by each of the Parties;
the Equity Pledge hereunder has been legally recorded in the register of members of the Company.
After this Agreement becomes effective, the Pledgor shall, at the request of the Pledgee, provide the registration certificate of
the pledge issued by the industrial and commercial administration departments to the Pledgee in a way that is satisfactory to the
Pledgee.
10.2 This Agreement shall remain effective until the full performance of the Contractual Obligations or the full repayment of the
Guaranteed Liabilities.
11.1 Any notice, request, demand and other correspondences required by this Agreement or made in accordance with this
Agreement shall be delivered in written to the relevant Party.
11.2 Any such notice or other correspondences shall be deemed to have been delivered when it is sent if delivery by facsimile or
telex, when it is delivered if delivery in person, and five (5) days after it was posted if delivery by post.
Article 11 — Notice
Article 12 — Miscellaneous
12.1 Without the need to get Pledgor’s consent, the Pledgee may assign its rights and/or obligations hereunder to any third party
after giving notice to the Pledgor; however, the Pledgor shall not, without the Pledgee’s prior written consent, assign their
respective rights, obligations and/or liabilities hereunder to any third party. Any successors or permitted assignees (if any) of
the Pledgor shall continue to perform the obligations of the Pledgor under this Agreement.
12.2 The amount of the Guaranteed Liabilities determined by the Pledgee in its sole discretion at the time when it exercises the right
of pledge to the Pledged Property according to this Agreement shall be the conclusive evidence of the Guaranteed Liabilities
hereunder.
8
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS10
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$MnulvGZzŠ
2*
0C
852134 EX4_22 9
HTM
ESS
Page 1 of 1
200GaisY$MnulvGZz
12.3 This Agreement is executed in Chinese in four (4) original sets, with one (1) original to be retained by each party hereto, and
one original shall be used for the application for registration of the Equity Pledge hereunder with the industrial and commercial
registration authority to which the Company relates.
12.4 The formation, validity, execution, amendment, interpretation and termination of this Agreement shall be governed by the PRC
Laws.
12.5 Any disputes arising out of and in connection with this Agreement shall be resolved through consultations between the Parties.
If the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such disputes shall
be submitted to China International Economic and Trade Arbitration Commission, Shanghai Branch, for arbitration in
Shanghai in accordance with the arbitration rules of such Commission, and the arbitration award shall be final and binding on
the Parties.
12.6 None of the rights, powers and remedies granted to the Parties by any provisions herein shall preclude any other rights, powers
and remedies available to such Parties at law and under the other provisions of this Agreement, nor shall the exercise by a party
of its rights, powers and remedies preclude any exercise by such party of its other rights, powers and remedies.
12.7 No failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws
(hereinafter the “Party’s Rights”) shall result in a waiver thereof, nor shall the waiver of any single or partial exercise of the
Party’s Rights shall preclude such Party from exercising such rights in any other way and exercising the other Party’s Rights.
12.8 The headings of the provisions herein are for reference only, and in no circumstances shall such headings be used for or affect
the interpretation of the provisions hereof.
12.9 Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one
or more provisions herein become(s) invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining
provisions herein shall not be affected as a result thereof.
12.10 Any amendments or supplements to this Agreement shall be made in written. Except for assignment by the Pledgee of its rights
hereunder according to Article 12.1 of this Agreement, the amendments or supplements to this Agreement shall become
effective only when duly signed by the Parties to this Agreement. The Parties shall obtain permission from and/or complete
registration or filing formalities with any government authority according to laws if any amendment or supplement to this
Agreement so requires.
12.11 This Agreement shall be binding on the legal successors of the Parties.
12.12 At the time of execution hereof, the Pledgor shall sign a power of attorney (hereinafter the “Power of Attorney”), the format
of which is shown in Appendix II, to authorize any person designated by the Pledgee to sign on its behalf according to this
Agreement any and all legal documents necessary for the exercise by the Pledgee of its rights hereunder. Such Power of
Attorney shall be delivered to the Pledgee for custody and, when necessary, the Pledgee may at any time submit the Power of
Attorney to the relevant government authority.
[The remainder of this page intentionally left blank]
9
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS10
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$MnuoycZlŠ
2*
0C
852134 EX4_22 10
HTM
ESS
Page 1 of 1
200GaisY$MnuoycZl
IN WITNESS HEREOF, the Parties have caused this Equity Pledge Agreement to be executed as of the date and in the place first
above written.
Lin Zhimin
Signature: /s/ Lin Zhimin
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Company chop is affixed
10
THE9 LIMITED
FORM 20-F
Appendix I:
RR Donnelley ProFile
START PAGE
ACXFBU-MWE-XN03
11.6.14
NCR andvk0dc
HKG
25-Mar-2015 00:57 EST
ˆ200GaisY$M$#N&e%‹Š
5*
0C
852134 EX4_22 11
HTM
ESS
Page 1 of 1
200GaisY$M$#N&e%
Basic Information of Company
Company Name:
Registered Address:
Registered Capital:
Legal Representative:
Shareholding Structure:
Shanghai The9 Information Technology Co., Ltd.
Room 201, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai, PRC
RMB23 million
Wang Yong
Shareholder’s Name
Ji Wei
Lin Zhimin
Total
Contributed Capital (in RMB)
Proportion of Equity Interests
14,720,000
8,280,000
23,000,000
64%
36%
100%
Financial Year:
January 1 to December 31
Appendix I
THE9 LIMITED
FORM 20-F
Appendix II:
RR Donnelley ProFile
START PAGE
NCRP64RS04
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:03 EST
ˆ200GaisY$Mo&ty4ZLŠ
4*
0C
852134 EX4_22 12
HTM
ESS
Page 1 of 1
200GaisY$Mo&ty4ZL
Form of the Power of Attorney
I, Lin Zhimin, hereby irrevocably appoint , ID no. , as my attorney-in-fact to sign all the requisite or
ancillary legal documents required for The9 Computer Technology Consulting (Shanghai) Co., Ltd. to exercise its rights under the
“Equity Pledge Agreement in relation to Shanghai The9 Information Technology Co., Ltd.” entered into between The9 Computer
Technology Consulting (Shanghai) Co., Ltd. and myself.
Signature:
Date:
Appendix II
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN03
11.6.14
NCR andvk0dc
HKG
25-Mar-2015 00:48 EST
ˆ200GaisY$M$pQ!e%ZŠ
3*
0C
852134 EX4_23 1
HTM
ESS
Page 1 of 1
200GaisY$M$pQ!e%Z
Exhibit 4.23
This is an English Translation
April 22, 2014
Exclusive Call Option Agreement
By and Among
Lin Zhimin
Ji Wei
and
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
Regarding
Shanghai The9 Information Technology Co., Ltd.
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN03
11.6.14
NCR andvk0dc
HKG
25-Mar-2015 00:51 EST
ˆ200GaisY$M$s1u4%0Š
4*
0C
852134 EX4_23 2
HTM
ESS
Page 1 of 1
200GaisY$M$s1u4%0
Exclusive Call Option Agreement
This Exclusive Call Option Agreement (hereinafter this “Agreement”) is entered into in Shanghai, the People’s Republic of China
(hereinafter “PRC”) as of April 22, 2014 by and among the following Parties:
(1)
(2)
Lin Zhimin, a PRC citizen with his identity card number: and his domicile address at Room 503, No. 140,
Gongnong No. 3 Village, Yangpu District, Shanghai
Ji Wei, a PRC citizen with his identity card number: and his domicile address at Back Building, 2F, No. 12, Lane
424, Huimin Road, Yangpu District, Shanghai
(Lin Zhimin and Ji Wei are hereinafter referred to individually or collectively as the “Existing Shareholder(s)”)
(3)
The9 Computer Technology Consulting (Shanghai) Co., Ltd., a limited liability company established and validly existing
under the PRC Laws with its registered address at Room 103, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park,
Shanghai (hereinafter “The9 Computer”);
(In this Agreement, all parties mentioned above are referred to individually as a “Party” and collectively as the “Parties”)
WHEREAS:
(1)
(2)
(3)
The Existing Shareholders are the shareholders of Shanghai The9 Information Technology Co., Ltd., a limited liability
company established and validly existing under the PRC Laws, hereinafter the “Company”) whose name appear on the
register of members of the Company, legally holding all equity interests of the Company, and the capital contribution and
equity ratio of the Existing Shareholders in the registered capital of the Company as of the date of this Agreement are set out
in Appendix I hereto.
The Existing Shareholders intend to transfer to The9 Computer and/or any other entity or individual designated by it, and
The9 Computer intends to accept the transfer of, all of their respective equity interests in the Company, subject to the PRC
Laws.
In order to realize the equity transfer described above, the Existing Shareholders agree to grant to The9 Computer an
exclusive and irrevocable equity transfer option, respectively. Pursuant to the equity transfer option, the Existing Shareholders
shall, at the request of The9 Computer and to the extent permitted by the PRC Laws, transfer the Option Equity (as defined
below) to The9 Computer and/or any other entity or individual designated by it in accordance with the provisions of this
Agreement.
Therefore, the Parties have reached the following agreement upon mutual consultations:
Article 1 — Definition
1.1
Except as otherwise construed in the context, the following terms in this Agreement shall be interpreted to have the following
meanings:
“PRC Laws” shall mean the laws, administrative regulations, administrative rules, local regulations, judicial interpretations and other
binding regulatory documents of the People’s Republic of China (for the purpose of this Agreement, excluding Hong Kong Special
Administrative Region, Macao Special Administrative Region and Taiwan) then in effect.
2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN23
11.6.14
NCR laser0ma
HKG
24-Mar-2015 09:48 EST
ˆ200GaisY$Mp%KlXZjŠ
3*
0C
852134 EX4_23 3
HTM
ESS
Page 1 of 1
200GaisY$Mp%KlXZj
“Transfer Option” shall mean the option to request for the purchase of equity interests in the Company as granted by the Existing
Shareholders to The9 Computer pursuant to the terms and conditions of this Agreement.
“Option Equity” shall mean, in respect of each of the Existing Shareholders, all the equity interests held by him in the Company
Registered Capital (as defined below); and in respect of all the Existing Shareholders, the equity interests accounting for 100% of the
Company Registered Capital.
“Company Registered Capital” shall mean the registered capital of the Company on the date of this Agreement, i.e.,
RMB23,000,000, and shall include any expanded registered capital as a result of any capital increase within the term of this
Agreement.
