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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
☐
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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 . . . . . . . . . . . . . . . .
For the transition period from to
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)
17 Floor, No. 130 Wu Song Road
Hong Kou District, Shanghai 200080
People’s Republic of China
(Address of principal executive offices)
George Lai, Chief Financial Officer
Tel: +86-21-6108-6080
Email: georgelai@corp.the9.com
17 Floor, No. 130 Wu Song Road
Hong Kou District, Shanghai 200080
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
Trading Symbol
Name of Each Exchange on Which Registered
American Depositary Shares, each representing thirty Class A ordinary
shares
NCTY
Nasdaq Capital Market
Class A ordinary shares, par value US$0.01 per share*
Nasdaq Capital Market*
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* Not for trading, but only in connection with the listing on the Nasdaq Capital Market of American depositary shares.
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:
As of December 31, 2021, there were 691,388,585 ordinary shares, par value US$0.01 per share, issued and outstanding, being the sum of 677,781,251 Class A ordinary shares
(excluding 160,545,180 ordinary shares we reserved for issuance upon the exercise of options under our share incentive plan, warrants and for our treasury ADSs) and
13,607,334 Class B ordinary shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities 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 Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under
those Sections.
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 ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated
filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the by the Financial Accounting Standards Board to its Accounting Standards Codification after
April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S. C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒
International Financial Reporting Standards as issued by the
International Accounting Standards Board ☐
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. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
(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 ☐
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TABLE OF CONTENTS
INTRODUCTION
1
PART I
2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
2
ITEM 3. KEY INFORMATION
3
ITEM 4. INFORMATION ON THE COMPANY
66
ITEM 4A. UNRESOLVED STAFF COMMENTS
98
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
98
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
120
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
127
ITEM 8. FINANCIAL INFORMATION
131
ITEM 9. THE OFFER AND LISTING
132
ITEM 10. ADDITIONAL INFORMATION
132
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
146
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
147
PART II
149
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
149
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
149
ITEM 15. CONTROLS AND PROCEDURES
149
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
150
ITEM 16B. CODE OF ETHICS
151
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
151
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
151
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
151
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
151
ITEM 16G. CORPORATE GOVERNANCE
152
ITEM 16H. MINE SAFETY DISCLOSURE
152
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
152
PART III
153
ITEM 17. FINANCIAL STATEMENTS
153
ITEM 18. FINANCIAL STATEMENTS
153
ITEM 19. EXHIBITS
153
SIGNATURES
155
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INTRODUCTION
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 consolidated variable interest entity, Shanghai The9 Information Technology Co., Ltd., or Shanghai IT, in which we do not have direct equity
interests but over which we effectively control through a series of contractual arrangements as described under “Item 7. Major Shareholders and Related Party
Transactions—B. Related Party Transactions—Arrangements with Variable Interest Entity,” (2) the terms “shares” and “ordinary shares” refer to our ordinary shares;
“Class A ordinary shares” refer to our Class A ordinary shares of par value US$0.01 per share; “Class B ordinary shares” refers to our Class B ordinary shares of par
value US$0.01 per share; and “ADSs” refers to our American depositary shares, each of which represents thirty Class A ordinary shares, (3) “China” and “PRC” refer to
the People’s Republic of China, and solely for the purpose of this annual report, excluding Taiwan, Hong Kong and Macau, (4) all references to “RMB” and “Renminbi”
are to the legal currency of China and all references to “U.S. dollars,” “dollars,” “US$” and “$” are to the legal currency of the United States, and (5) all discrepancies in
any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
Our reporting currency is 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 2021 at US$1.00 to RMB6.3726, as of December 30, 2021. 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.”
On December 15, 2004, our ADSs commenced trading on the Nasdaq Global Market under the symbol “NCTY.” In October 2018, we transferred our listing venue to the
Nasdaq Capital Market. On May 6, 2019, we adjusted our authorized share capital and adopted dual-class share structure, consisting of Class A ordinary shares and Class
B ordinary shares. Effective October 19, 2020, we effected a change of the ratio of the ADS to our Class A ordinary shares from one ADS representing three Class A
ordinary shares to one ADS representing thirty Class A ordinary shares. Currently, each ADS represents thirty Class A ordinary shares. In April 2021, we offered
3,765,100 ADSs, representing 112,953,000 Class A ordinary shares, and ADS warrants to purchase 2,823,825 ADSs, representing 84,714,750 Class A ordinary shares. In
November 2021, we offered 416,705 ADSs, representing 12,501,150 Class A ordinary shares. In November 2021, we offered 968,718 ADSs, representing 29,061,540
Class A ordinary shares. Unless otherwise indicated, ADSs and per ADS amount in this annual report have been retroactively adjusted to reflect the changes in ratio for
all periods presented.