“Transferred Equity” shall mean the equity interests of the Company which The9 Computer has the right to require any of the
Existing Shareholders to transfer to it or its designated entity or individual in accordance with Article 3.2 hereof when The9
Computer exercises its Transfer Option, the quantity of which may be all or part of the Option Equity and the specific amount of
which shall be determined by The9 Computer in its sole discretion in accordance with the PRC Laws then in effect and based on its
own commercial consideration.
“Exercise of Option” shall mean any exercise by The9 Computer of its Transfer Option.
“Transfer Price” shall mean all the considerations which The9 Computer or its designated entity or individual is required to pay to
the Existing Shareholders in order to obtain the Transferred Equity upon each Exercise of Option.
“Business Permits” shall mean any approvals, permits, filings and registrations etc. which the Company is required to have for
legally and validly operating all of its businesses, including but not limited to the Business License of the Corporate Legal Person, the
Tax Registration Certificate, the Permit for Operations of Value-added Telecommunication Businesses with respect to the business
operation of internet information services, the Network Cultural Business Permit for operating internet cultural products containing
online games, the approval document number required to obtain from internet publication institutions for operating online games, the
filings required to be made with the producers of electronic publications for producing electronic publications, and such other relevant
licenses and permits as required by the PRC Laws then in effect.
3
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN23
11.6.14
NCR laser0ma
HKG
24-Mar-2015 09:48 EST
ˆ200GaisY$Mp%WgFZÄŠ
5*
0C
852134 EX4_23 4
HTM
ESS
Page 1 of 1
200GaisY$Mp%WgFZ˜
“Company Assets” shall mean all the tangible and intangible assets which the Company owns or has the right to dispose of during
the term of this Agreement, including but not limited to any immoveable and moveable assets, and such intellectual property rights as
trademarks, copyrights, patents, proprietary know-how, domain name, software use right, and any investment interest.
“Material Asset” shall mean any asset which has a book value of RMB100,000 or more or has a material impact on the businesses
operation of any Party.
“Material Agreement” shall mean any agreement to which the Company is a party and which has a material impact on the business
or assets of the Company, including but not limited to the important agreements regarding the profit distribution of online games, its
technical services, information release/business of the Company.
“Exercise Notice” shall have the meaning ascribed to it in Article 3.5 of this Agreement.
“Confidential Information” shall have the meaning ascribed to it in Article 6.1 of this Agreement.
“Defaulting Party” shall have the meaning ascribed to it in Article 9.1 of this Agreement.
“Default” shall have the meaning ascribed to it in Article 9.1 of this Agreement.
“Party’s Rights” shall have the meaning ascribed to it in Article 10.5 of this Agreement.
1.2
1.3
2.1
Any reference to the PRC Laws herein shall be deemed (1) to include the references to the amendments, changes,
supplements and reenactments of such law, irrespective of whether they take effect before or after the formation of this
Agreement; and (2) to include the references to other decisions, notices and regulations enacted in accordance therewith or
effective as a result thereof.
Except as otherwise stated in the context herein, all references to an article, clause, item or paragraph shall refer to the
relevant part of this Agreement.
Article 2 Grant of Transfer Option
The Existing Shareholders hereby severally and jointly agree to grant to The9 Computer an irrevocable, unconditional and
exclusive Transfer Option. Pursuant to the Transfer Option, The9 Computer shall have the right to, to the extent permitted by
the PRC Laws, require the Existing Shareholders to transfer the Option Equity to The9 Computer or its designated entity or
individual according to the terms and conditions of this Agreement. The9 Computer also agrees to accept such Transfer
Option.
4
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp1pwi%VŠ
5*
0C
852134 EX4_23 5
HTM
ESS
Page 1 of 1
200GaisY$Mp1pwi%V
3.1
3.2
3.3
3.4
3.5
3.6
Article 3 Method for Exercise of Option
Subject to the terms and conditions of this Agreement, The9 Computer shall have the absolute sole discretion to determine the
specific time, method and times of its Exercise of Option to the extent permitted by the PRC Laws.
If The9 Computer and/or any other entity or individual designated by it is/are permitted by the PRC Laws then in effect to
hold all the equity interests of the Company, The9 Computer shall have the right to elect to exercise all of its Transfer Option
on a one-off basis, and The9 Computer and/or any other entity or individual designated by it shall accept the one-off transfer
of all the Option Equity from the Existing Shareholders; if The9 Computer and/or any other entity or individual designated by
it is/are permitted by the PRC Laws then in effect to hold only part of the equity interests of the Company, The9 Computer
shall have the right to determine the amount of the Transferred Equity within the extent of not exceeding the upper limit of
shareholding ratio as specified by the PRC Laws then in force (hereinafter the “Shareholding Limit”), and shall also have the
right to designate at its own will the amount of the Transferred Equity that the Existing Shareholders shall transfer to The9
Computer and/or any entity or individual designated by it in such Exercise of Option. In the latter case, The9 Computer shall
have the right to exercise its Transfer Option at multiple times in line with the gradual release of the PRC Laws on the
permitted Shareholding Limit, with a view to ultimately acquiring all the Option Equity.
At each Exercise of Option by The9 Computer, each of the Existing Shareholders shall transfer the Transferred Equity to
The9 Computer and/or any other entity or individual designated by it in the amount requested by The9 Computer. The9
Computer and any other entity or individual designated by it shall pay the Transfer Price in respect of the Transferred Equity
accepted in each Exercise of Option to the Existing Shareholders transferring such Transferred Equity.
Subject to the terms and conditions of this Agreement and without violating the PRC Laws then in effect, The9 Computer
may accept the transfer of the Transferred Equity by itself or designate any third party to accept the transfer of all or part of
the Transferred Equity in each Exercise of Option.
Having decided each Exercise of Option, The9 Computer shall issue to the Existing Shareholders a notice for exercising the
Transfer Option (hereinafter the “Exercise Notice”, the form of which is set out in Appendix II hereto). The Existing
Shareholders shall, upon receipt of the Exercise Notice, forthwith transfer the Transferred Equity to The9 Computer and/or
any other entity or individual designated by it in such method as described in Article 3.3 hereof.
Each of the Existing Shareholders hereby jointly and severally undertake and guarantee that once The9 Computer issues the
Exercise Notice:
(1)
(2)
(3)
he shall immediately convene a shareholders’ meeting, pass shareholders’ resolution and take all other necessary
actions to approve the transfer by any Existing Shareholder of all the Transfer Option at the Transfer Price to The9
Computer and/or any other entity or individual designated by it, and give up any pre-emptive right owned by him (if
any);
he shall immediately enter into an equity transfer agreement with The9 Computer and/or any other entity or
individual designated by it for the transfer of all the Transferred Equity at the Transfer Price to The9 Computer
and/or any other entity or individual designated by it;
he shall provide The9 Computer with necessary support (including providing and executing all relevant legal
documents, performing all government approval and registration procedures and assuming all relevant obligations)
as per its request and in accordance with the requirements of the laws and regulations, so that The9 Computer and/or
any other entity or individual designated by it can acquire all the Transferred Equity, free from and clear of any legal
defect and any encumbrance, third party right or any other restriction on equity interests.
5
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp1uWg%UŠ
4*
0C
852134 EX4_23 6
HTM
ESS
Page 1 of 1
200GaisY$Mp1uWg%U
3.7
In respect of the Transfer Option, at each Exercise of Option by The9 Computer, all the Transfer Price that shall be paid by
The9 Computer or its designated entity or individual to each of the Existing Shareholders shall be the book value of the
Company Registered Capital that is corresponding to the Transferred Equity. If, however, the lowest price permitted by the
PRC Laws then in force is higher than the book value of the Company Registered Capital, the Transfer Price shall be the
lowest price permitted by the PRC Laws.
4.1
Each of the Existing Shareholders hereby jointly and severally represents and warrants as follows:
Article 4 Representations and Warranties
4.1.1
4.1.2
4.1.3
4.1.4
He is a PRC citizen with full capacity, has full and independent legal status and legal capacity to execute, deliver
and perform this Agreement, and may act independently as a party to lawsuit.
He has full power to execute, deliver and perform this Agreement and all the other documents to be signed by him in
relation to the transaction referred to herein, and he has the full power to complete the transaction referred to herein.
This Agreement shall be executed and delivered by him legally and properly. This Agreement constitutes the legal
and binding obligations on him and is enforceable against him in accordance with its terms and conditions.
He is the legal owner of the Option Equity whose name appears on the register of members of the Company as of
the effective date of this Agreement, and except the pledge right created by the Equity Pledge Agreement dated
April 22, 2014 between The9 Computer and the Existing Shareholders, the delegated power created by the
Shareholders’ Voting Proxy Agreement dated April 22, 2014 among the Company, The9 Computer and the Existing
Shareholders, and the rights created by this Agreement, there is no lien, pledge, claim and other encumbrances and
third party rights on the Option Equity. In accordance with this Agreement, The9 Computer and/or any other entity
or individual designated by it may, upon the Exercise of Option, obtain a good title to the Transferred Equity, free
from and clear of any lien, pledge, claim and other encumbrances or third party rights.
4.1.5
The execution, delivery and performance by the Existing Shareholders of this Agreement and the consummation by
the Existing Shareholders of the transactions contemplated hereby do not violate any provisions of the PRC Laws,
and any of its agreements, contracts and other arrangements with any third party by which he is bound.
4.2
The9 Computer hereby represents and warrants as follows:
4.2.1
4.2.2
The9 Computer is a wholly foreign-owned company with limited liability duly incorporated and legally existing
under the PRC Laws and possesses an independent legal person qualification. The9 Computer has full and
independent legal status and legal capacity to execute, deliver and perform this Agreement and may act
independently as a party to lawsuit.
The9 Computer has the full corporate power and authority to execute, deliver and perform this Agreement and all
the other documents to be signed by it in relation to the transaction referred to herein, and it has the full power and
authority to complete the transaction referred to herein.
6
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN23
11.6.14
NCR laser0ma
HKG
24-Mar-2015 09:38 EST
ˆ200GaisY$MpwpyZ%oŠ
7*
0C
852134 EX4_23 7
HTM
ESS
Page 1 of 1
200GaisY$MpwpyZ%o
Article 5 Undertakings by Existing Shareholders
Each of the Existing Shareholders hereby severally and jointly undertakes as follows:
5.1
He shall take all necessary measures during the term of this Agreement to ensure that the Company is able to obtain all the
Business Permits timely and all the Business Permits remain to be valid at any time.
5.2
Without the prior written consent by The9 Computer during the term of this Agreement,
5.2.1
5.2.2
5.2.3
5.2.4
5.2.5
5.2.6
5.2.7
5.2.8
5.2.9
5.2.10
none of the Existing Shareholders shall transfer or otherwise dispose of any Option Equity or create any
encumbrance or other third party rights on any Option Equity;
he shall not increase or decrease the Company Registered Capital, or cause/approve the Company to be divided or
merged with any other entity;
he shall not dispose of or cause the management of the Company to dispose of any Material Asset (other than in the
ordinary course of business), or create any encumbrance or other third party rights on any Material Asset;
he shall not terminate or cause the management of the Company to terminate any Material Agreements entered into
by the Company, or enter into any other agreements in conflict with the existing Material Agreements;
he shall not appoint or replace any executive directors or members of the board (if any) or supervisors of the
Company or any other management personnel of the Company who shall be appointed or dismissed by the Existing
Shareholders;
he shall not procure the Company to declare the distribution of or in practice release any distributable profit, bonus,
share profit or dividend;
he shall ensure that the Company validly exists and is not terminated, liquidated or dissolved;
he shall not amend the articles of association of the Company;
he shall ensure that the Company shall not lend or borrow any money, or provide guarantee or engage in security
activities in any other forms, or bear any substantial obligations other than in the ordinary course of business;
he shall not in any way make or authorize others (including but not limited to the Company’s directors nominated by
him) to make any resolution, instruction, consent or order to procure the Company to carry out any transaction that
would or might substantially affect any asset, right, obligation or business of the Company (including its branches,
subsidiaries or affiliates) (hereinafter “Prohibited Transaction”), nor sign any agreement, contract, memorandum
or transaction document of any other form in respect of the Prohibited Transaction (hereinafter “Prohibited
Document”), nor shall he allow any Prohibited Transaction to be carried out nor any Prohibited Documents to be
signed through omission to act; and
5.2.11
he shall not cause the Company or the management of Company to approve any of the following acts of the
Company’s subsidiaries or affiliates (collectively referred to the “Subsidiaries”):
(a)
to increase or decrease any Subsidiary’s registered capital, or cause/approve any Subsidiary to be divided or
merged with any other entity;
7
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN23
11.6.14
NCR laser0ma
HKG
24-Mar-2015 09:38 EST
ˆ200GaisY$Mpx0km%eŠ
5*
0C
852134 EX4_23 8
HTM
ESS
Page 1 of 1
200GaisY$Mpx0km%e
(b)
(c)
(d)
(e)
(f)
(g)
to dispose of or cause the management of the Subsidiaries to dispose of any Material Assets of any
Subsidiary (other than in the ordinary course of business), or create any encumbrance or other third party
rights on the Material Asset;
to terminate or cause the management of the Subsidiaries to terminate any Material Agreements entered into
by any Subsidiary, or enter into any other agreements in conflict with the existing Material Agreements;
to appoint or replace any directors or supervisors of any Subsidiary or any other management personnel of
such Subsidiary who shall be appointed or dismissed by the Company;
to terminate, liquidate or dissolve any Subsidiary or act in any way that damages or is likely to damage the
valid existence of any Subsidiary;
to amend the articles of association of any Subsidiary; and
to lend or borrow any money, or provide guarantee or engage in security activities in any other forms, or
bear any substantial obligations other than in the ordinary course of business.
Within the term of this Agreement, he shall make his best effort to develop the business of the Company and ensure that the
operation of the Company is legal and in compliance with the regulations, and he will not engage in any act or omission to act
which may damage the Company’s (including the Subsidiaries’) assets, goodwill or affect the validity of the Business Permits
of the Company.
Within the term of this Agreement, he shall timely notify The9 Computer of any situation that may have a material adverse
effect on the existence, business operation, financial condition, assets or goodwill of the Company (including the
Subsidiaries), and shall timely take all the measures approved by The9 Computer to remove such adverse situation or take
effective remedial measures with respect thereto.
He will procure any director of the Company nominated by him or any management personnel of the Company recommended
by him (if any) to strictly observe the above undertakings when performing their duties as director or management personnel
of the Company, and shall not in any way engage in any act or omission to act that is in conflict with any such undertaking.
If the total amount of the Transfer Price obtained by any Existing Shareholder with respect to the Transferred Equity held by
him is higher than his capital contribution to the Company, or he receives any form of profit distribution, share profit,
dividend or bonus from the Company, then the Existing Shareholder agrees that he will, subject to the provisions of the PRC
Laws, give up the premium earnings and any profit distribution, share profit, dividend or bonus (after the deduction of
relevant taxes), and The9 Computer shall be entitled thereto. Otherwise, such Existing Shareholder shall compensate The9
Computer and/or any other entity or individual designated by it for any loss incurred as a result thereof.
Article 6 Confidentiality
Regardless of whether this Agreement has terminated or not, the Parties shall keep in strict confidence all the trade secrets,
proprietary information and customer information and all other information of a confidential nature about the other Parties
known by them during the execution and performance of this Agreement (hereinafter collectively the “Confidential
Information”). Unless a prior written consent is obtained from the Party disclosing the Confidential Information or unless it
is required to be disclosed to third parties according to the relevant laws and regulations or the requirement of the country on
which any affiliate of a Party is listed, the Party receiving the Confidential Information shall not disclose to any third party
any Confidential Information. The receiving Party shall not use or indirectly use any Confidential Information other than for
the purpose of performing this Agreement.
8
5.3
5.4
5.5
5.6
6.1
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp22@P%hŠ
4*
0C
852134 EX4_23 9
HTM
ESS
Page 1 of 1
200GaisY$Mp22@P%h
6.2
The following information shall not deemed as the Confidential Information:
6.3
6.4
7.1
8.1
8.2
8.3
9.1
(a)
(b)
(c)
any information that has been legally known by receiving Party before as evidenced by written documents;
any information entering into the public domain not attributable to the fault of the receiving Party; or
any information lawfully acquired by the receiving Party through other sources after his/its receipt of such
information.
The receiving Party may disclose the Confidential information to his/its relevant employees, agents or professionals retained
by him/it. However, the receiving Party shall ensure that the aforesaid personnel shall comply with the relevant terms and
conditions of this Agreement and be responsible for any liability incurred in connection with any breach by such personnel of
the relevant terms and conditions hereof.
Notwithstanding any other provisions herein, the effect of this Article shall not be affected by the suspension or termination
of this Agreement.
This Agreement shall become effective once it is duly signed by the Parties, and shall terminate after all the Option Equity is
legally transferred to The9 Computer and/or any other entity or individual designated by it in accordance with the provisions
of this Agreement.
Article 7 Term of Agreement
Article 8 Notice
Any notice, request, demand and other correspondences required by this Agreement or made in accordance with this
Agreement shall be delivered in writing to the relevant Party.
Any such notice or other correspondences shall be deemed to have been delivered when it is sent if delivery by facsimile or
telex, when it is delivered if delivery in person, and five (5) days after it was posted if delivery by post.
Any notice, request, demand and other correspondences made to The9 Computer shall be delivered to the address of the
Company as first above written.
Article 9 Liabilities for Breach of Contract
The Parties agree and confirm that, if any Party (hereinafter the “Defaulting Party”) substantially violates any of the
provisions herein or substantially fails to perform any of the obligations hereunder, such violation or failure shall constitute a
default under this Agreement (hereinafter a “Default”), and the non-defaulting Party shall have the right to require the
Defaulting Party to rectify such Default or take remedial measures within a reasonable period. If the Defaulting Party fails to
rectify such Default or take remedial measures within such a reasonable period or within ten (10) days after the non-
defaulting Party notifies the Defaulting Party in writing and require it to rectify the Default, then the non-defaulting Party
shall have the right at its own discretion to decide the following:
9.1.1
if any Existing Shareholder or the Company is the Defaulting Party, The9 Computer shall be entitled to terminate
this Agreement and require the Defaulting Party to make compensation for damages;
9
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp27yoZuŠ
4*
0C
852134 EX4_23 10
HTM
ESS
Page 1 of 1
200GaisY$Mp27yoZu
9.1.2
if The9 Computer is the Defaulting Party, the non-defaulting Party shall be entitled to require the Defaulting Party to
make compensation for damages, but unless otherwise provided by law, the non-defaulting Party shall have no right
to terminate or discharge this Agreement in any circumstances.
The rights and remedies set out herein shall be cumulative, and shall not preclude any other rights or remedies provided by
law.
Notwithstanding any other provisions herein, the effect of this Article shall not be affected by the suspension or termination
of this Agreement.
Article 10 Miscellaneous
This Agreement is executed in Chinese in three (3) originals, with one (1) original to be retained by each Party hereto.
The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed
by the PRC Laws.
Any disputes arising out of and in connection with this Agreement shall be resolved through consultations among the Parties.
If the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such disputes
shall be submitted to China International Economic and Trade Arbitration Commission, Shanghai Branch, for arbitration in
Shanghai in accordance with the arbitration rules of such Commission, and the arbitral award shall be final and binding on the
Parties.
None of the rights, powers and remedies granted to any Party by any provisions herein shall preclude any other rights, powers
and remedies available to such Party at law and under the other provisions of this Agreement, nor shall the exercise by a Party
of its rights, powers and remedies preclude any exercise by such Party of its other rights, powers and remedies.
Any failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws
(hereinafter the “Party’s Rights”) shall not result in a waiver thereof, nor shall the waiver of any single or partial exercise of
the Party’s Rights preclude such Party from exercising such rights in any other way and exercising the other Party’s Rights.
The headings of the provisions herein are for reference only, and in no circumstances shall such headings be used for or affect
the interpretation of the provisions hereof.
Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one
or more provisions herein become(s) invalid, illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions herein shall not be affected as a result thereof.
This Agreement, once executed, shall supersede any other previous legal documents executed by the Parties with respect to
the subject matter hereof. Any amendments or supplements to this Agreement shall be made in writing and shall become
effective only when duly signed by the Parties to this Agreement.
9.2
9.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9 Without the prior written consent of The9 Computer, neither the Existing Shareholders nor the Company shall transfer any of
their/its rights and/or obligations hereunder to any third parties. The Existing Shareholders and the Company hereby agree
that The9 Computer shall be entitled to transfer any of its rights and/or obligations hereunder to any third party after serving
written notice to the Existing Shareholders and the Company.
10
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
10.10 This Agreement shall be binding on the legal successors of the Parties.
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp2BCFZ}Š
4*
0C
852134 EX4_23 11
HTM
ESS
Page 1 of 1
200GaisY$Mp2BCFZ}
[The remainder of this page intentionally left blank]
11
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp2FGbZ#Š
4*
0C
852134 EX4_23 12
HTM
ESS
Page 1 of 1
200GaisY$Mp2FGbZ#
IN WITNESS HEREOF, the Parties have caused this Exclusive Call Option Agreement to be executed as of the date and in the
place first above written.
Lin Zhimin
Signature: /s/ Lin Zhimin
Ji Wei
Signature: /s/ Ji Wei
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Company chop is affixed
12
THE9 LIMITED
FORM 20-F
Appendix I:
RR Donnelley ProFile
ACXFBU-MWE-XN03
11.6.14
NCR andvk0dc
HKG
25-Mar-2015 00:52 EST
ˆ200GaisY$M$tuJL%TŠ
5*
0C
852134 EX4_23 13
HTM
ESS
Page 1 of 1
200GaisY$M$tuJL%T
Company Name:
Shanghai The9 Information Technology Co., Ltd.
Basic Information of Company
Registered Address:
Shanghai, PRC
Registered Capital:
RMB23 million
Legal Representative:
Wang Yong
Shareholding Structure:
Shareholder’s Name
Lin Zhimin
Ji Wei
Total
Contributed Capital (in RMB)
8,280,000
14,720,000
23,000,000
Proportion of Equity Interests
36%
64%
100%
Financial Year:
January 1 to December 31
13
RR Donnelley ProFile
NCRP64RS04
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp2NZS%5Š
4*
0C
852134 EX4_23 14
HTM
ESS
Page 1 of 1
200GaisY$Mp2NZS%5
Form of the Option Exercise Notice
THE9 LIMITED
FORM 20-F
Appendix II
To:
:
WHEREAS this Company and you signed an Exclusive Call Option Agreement as of April 22, 2014 (“Option Agreement”), and
agreed that you shall transfer the equity you hold in Shanghai The9 Information Technology Co., Ltd. (hereinafter “Company”) to this
Company or any third parties designated by this Company on demand of this Company to the extent as permitted by the PRC Laws
and regulations.
This Company hereby gives this Notice to you as follows:
This Company hereby requires to exercise the Transfer Option under the Option Agreement and [this Company]/[name of
company/individual] designated by this Company shall accept the equity you hold accounting for % of the Company’s
Registered Capital (hereinafter the “Proposed Equity to be Transferred”). You are required to forthwith transfer all the Proposed
Equity to be Transferred to [this Company]/[name of designated company/individual] upon receipt of this Notice in accordance with
the agreed terms in the Option Agreement.
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company Chop)
Authorized Representative:
Date:
14
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN13
11.6.14
NCR peetp0dc
HKG
25-Mar-2015 00:49 EST
ˆ200GaisY$M$pkRmZ}Š
6*
0C
852134 EX4_24 1
HTM
ESS
Page 1 of 1
200GaisY$M$pkRmZ}
Exhibit 4.24
This is an English Translation
April 22, 2014
Loan Agreement
by and among
Lin Zhimin
Ji Wei
and
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN13
11.6.14
NCR peetp0dc
HKG
Loan Agreement
25-Mar-2015 00:52 EST
ˆ200GaisY$M$uC98%)Š
8*
0C
852134 EX4_24 2
HTM
ESS
Page 1 of 1
200GaisY$M$uC98%)
This Loan Agreement (hereinafter this “Agreement”) is entered into in Shanghai, the People’s Republic of China (hereinafter
“PRC”) as of April 22, 2014 by and among the following Parties:
1.
2.
3.
The9 Computer Technology Consulting (Shanghai) Co., Ltd. (hereinafter “The9 Computer”)
Registered address: Room 103, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai
Lin Zhimin, identity card number:
Domicile address: Room 503, No. 140, Gongnong No. 3 Village, Yangpu District, Shanghai
Ji Wei, identity card number:
Domicile address: Back Building, 2F, No. 12, Lane 424, Huimin Road, Yangpu District, Shanghai
(Lin Zhimin and Ji Wei are hereinafter referred to collectively as the “Borrowers” and individually as the “Borrower”).
The Borrowers intend to borrow from The9 Computer for investing in Shanghai The9 Information Technology Co., Ltd. (the
“Company”) and The9 Computer agrees to provide the loans in a total amount of RMB23,000,000 to the Borrowers pursuant to the
terms and conditions hereof. Therefore, the parties have reached the following agreement to confirm the matters in relation to the loan
upon friendly consultations:
Article 1 Amount and Interest Rate of Loan
1.1
The sum of the loans under this Agreement shall amount to Twenty Three Million Renminbi (RMB23,000,000) (“Loan”), that
is, The9 Computer shall provide the loans to the Borrowers in Twenty Three Million Renminbi Renminbi (RMB23,000,000),
of which:
The9 Computer shall provide a loan to Lin Zhimin in Eight Million and Two Hundred and Eighty Thousand Renminbi
(RMB8,280,000)
The9 Computer shall provide a loan to Ji Wei in Fourteen Million and Seven Hundred and Twenty Thousand Renminbi
(RMB14,720,000)
The interest rate of the Loan under this Agreement shall be zero, which means that no interest will be charged.
Each of the Borrowers shall sign an equity pledge agreement with The9 Computer at the request of The9 Computer to pledge
all of his equity interests in the Company to The9 Computer as a security for the Loan.
1.2
1.3
2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN23
11.6.14
NCR laser0ma
HKG
24-Mar-2015 09:40 EST
ˆ200GaisY$Mpy#jKZ>Š
6*
0C
852134 EX4_24 3
HTM
ESS
Page 1 of 1
200GaisY$Mpy#jKZ>
2.1
2.2
3.1
Article 2 Use and Withdrawal of Loan
The Borrowers shall only use the Loan hereunder for the investment in or the operation of the Company. The Borrowers shall
not use any part of the Loan for any other purpose without the prior written consent of The9 Computer.
Each Borrower shall make a request with The9 Computer within five business days from the date this agreement is executed to
draw down the Loan hereunder in full in one-off. Subject to the agreement hereunder, the Loan will be deposited to the
Borrowers’ designated account(s) according to the Borrowers’ request.
Article 3 Term of Loan
The term of the Loan under this Agreement shall expire on the date when The9 Computer requests the Borrowers to repay the
Loan in accordance with Article 3.2 of this Agreement. However, the maximum term shall not exceed the business term of
The9 Computer (including the business term as extended from time to time) or the business term of the Company (including
the business term as extended from time to time), whichever is earlier (hereinafter “Loan Term”). Upon expiry of the Loan
Term, the Borrowers shall repay all outstanding amounts under the Loan (hereinafter “Amounts”) in a lump sum on the expiry
date of the Term.
Upon execution hereof, The9 Computer shall, at any time within the Term and in its absolute discretion, be entitled to deliver
to the Borrowers or any of the Borrowers a repayment notice as set forth in Article 4.1 of this Agreement, requesting the
Borrowers to repay all or part of their respective Amounts under this Agreement.
3.2 Any Borrower required to make repayment shall repay the relevant Amounts in cash, or in any other forms as decided by the
board of directors of The9 Computer by way of resolution duly passed by it. If the repayment is made in cash, the Borrowers
shall credit the entire Amounts required by The9 Computer for repayment to the bank account designated by The9 Computer
within five (5) business days upon the receipt of a repayment notice as set forth in Article 4.1 of this Agreement.
3.3
3.4
If The9 Computer serves the repayment notice as set forth in Article 4.1 of this Agreement to the Borrowers, it shall, without
violating any applicable laws and regulations, have the right to acquire on its own or designate any third party to acquire all of
the equity interests owned by the Borrowers in the Company at the transfer price that is equivalent to the Amounts at the time
when such notice is given.
The9 Computer shall, in its absolute discretion, also have the right to demand to offset its creditor’s right to the Borrowers
under this Agreement against all or part of the transfer price required to be paid by it to the Borrowers in connection with its
exercise of the relevant call option (hereinafter “Call Option”) when it exercises the Call Option in accordance with the
provisions of the Exclusive Call Option Agreement entered into between The9 Computer and the Borrowers on April 22, 2014
(hereinafter “Option Agreement”).
3.5
The Borrower shall not be jointly liable for the repayment by the other Borrower of his Loan under this Agreement.
4.1
The repayment notice given by The9 Computer to the Borrower or any or several of the Borrowers shall at least contain the
following items: name of Borrower, amount of Loan, amount of repayment, time of repayment and bank account for
repayment.
Article 4 Repayment Notice
3
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS19
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp2jve%1Š
5*
0C
852134 EX4_24 4
HTM
ESS
Page 1 of 1
200GaisY$Mp2jve%1
5.1
Each Borrower hereby represents and warrants as follows:
Article 5 Representations and Warranties
5.1.1 he is a PRC citizen with full capacity, has full and independent legal status and legal capacity to execute, deliver and
perform this Agreement, and may act independently as a party to lawsuit.
5.1.2 he has full power to execute and deliver this Agreement and all the other documents to be signed by him in relation to
the transaction referred to herein, and he has full power to complete the transaction referred to herein. This Agreement
shall be executed and delivered by him legally and properly. This Agreement constitutes the legal and binding
obligations on him and is enforceable against him in accordance with its terms and conditions.
5.1.3 he has fully disclosed his financial conditions to The9 Computer before the execution of this Agreement. As of the
execution of this Agreement, there exist no circumstances that may render him in insolvency, nor are there any material
liabilities that affect his ability to repay debts. The9 Computer may demand him to perform his obligations hereunder in
accordance with this Agreement.
5.2
The9 Computer hereby represents and warrants as follows:
5.2.1 it is a limited liability company duly incorporated and legally existing under the PRC laws and possesses an independent
legal person qualification. It has full and independent legal status and legal capacity to execute, deliver and perform this
Agreement and may act independently as a party to lawsuit.
5.2.2 it has the full corporate power and authority to execute and deliver this Agreement and all the other documents to be
signed by it in relation to the transaction referred to herein, and it has the full power and authority to complete the
transaction referred to herein.
Article 6 Term of Agreement
6.1
6.2
This Agreement shall become effective once it is duly signed by the parties. This Agreement confirms all matters with regard
to the Loan between the parties and shall terminate when the Borrowers repay in full the Loan under this Agreement.
If any of the Borrowers transfers his liabilities under this Agreement with the prior consent of The9 Computer, then the
successor of such liabilities shall continue to perform such Borrower’s obligations under this Agreement, and the obligations
and undertakings of the other Borrower under this Agreement shall not be adversely affected as a result thereof.
7.1 All taxes in connection with the Loan shall be borne by The9 Computer.
Article 7 Taxes
Article 8 Confidentiality
8.1
Regardless of whether this Agreement has terminated or not, the Borrowers shall be under an obligation to keep in confidence
any trade secret, proprietary information and customer information (hereinafter “Confidential Information”) in connection
with The9 Computer that are known to or received by them due to the execution and performance of this Agreement. The
Borrowers shall use the Confidential Information only for the purpose of performing their obligations under this Agreement.
Without the written permission of The9 Computer, the Borrowers shall not disclose the above Confidential Information to any
third party. Otherwise, they shall be liable for the breach of this Agreement and make compensation for all losses arising
therefrom.
4
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS19
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp2maZZAŠ
6*
0C
852134 EX4_24 5
HTM
ESS
Page 1 of 1
200GaisY$Mp2maZZA
8.2
The following information shall not be deemed as the Confidential Information:
(a)
(b)
(c)
any information that has been legally known by the receiving party before as evidenced by written documents;
any information entering into the public domain not attributable to the fault of the receiving party; or
any information lawfully acquired by the receiving party through other sources after his/its receipt of such information.
8.3
Following the termination of this Agreement, the Borrowers shall, upon request by The9 Computer, return, destroy or
otherwise dispose of all files, materials or software containing the Confidential Information, and shall cease to use such
Confidential Information.
8.4 Notwithstanding any other provisions herein, the effect of this Article 8 shall not be affected by the suspension or termination
of this Agreement.
Article 9 Undertakings and Warranties
9.1
The Borrowers hereby irrevocably guarantee and warrant that they will not in any way make or authorize others (including but
not limited to the Company’s directors nominated by them) to make any resolution, instruction, consent or order to procure the
Company to carry out any transaction that would or might substantially affect any asset, right, obligation or business of the
Company and/or its subsidiaries (hereinafter “Prohibited Transaction”), including but not limited to:
(1)
(2)
(3)
(4)
(5)
(6)
borrowing money from any third party or assuming any debts (except for any single debt whose amount does not exceed
One Hundred Thousand Renminbi incurred in the usual and normal business activities or any debt whose total amount
does not exceed One Hundred Thousand Renminbi in a consecutive of six months);
providing guarantees to any third party for its own debts, or providing any guarantee to any third party;
transferring any businesses, material assets, actual or potential business opportunities to any third party;
transferring or giving license to any third party any domain names, trademarks or other intellectual property in which the
Company has legal right;
transferring all or part of their equity interests in the Company to any third party;
any other material transactions;
nor sign any agreement, contract, memorandum or transaction document of any other form in respect of the Prohibited
Transaction (hereinafter “Prohibited Document”), nor will they allow any Prohibited Transaction to be carried out nor any
Prohibited Document to be signed through omission to act.
9.2
The Borrowers shall procure any directors and management personnel of the Company to strictly observe the provisions of this
Agreement when performing their duties as directors and management directors of the Company, and shall not in any way
engage in any act or omission to act that is in conflict with any such undertaking.
10.1 Any notice, request, demand and other correspondences required by this Agreement or made in accordance with this
Agreement shall be delivered in writing to the relevant party.
10.2 Any such notice or other correspondences shall be deemed to have been delivered when it is sent if delivery by facsimile or
telex, when it is delivered if delivery in person, and five (5) days after it was posted if delivery by post.
Article 10 Notices
5
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS19
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp2qn1%HŠ
4*
0C
852134 EX4_24 6
HTM
ESS
Page 1 of 1
200GaisY$Mp2qn1%H
Article 11 Liabilities for Breach of Contract
11.1 Each party agrees and confirms that, if any of the parties (hereinafter the “Defaulting Party”) substantially violates any of the
provisions herein or substantially fails to perform any of the obligations hereunder, such violation or failure shall constitute a
default under this Agreement (hereinafter a “Default”), and any of the other non-defaulting parties (hereinafter a “Non-
defaulting Party”) shall have the right to require the Defaulting Party to rectify such Default or take remedial measures within
a reasonable period. If the Defaulting Party fails to rectify such Default or take remedial measures within such a reasonable
period or within ten (10) days after the other party notifies the Defaulting Party in writing and requires it to rectify the Default,
then the Non-defaulting Party shall have the right to terminate this Agreement and/or to demand the Defaulting Party to make
compensation for any loss.
11.2 The rights and remedies set out herein shall be cumulative, and shall not preclude any other rights or remedies provided by law.
11.3 Notwithstanding any other provisions herein, the effect of this Article shall not be affected by the suspension or termination of
this Agreement.
Article 12 Miscellaneous
12.1 This Agreement is executed in Chinese in three (3) originals, with one (1) original to be retained by each party hereto.
12.2 The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by
the PRC laws.
12.3 Any disputes arising out of and in connection with this Agreement shall be resolved through consultations among the parties. If
the parties cannot reach an agreement regarding such disputes within thirty (30) days upon their occurrence, such disputes shall
be submitted to China International Economic and Trade Arbitration Commission, Shanghai Branch, for arbitration in
Shanghai in accordance with the arbitration rules of such Commission, and the arbitral award shall be final and binding on the
parties.
12.4 None of the rights, powers and remedies granted to the parties by any provisions herein shall preclude any other rights, powers
and remedies available to such parties at law and under the other provisions of this Agreement, nor shall the exercise by a party
of its rights, powers and remedies preclude any exercise by such party of its other rights, powers and remedies.
12.5 Any failure or delay by a party in exercising any of its rights, powers and remedies hereunder or in accordance with laws
(hereinafter the “Party’s Rights”) shall not result in a waiver thereof, nor shall the waiver of any single or partial exercise of
the Party’s Rights preclude such party from exercising such rights in any other way and exercising the other Party’s Rights.
12.6 The headings of the provisions herein are for reference only, and in no circumstances shall such headings be used for or affect
the interpretation of the provisions hereof.
6
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS02
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$Mnu#&w%XŠ
2*
0C
852134 EX4_24 7
HTM
ESS
Page 1 of 1
200GaisY$Mnu#&w%X
12.7 Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one
or more provisions herein become(s) invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining
provisions herein shall not be affected as a result thereof.
12.8 Any amendments or supplements to this Agreement shall be made in writing and shall become effective only when duly signed
by the parties to this Agreement.
12.9 Without the prior written consent of the lender, the Borrowers shall not transfer any of their respective rights and/or obligations
hereunder to any third parties. The lender shall be entitled to transfer any of its rights hereunder to any third party designated
by it after serving notice to the other parties.
12.10 This Agreement shall be binding on the legal successors of the parties.
7
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS16
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:05 EST
ˆ200GaisY$Mp3DBv%‹Š
4*
0C
852134 EX4_24 8
HTM
ESS
Page 1 of 1
200GaisY$Mp3DBv%
IN WITNESS HEREOF, the parties hereto have caused this Loan Agreement to be executed as of the date and in the place first
above written.
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Company chop is affixed
Lin Zhimin
Signature: /s/ Lin Zhimin
Ji Wei
Signature: /s/ Ji Wei
8
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN13
11.6.14
NCR peetp0dc
HKG
25-Mar-2015 00:52 EST
ˆ200GaisY$M$vJe=%rŠ
3*
0C
852134 EX4_25 1
HTM
ESS
Page 1 of 1
200GaisY$M$vJe=%r
Exhibit 4.25
This is an English Translation
April 22, 2014
Shareholder Voting Proxy Agreement
by and among
Lin Zhimin
Ji Wei
and
Shanghai The9 Information Technology Co., Ltd.
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
Regarding
Shanghai The9 Information Technology Co., Ltd.
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN13
11.6.14
NCR peetp0dc
HKG
25-Mar-2015 00:53 EST
ˆ200GaisY$M$w6pL%ÁŠ
10*
0C
852134 EX4_25 2
HTM
ESS
Page 1 of 1
200GaisY$M$w6pL%`
This Shareholder Voting Proxy Agreement (hereinafter this “Agreement”) is entered into in Shanghai as of April 22, 2014 by and
among the following Parties:
Shareholder Voting Proxy Agreement
1.
2.
3.
4.
The9 Computer Technology Consulting (Shanghai) Co., Ltd. (hereinafter “The9 Computer”)
Registered address: Room 103, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai
Shanghai The9 Information Technology Co., Ltd. (hereinafter the “Company”)
Registered address: Room 201, Building 3, No. 690 Bibo Road, Zhangjiang Hi-Tech Park, Shanghai
Lin Zhimin, identity card number:
Domicile address: Room 503, No. 140, Gongnong No. 3 Village, Yangpu District, Shanghai
Ji Wei, identity card number:
Domicile address: Back Building, 2F, No. 12, Lane 424, Huimin Road, Yangpu District, Shanghai
(Lin Zhimin and Ji Wei are hereinafter referred to individually and collectively as the “Shareholder(s)”)
(In this Agreement, all parties mentioned above are referred to individually as a “Party” and collectively as the “Parties”.)
WHEREAS:
1.
2.
The Shareholders are all existing shareholders of the Company, who own 100% equity interests in the Company;
Each of the Shareholders intends to entrust any individual designated by The9 Computer to exercise his voting rights in the
Company, and The9 Computer intends to designate such individuals to accept the entrustment.
Therefore, the Parties have reached the following agreement upon friendly consultations:
Article 1 Entrustment of Voting Right
1.1
The Shareholders hereby irrevocably undertake that they will, upon execution hereof, sign a power of attorney in substance and
form as set out in Appendix I hereto, respectively, to entrust any individuals then designated by The9 Computer (hereinafter
the “Entrusted Persons”) to exercise, on behalf of each of the Shareholders, the following rights to which the Shareholders are
entitled in their capacity of the Company’s shareholders under the articles of association of the Company then in effect
(collectively the “Entrusted Rights”):
(1)
(2)
(3)
(4)
to propose to convene and attend Shareholders’ meetings of the Company as the proxy of each of the Shareholders
according to the articles of association of the Company;
to exercise, on behalf of each of the Shareholders, his voting rights on all matters requiring discussion or resolutions of
the Shareholders’ meeting of the Company, including without limitation, the designation and election of the Company’s
directors and general manager, and other senior management that shall be appointed and removed by the Shareholders;
to exercise other voting rights to which the Shareholders are entitled under the laws and regulations of the PRC
(including any amendment, change, addition and supplement and reenactment thereof, irrespective of whether they take
effect before or after the formation of this Agreement);
to exercise other voting rights of the Shareholders as specified in the articles of association of the Company (including
any other shareholders’ voting rights as specified in the amended articles of association).
2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$MnvG@NZÀŠ
2*
0C
852134 EX4_25 3
HTM
ESS
Page 1 of 1
200GaisY$MnvG@NZ
The above authorization and entrustment shall be conditional upon The9 Computer approving such authorization and
entrustment. If and only if The9 Computer gives a written notice for removal and replacement of the Entrusted Person(s) to
each of the Shareholders, the Shareholders shall immediately designate the other PRC citizen then designated by The9
Computer to exercise the above Entrusted Rights, and the new power of attorney shall, once made, supersede the original
power of attorney. Save as aforesaid, no Shareholders shall revoke the authorization and entrustment given to the Entrusted
Person(s).
1.2
1.3
The Entrusted Person(s) shall perform their obligations in respect of the entrustment hereunder to the extent authorized
hereunder with due care and diligence and in compliance with laws. The Shareholders shall acknowledge and assume liabilities
for any legal consequences resulting from the exercise by the Entrusted Persons of the Entrusted Rights described above.
The Shareholders hereby confirm that the Entrusted Persons shall not be required to seek opinions from the Shareholders prior
to their exercise of the above Entrusted Rights. However, the Entrusted Persons shall notify the Shareholders in a timely
manner of any resolution or proposal for convening an interim shareholders’ meeting after such resolution or proposal is made.
2.1
For the purpose of exercising the Entrusted Rights hereunder, the Entrusted Persons shall be entitled to know all information of
the Company relating to its operation, business, customers, finance and employees, and shall have access to the relevant
documents and materials of the Company. The Company shall fully cooperate with the Entrusted Persons in this regard.
Article 2 Right to Information
3.1
3.2
4.1
4.2
Article 3 Exercise of Entrusted Rights
The Shareholders will provide sufficient assistances to the Entrusted Persons with regard to their exercise of the Entrusted
Rights, including the execution of resolutions of shareholders’ meetings made by the Entrusted Persons or other relevant legal
documents in a timely manner when necessary (e.g., where the same is required in order to submit documents for the purposes
of government approvals, registrations or filings).
If, at any time within the term of this Agreement, the grant or exercise of the Entrusted Rights hereunder cannot be realized due
to any reason (except for the default of any Shareholder or the Company), the Parties shall immediately seek the alternative
proposal that is most similar to the one that cannot be realized and, if necessary, enter into a supplementary agreement to
amend or adjust the provisions herein, in order to ensure that the purpose of this Agreement can continue to realize.
Article 4 Exemption and Compensation
The Parties acknowledge that in no case shall The9 Computer be required to be liable to or compensate (economic or
otherwise) the other Parties or any third party in connection with any exercise of the Entrusted Rights hereunder by the
individuals designated by it.
The Shareholders and the Company agree to indemnify and hold The9 Computer harmless against all losses suffered or likely
to be suffered by it due to any exercise of the Entrusted Rights by the Entrusted Persons designated by The9 Computer,
including without limitation, any loss resulting from any litigation, demand, arbitration or claim by any third party against it or
from administrative investigation or penalty by government authorities, provided however that no indemnification is available
for any losses caused by a willful default or gross negligence of the Entrusted Persons.
3
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$MnvQCC%vŠ
2*
0C
852134 EX4_25 4
HTM
ESS
Page 1 of 1
200GaisY$MnvQCC%v
5.1
Each of the Shareholders hereby jointly and severally represents and warrants as follows:
Article 5 Representations and Warranties
5.1.1 He is a PRC citizen with full capacity, has full and independent legal status and legal capacity to execute, deliver and
perform this Agreement, and may act independently as a party to lawsuit.
5.1.2 He has full power to execute and deliver this Agreement and all the other documents to be signed by him in relation to
the transaction referred to herein, and has the full power to complete the transaction referred to herein. This Agreement
shall be executed and delivered by him legally and properly. This Agreement constitutes the legal and binding
obligations on him and is enforceable against him in accordance with its terms and conditions
5.1.3 He is the legitimate shareholder of the Company whose name appears on its register of members as of the effective date
of this Agreement, and except for the rights created by this Agreement, the Equity Pledge Agreement and the Exclusive
Call Option Agreement entered into by the Shareholders, the Company and The9 Computer, there is no third party right
on the Entrusted Rights. In accordance with this Agreement, the Entrusted Persons may exercise the Entrusted Rights
fully and completely pursuant to the articles of association of the Company then in effect.
5.2
Each of The9 Computer and the Company hereby severally represents and warrants as follows:
5.2.1 It is a limited liability company duly incorporated and legally existing under the laws of the place of its incorporation
and possesses an independent legal person status. It has full and independent legal status and legal capacity to execute,
deliver and perform this Agreement and may act independently as a party to lawsuit.
5.2.2 It has the full corporate power and authority to execute and deliver this Agreement and all the other documents to be
signed by it in relation to the transaction referred to herein, and it has the full power and authority to complete the
transaction referred to herein.
5.3
The Company further represents and warrants as follows:
5.3.1 The Shareholders are all legitimate shareholders of the Company whose names appear on its register of members as of
the effective date of this Agreement, and except for the rights created by this Agreement, the Equity Pledge Agreement
and the Exclusive Call Option Agreement entered into by the Shareholders, the Company and The9 Computer, there is
no third party right on the Entrusted Rights. In accordance with this Agreement, the Entrusted Persons may exercise the
Entrusted Rights fully and completely pursuant to the articles of association of the Company then in effect.
Article 6 Term of Agreement
6.1
Subject to Articles 6.2 and 6.3 hereof, this Agreement shall become effective once it is duly signed by the Parties, and shall
remain effective until the date on which the business term of the Company or The9 Computer expires (whichever is earlier),
unless it is early terminated by the Parties in writing or pursuant to Article 9.1 hereof. This Agreement will be automatically
extended for one (1) year upon the expiration except where The9 Computer gives the other Parties a prior notice of thirty
(30) days not to extend the term of this Agreement upon its expiration, and the same mechanism will apply subsequently upon
the expiration of each extended term.
4
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$MnvVq9%;Š
2*
0C
852134 EX4_25 5
HTM
ESS
Page 1 of 1
200GaisY$MnvVq9%;
6.2
6.3
This Agreement shall terminate if the Company or The9 Computer, upon expiry of its business term, fails to complete the
formalities in relation to the approval and registration for the extension thereof.
If any of the Shareholders transfers all of his equity interests in the Company with the prior consent of The9 Computer, such
Shareholder will no longer be a Party hereto and the obligations and undertakings of any other Parties hereunder will not be
adversely affected.
7.1 Any notice, request, demand and other correspondences required by this Agreement or made in accordance with this
Agreement shall be delivered in writing to the relevant Party.
7.2 Any such notice or other correspondences shall be deemed to have been delivered when it is sent if delivery by facsimile or
telex, when it is delivered if delivery in person, and five (5) days after it was posted if delivery by post.
Article 7 Notice
Article 9 Liabilities for Breach of Contract
9.1
The Parties agree and confirm that, if any Party (hereinafter the “Defaulting Party”) substantially violates any of the
provisions herein or substantially fails to perform any of the obligations hereunder, such violation or failure shall constitute a
default under this Agreement (hereinafter a “Default”), and any of the other non-defaulting Parties (hereinafter the “Non-
defaulting Party”) shall have the right to require the Defaulting Party to rectify such Default or take remedial measures within
a reasonable period. If the Defaulting Party fails to rectify such Default or take remedial measures within such a reasonable
period or within ten (10) days after the Non-defaulting Party notifies the Defaulting Party in writing and require it to rectify the
Default, then: (1) if any Shareholder or the Company is the Defaulting Party, The9 Computer shall be entitled to terminate this
Agreement and require the Defaulting Party to make compensation for damages; (2) if The9 Computer is the Defaulting Party,
the Non-defaulting Party shall be entitled to require the Defaulting Party to make compensation for damages, but unless
otherwise provided by law, the Non-defaulting Party shall have no right to terminate or discharge this Agreement or the
entrustment hereunder in any circumstances.
9.2
The rights and remedies set out herein shall be cumulative, and shall not preclude any other rights or remedies provided by law.
9.3 Notwithstanding any other provisions herein, the effect of this Article shall not be affected by the suspension or termination of
this Agreement.
Article 10 Miscellaneous
10.1 This Agreement is executed in Chinese in [four (4)] originals, with one (1) original to be retained by each Party hereto.
10.2 The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by
the laws of the PRC.
10.3 Any disputes arising out of and in connection with this Agreement shall be resolved through consultations among the Parties. If
the Parties cannot reach an agreement regarding such disputes within thirty (30) days of their occurrence, such disputes shall be
submitted to China International Economic and Trade Arbitration Commission, Shanghai Branch, for arbitration in Shanghai in
accordance with the arbitration rules of such Commission, and the arbitral award shall be final and binding on the Parties.
5
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$MnvZ#nZ,Š
2*
0C
852134 EX4_25 6
HTM
ESS
Page 1 of 1
200GaisY$MnvZ#nZ,
10.4 None of the rights, powers and remedies granted to any Party by any provisions herein shall preclude any other rights, powers
and remedies available to such Party at law and under the other provisions of this Agreement, nor shall the exercise by a Party
of its rights, powers and remedies preclude any exercise by such Party of its other rights, powers and remedies.
10.5 Any failure or delay by a Party in exercising any of its rights, powers and remedies hereunder or in accordance with laws
(hereinafter the “Party’s Rights”) shall not result in a waiver thereof, nor shall the waiver of any single or partial exercise of
the Party’s Rights preclude such Party from exercising such rights in any other way and exercising the other Party’s Rights.
10.6 The headings of the provisions herein are for reference only, and in no circumstances shall such headings be used for or affect
the interpretation of the provisions hereof.
10.7 Each provision contained herein shall be severable and independent from each of other provisions, and if at any time any one
or more provisions herein become(s) invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining
provisions herein shall not be affected as a result thereof.
10.8 Any amendments or supplements to this Agreement shall be made in writing, and shall become effective only when duly
signed by the Parties to this Agreement.
10.9 Without the prior written consent of The9 Computer, the other Parties shall not transfer any of their rights and/or obligations
hereunder to any third parties. The Shareholders and the Company hereby agree that The9 Computer shall be entitled to
transfer any of its rights and/or obligations hereunder to any third party after serving written notice to the Shareholders and the
Company.
10.10 This Agreement shall be binding on the legal successors of the Parties.
6
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
LANFBU-MWE-XN09
11.6.14
NCR pomar0ma
HKG
24-Mar-2015 08:19 EST
ˆ200GaisY$Mo4ev7Z4Š
4*
0C
852134 EX4_25 7
HTM
ESS
Page 1 of 1
200GaisY$Mo4ev7Z4
IN WITNESS HEREOF, the Parties have caused this Shareholder Voting Proxy Agreement to be executed as of the date and in the
place first above written.
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Company chop is affixed
Shanghai The9 Information Technology Co., Ltd.
(Company chop)
Company chop is affixed
Lin Zhimin
Signature: /s/ Lin Zhimin
Ji Wei
Signature: /s/ Ji Wei
7
THE9 LIMITED
FORM 20-F
Appendix I:
RR Donnelley ProFile
NCRP64RS06
11.6.14
NCR pf_rend
HKG
Power of Attorney
24-Mar-2015 08:08 EST
ˆ200GaisY$Mnvc01Z.Š
2*
0C
852134 EX4_25 8
HTM
ESS
Page 1 of 1
200GaisY$Mnvc01Z.
This Power of Attorney (hereinafter “this Power of Attorney”) is executed by (with domicile address at
and ID no. ) on and issued to (with domicile address at and ID no. )
(hereinafter the “Attorney-in-Fact”).
I, , hereby grant the Attorney-in-Fact a general power of attorney to authorize the Attorney-in-Fact to act as my agent and
in my name to exercise my following rights as a shareholder of Shanghai The9 Information Technology Co., Ltd. (hereinafter the
“Company”):
(1)
(2)
(3)
To act as my agent to propose to convene and attend the shareholders’ meeting in accordance with the Company’s
Articles of Association;
To act as my agent to exercise the voting right in respect of all the matters being discussed and resolved in the
shareholders’ meeting, including but not limited to the designation and election of the Company’s directors and other
senior management personnel to be appointed and removed by the board of shareholders;
To act as my agent to exercise other shareholder’s voting right under the Company’s Articles of Association (including
but not limited to any other shareholder’s voting rights under the amended Articles of Association).
I hereby irrevocably acknowledge that unless The9 Computer Technology Consulting (Shanghai) Co., Ltd. (“The9 Computer”)
directs me to replace the Attorney-in-Fact, this Power of Attorney shall remain effective until the expiration or the early termination
of the Shareholder Voting Proxy Agreement executed by The9 Computer, the Company and all the shareholders of the Company on
[Date].
IN WITNESS WHEREOF, the power of attorney is hereby granted.
Name:
Signature:
Date:
8
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
SWRFBU-MWE-XN13
11.6.14
NCR peetp0dc
HKG
25-Mar-2015 00:54 EST
ˆ200GaisY$M$xPNf%aŠ
3*
0C
852134 EX4_26 1
HTM
ESS
Page 1 of 1
200GaisY$M$xPNf%a
Exhibit 4.26
This is an English Translation
This Agreement is entered into by the following parties on April 22, 2014 in Shanghai:
Novation Agreement
(1) Wang Yong (the “Transferor”)
ID Number:
(2) Lin Zhimin (the “Transferee”)
ID Number:
(3)
Ji Wei
ID Number:
(4) The9 Computer Technology Consulting (Shanghai) Co., Ltd. (“The9 Computer”)
(5) Shanghai The9 Information Technology Co., Ltd. (“Company”)
RECITAL
WHEREAS the Transferor, Ji Wei and The9 Computer entered into a Loan Agreement on November 24, 2011 (“Loan Agreement”)
and according to such agreement, The9 Computer has provided a loan in a total amount of RMB8,280,000 to the Transferor;
WHEREAS the Transferor, Ji Wei and The9 Computer entered into a Call Option Agreement on November 24, 2011 (“Call Option
Agreement”) and according to such agreement, the Transferor shall at request of The9 Computer transfer all or part of its equity
interests in the Company to The9 Computer and/or any other entity or individual designated by The9 Computer to the extent
permitted by laws of China;
WHEREAS the Transferor, Ji Wei and The9 Computer entered into a Shareholder Voting Proxy Agreement on November 24, 2011
(“Shareholder Voting Proxy Agreement”) and according to such agreement, the Transferor has irrevocably authorized The9 Computer
to act on its behalf to exercise all its shareholder voting rights in the Company.
WHEREAS the Transferor and The9 Computer entered into an Equity Pledge Agreement in respect of the Company on
November 24, 2011 (“Equity Pledge Agreement”) and according to such agreement, the Transferor pledged its 36% equity interests in
the Company fully to The9 Computer as the guarantee for its performance of obligations under the Loan Agreements, Call Option
Agreement, and Shareholders Voting Proxy Agreement. Such pledge granted The9 Computer a first priority right on the pledged
equity.
WHEREAS the Transferor and the Transferee entered into an Equity Transfer Agreement on April 22, 2014 (“Equity Transfer
Agreement”) and according to such agreement, the Transferee has acquired 36% of equity interests in the Company from the
Transferor (“Equity Transfer”).
WHEREAS after the Equity Transfer, the Transferee will hold 36% of equity interests in the Company (with the remaining 64%
equity interests held by Ji Wei), and the Transferor will no longer hold any equity interests in the Company. Simultaneously, the
Transferor will transfer all his rights and obligations under the Loan Agreements, Call Option Agreement, Shareholders Voting Proxy
Agreement, and Equity Pledge Agreement (collectively the “Original Agreements”) to the Transferee (“Novation”). The9 Computer
as a contractual party to the Original Agreements hereby agrees to such Novation, and Ji Wei and the Company as the contractual
related parties also accept the Novation (if the context is applicable).
1
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS22
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$MnvKgF%JŠ
2*
0C
852134 EX4_26 2
HTM
ESS
Page 1 of 1
200GaisY$MnvKgF%J
THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements herein, the parties agree as
follows:
1. Novation under the Original Agreements:
1.1 Pursuant to the terms and conditions of this Agreement, the Transferor shall transfer to the Transferee all his rights and
obligations under the Loan Agreements, and shall within five (5) days after the effective date of equity transfer under
Equity Transfer Agreement (“Effective Equity Transfer Date”) remit RMB8,280,000 to the bank account designated by the
Transferee. The Transferor and the Transferee agree that such fund shall set off the share purchase price payable by the
Transferee to the Transferor under the Equity Transfer Agreement and no actual payments are required. Since the Effective
Equity Transfer Date, the Transferee will succeed all rights and obligations of the Transferor under the Loan Agreements.
The9 Computer agrees that the transfer of rights and obligations under the Loan Agreements and the offset of purchase
price shall be deemed as the full repayment of loans under the Loan Agreements by the Transferor to The9 Company on
the Effective Equity Transfer Date.
1.2 In accordance with the terms and conditions of this Agreement, the Transferor shall transfer to the Transferee all his rights
and obligations under the Call Option Agreement. Since the Effective Equity Transfer Date, the Transferee will succeed all
rights and obligations of Transferor under the Call Option Agreement.
1.3 In accordance with the terms and conditions of this Agreement, the Transferor shall transfer to the Transferee all his rights
and obligations under the Shareholder Voting Proxy Agreement. Since the Effective Equity Transfer Date, the Transferee
will succeed all rights and obligations of Transferor under the Shareholder Voting Proxy Agreement.
1.4 In accordance with the terms and conditions of this Agreement, the Transferor shall transfer to the Transferee all his rights
and obligations under the Equity Pledge Agreement, and since the Effective Equity Transfer Date, the Transferee will
succeed all rights and obligations of Transferor under the Equity Pledge Agreement. Meanwhile, in order to register the
equity pledge of the Transferee, the Transferee shall enter into a new equity pledge agreement with The9 Computer on the
Effective Equity Transfer Date to pledge its 36% equity interests in the Company to The9 Computer as the guarantee for its
performance of obligations under the loan agreements, call option agreement and shareholder voting proxy agreement
newly made by it. The Company agrees to promptly record the pledge in the Company’s register of shareholders on the
Effective Equity Transfer Date.
2.
3.
4.
In consideration that the Transferee will fully assume all the obligations and liabilities of the Transferor under the Original
Agreements, The9 Computer, Ji Wei and the Company, as the contractual parties of the Original Agreements, hereby agree to
and accept this Novation.
The Transferee agrees that since the Effective Equity Transfer Date, the Transferee will replace the Transferor as a party to each
of the Original Agreements, enjoy all rights and perform all obligations of the Transferor under the Original Agreements and be
bound by terms thereof in all aspects.
If the Transferor has committed breaches of his obligations or any terms of the Original Agreements before the Effective Equity
Transfer Date (regardless whether such breaches have been discovered or claimed on the execution of this Agreement), the
resulting liabilities or any other consequences from such breaches of the Transferor shall remain the obligations of the
Transferor and shall not be transferred to the Transferee, notwithstanding the execution of this Agreement.
2
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS22
11.6.14
NCR pf_rend
HKG
24-Mar-2015 08:08 EST
ˆ200GaisY$MnvSYk%}Š
2*
0C
852134 EX4_26 3
HTM
ESS
Page 1 of 1
200GaisY$MnvSYk%}
5.
6.
7.
8.
If the Transferee breaches this Agreement or his obligations or any terms of any agreement mentioned in this Agreement after
the Effective Equity Transfer Date, the Transferee shall be responsible for all liabilities or any other consequences from such
breaches in accordance with each relevant agreement, and the Transferor shall not be held responsible for such liabilities or
consequences.
The Transferor agrees that he will not require The9 Computer or the Company or the Transferee to pay him any fees for any
obligations he has fulfilled for The9 Computer under the Original Agreements, and the Transferor shall not since the execution
date of this Agreement claim for any right, benefit or interest in respect of the Original Agreements against The9 Computer or
any other parties of the Original Agreements. The Transferor hereby irrevocably waives his right of claim, defense and/or any
other rights or interests under the Original Agreements against any other parties, and warrants that his performance of the
Original Agreements will not cause any requests, claims, demands, defenses, litigation, administrative punishment or any other
legal proceedings against the Transferee or any other parties to the Original Agreements by any third party; otherwise the
Transferor shall be liable for indemnification for all losses suffered by the Transferee and/or other parties to the Original
Agreements.
The Transferor and the Transferee jointly covenant to The9 Computer that, they will not, for reason of novation of the Original
Agreements or execution and performance of this Agreement (i.e. the Novation), create any new obligation to or increase the
obligations of The9 Computer or any other parties to the Original Agreements (including but not limited to increasing any
expenses), or reduce any rights of The9 Computer or any other parties to the Original Agreements, or create any original rights
against The9 Computer or the other parties to the Original Agreements, or create any requests, claims, litigation, administrative
punishment or any other legal proceedings against The9 Computer or the other parties to the Original Agreements; otherwise
The9 Computer or any other parties to the Original Agreements shall have the right to request the Transferor and/or the
Transferee to be responsible for the relevant liabilities. The Transferor and/or the Transferee shall fully indemnify The9
Computer or any other parties to the Original Agreements for any losses or expenses suffered by reason of such Novation.
Except for the parties to the Original Agreements as expressly altered in this Agreement, all other terms and conditions
contained in the Original Agreements shall remain in full force and effect. To facilitate the execution and the registration, the
Transferee agrees to execute the corresponding agreements with the relevant parties to the Original Agreements. Except the
changes in the parties, the remaining contents in the new agreements shall remain the same as in the Original Agreements.
9. Any dispute arising from or in connection this Agreement shall be settled through negotiation. If the parties are unable to settle
such dispute within thirty (30) days, the dispute shall be submitted to the China International Economic and Trade Arbitration
Commission, Shanghai Commission, and settled by arbitration in accordance with its arbitration rules in Shanghai. The arbitral
award shall be final and binding on all parties.
10. Each provision of this Agreement is severable and independent from the other provisions. Where any provision or provisions of
this Agreement becomes invalid, illegal or unenforceable, the other provisions of this Agreement shall nevertheless remain
valid, legal and enforceable and not be affected.
11. Upon execution by all the parties, this Agreement shall have its retrospective effect from the Effective Equity Transfer Date.
12. This Agreement has been written in Chinese and executed in six (6) original copies. Each original copy shall be deemed as an
original and have the same legal effect. All the copies shall together constitute one and the same document.
[No Text Below]
3
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS01
11.6.14
NCR pf_rend
HKG
24-Mar-2015 09:02 EST
ˆ200GaisY$Mo%=ed%JŠ
5*
0C
852134 EX4_26 4
HTM
ESS
Page 1 of 1
200GaisY$Mo%=ed%J
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed for their respective benefits on the date first above
written.
Wang Yong
Signature: /s/ Wang Yong
Lin Zhimin
Signature: /s/ Lin Zhimin
Ji Wei
Signature: /s/ Ji Wei
The9 Computer Technology Consulting (Shanghai)
Co., Ltd. (Company Chop)
Signature: Company Chop is affixed
Name:
Title:
Authorized Representative
Shanghai The9 Information Technology Co., Ltd.
(Company Chop)
Signature: Company Chop is affixed
Name:
Title:
Authorized Representative
4
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS10
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:45 EST
ˆ200GaisY$NL%&f$Z~Š
3*
0C
852134 EX8_1 1
HTM
ESS
Page 1 of 1
200GaisY$NL%&f$Z~
Significant and Other Principal Subsidiaries and Affiliated Entities of The Registrant
(as of the date of the annual report)
EXHIBIT 8.1
Wholly-owned subsidiaries
Name of Subsidiary
GameNow.net (Hong Kong) Limited
China The9 Interactive Limited
9Dream Limited
China Crown Technology Limited
The9 Development Center Limited
Asian Way Development Limited
New Star International Development Limited
TDC (Asia) Limited
The9 Interactive, Inc.
The9 Korea Co., Ltd.
Red 5 Korea, LLC
The9 Computer Technology Consulting (Shanghai) Co., Ltd.
China The9 Interactive (Shanghai) Limited
China The9 Interactive (Beijing) Limited
Jiu Jing Era Information Technology (Beijing) Limited
Jiu Tuo (Shanghai) Information Technology Limited
Majority-owned subsidiaries
Name of Subsidiary
Red 5 Studios, Inc.
Red 5 Singapore Pte. Ltd.
Affiliated entities
Name of Subsidiary
Shanghai The9 Information Technology Co., Ltd.
Shanghai Jiucheng Advertisement Co., Ltd.
Shanghai Jiushi Interactive Network Technology Co., Ltd.
Shanghai Fire Wing Information Technology Co., Ltd.
Shanghai The9 Educational Software Technology Co., Ltd.
Beijing Chuan Yun Interactive Network Technology Co., Ltd.
Shanghai Jiuchang Investment Co., Ltd
Jurisdiction of Incorporation
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
British Virgin Islands
Delaware, USA
Korea
Korea
China
China
China
China
China
Jurisdiction of Incorporation
Delaware, USA
Singapore
Jurisdiction of Incorporation
China
China
China
China
China
China
China
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS20
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&9z8%uŠ
4*
0C
852134 EX12_1 1
HTM
ESS
Page 1 of 1
200GaisY$NL&9z8%u
EXHIBIT 12.1
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jun Zhu, certify that:
1. I have reviewed this annual report on Form 20-F of The9 Limited. (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods
presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Company’s internal control over financial reporting.
Date: March 27, 2015
/s/ Jun Zhu
By:
Name: Jun Zhu
Title: Chief Executive Officer
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS21
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:45 EST
ˆ200GaisY$NL%@TT%TŠ
3*
0C
852134 EX12_2 1
HTM
ESS
Page 1 of 1
200GaisY$NL%@TT%T
EXHIBIT 12.2
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, George Lai, certify that:
1. I have reviewed this annual report on Form 20-F of The9 Limited (the “Company”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods
presented in this report;
4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting; and
5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons
performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Company’s internal control over financial reporting.
Date: March 27, 2015
/s/ George Lai
By:
Name: George Lai
Title: Chief Financial Officer
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS22
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:45 EST
ˆ200GaisY$NL%wuW%FŠ
3*
0C
852134 EX13_1 1
HTM
ESS
Page 1 of 1
200GaisY$NL%wuW%F
Certification by the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 13.1
In connection with the Annual Report of The9 Limited (the “Company”) on Form 20-F for the year ended December 31,
2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jun Zhu, Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 27, 2015
/s/ Jun Zhu
By:
Name: Jun Zhu
Title: Chief Executive Officer
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS16
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:46 EST
ˆ200GaisY$NL&CVs%qŠ
3*
0C
852134 EX13_2 1
HTM
ESS
Page 1 of 1
200GaisY$NL&CVs%q
Certification by the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 13.2
In connection with the Annual Report of The9 Limited (the “Company”) on Form 20-F for the year ended December 31,
2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, George Lai, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 27, 2015
/s/ George Lai
By:
Name: George Lai
Title: Chief Financial Officer
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
ACXFBU-MWE-XN09
11.6.14
NCR venkp1dc
HKG
26-Mar-2015 00:58 EST
ˆ200GaisY$NWnjGSZsŠ
4*
0C
852134 EX15_1 1
HTM
ESS
Page 1 of 1
200GaisY$NWnjGSZs
[Letterhead of Maples and Calder]
EXHIBIT 15.1
Our ref: SSY/604835-000001/7901266v2
Direct +852 3690 7498
Email sophie.yu@maplesandcalder.com
The9 Limited
Building No. 3, 690 Bibo Road
Zhang Jiang Hi-Tech Park
Pudong New Area, Pudong
Shanghai 201203
People’s Republic of China
27 March 2015
Dear Sirs,
The9 Limited (the “Company”)
We consent to the reference to our firm under the heading “Cayman Islands Taxation” in the Company’s Annual Report on Form 20-
F for the year ended December 31, 2014, which will be filed with the Securities and Exchange Commission in the month of March
2015.
Yours faithfully
/s/ Maples and Calder
Maples and Calder
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
NCRP64RS24
11.6.14
NCR pf_rend
HKG
25-Mar-2015 17:45 EST
ˆ200GaisY$NL%h#LZÇŠ
3*
0C
852134 EX15_2 1
HTM
ESS
Page 1 of 1
200GaisY$NL%h#LZ˙
[Letterhead of Zhong Lun Law Firm]
EXHIBIT 15.2
March 27, 2015
The9 Limited
Building No. 3, 690 Bibo Road
Zhangjiang Hi-tech Park
Pudong New Area, Pudong
Shanghai 201203
People’s Republic of China
Dear Sirs,
We consent to the reference to our firm under the headings of “Government Regulations” and “Arrangements with Affiliated PRC
Entities” in The9 Limited’s Annual Report on Form 20-F for year ended December 31, 2014, which will be filed with the Securities
and Exchange Commission in the month of March 2015.
Yours faithfully,
/s/ Zhong Lun Law Firm
Zhong Lun Law Firm
THE9 LIMITED
FORM 20-F
RR Donnelley ProFile
RRWIN-XENP142
11.6.14
NCR palap0dc
HKG
26-Mar-2015 00:19 EST
ˆ200GaisY$NVpuhoZ{Š
4*
0C
852134 EX15_3 1
HTM
ESS
Page 1 of 1
200GaisY$NVpuhoZ{
[Letterhead of Deloitte Touche Tohmatsu Certified Public Accountants LLP]
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-127700,
No. 333-156306 and No. 333-168780) of The9 Limited of our report dated March 27, 2015 relating to the consolidated financial
statements of The9 Limited, its subsidiaries and its variable interest entities, appearing in this Annual Report on Form 20-F of The9
Limited for the year ended December 31, 2014.
EXHIBIT 15.3
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shanghai China
March 27, 2015