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2
FORWARD-LOOKING INFORMATION
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,” “considers” 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 return to profitability or raise sufficient capital to cover our capital needs;
●
our ability to identify business development focus;
●
our ability to develop our cryptocurrency mining business and difficulty of cryptocurrency mining to generate sufficient economic return;
●
the price fluctuation and market demand of cryptocurrencies;
●
risks inherent in cryptocurrencies, such as hacking, fraud and safety concerns;
●
risks associated with our future acquisitions and investments;
●
our ability to compete effectively against our competitors;
●
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.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
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ITEM 3. KEY INFORMATION
Our Holding Company Structure and Contractual Arrangements with The Variable Interest Entity
The9 Limited is not a Chinese operating company but a Cayman Islands holding company with no equity ownership in its variable interest entity. We currently derive
substantially all of our revenue from jurisdictions other than PRC. Since February 2021, we have turned our business focus to global blockchain business and are
primarily engaged in the operation of cryptocurrency mining and a Non-Fungible Token platform NFTSTAR. We have significantly reduced our PRC-related revenue,
which represents an insignificant amount in 2021. Historically we had been operating online game business before our listing until this year and conducted our operations
in China through (i) our PRC subsidiaries and (ii) the variable interest entity with which we have maintained contractual arrangements.
For our insignificant operation in China, PRC laws and regulations restrict and impose conditions on foreign investment in internet content, value-added
telecommunication-based online marketing, audio and video services and mobile application distribution businesses. Accordingly, we operated online game business in
China through the variable interest entity, and rely on contractual arrangements among our PRC subsidiaries, the variable interest entity and its shareholders to control the
business operations of the variable interest entity. The variable interest entity contributed an aggregate of 53.3 %, 100.0 % and 0.9% of the consolidated net revenues for
the years ended December 31, 2019, 2020 and 2021, respectively. As used in this annual report, “we,” “us,” “our company” and “our” refers to The9 Limited, its
subsidiaries, and, in the context of describing our operations and consolidated financial information, the variable interest entity in China, including but not limited to
Shanghai The9 Information Technology Co., Ltd. or Shanghai IT, which was established in Sept 2000, currently holds one Internet Content Provider license, operates our
website and primarily engages in our gaming business. Investors in our ADSs are not purchasing equity interest in the variable interest entity in China but instead are
purchasing equity interest in a holding company incorporated in the Cayman Islands.
A series of contractual agreements, including loan agreements, exclusive purchase option agreements, exclusive technology consulting and services agreements or
exclusive business cooperation agreements, intellectual property rights license agreement, equity pledge agreements, powers of attorney, business cooperation agreement
and business operations agreements, have been entered into by and among our subsidiaries, the variable interest entity and their respective shareholders. Terms contained
in each set of contractual arrangements with the variable interest entity and their respective shareholders are substantially similar. Despite the lack of legal majority
ownership, our Cayman Island holding company is considered the primary beneficiary of our consolidated affiliated entities and consolidates our consolidated affiliated
entities and their subsidiaries as required by Accounting Standards Codification topic 810, Consolidation. Accordingly, we treat our consolidated affiliated entities as our
consolidated entities under U.S. GAAP and we consolidate the financial results of our consolidated affiliated entities in our consolidated financial statements in
accordance with U.S. GAAP. For more details of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual
Arrangements with The Variable Interest Entity,” and “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Arrangements with
Variable Interest Entity.”
However, the contractual arrangements may not be as effective as direct ownership in providing us with control over the variable interest entity and we may incur
substantial costs to enforce the terms of the arrangements. In addition, these agreements have not been tested in China courts. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements for our operations and operating licenses in China, which may not be as
effective in providing operational control as direct ownership” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—The
principal shareholders of the variable interest entity have potential conflicts of interest with us, which may adversely affect our business”
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There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights
of our Cayman Islands holding company with respect to its contractual arrangements with the variable interest entity and its shareholders. It is uncertain whether any new
PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of the variable interest entity is
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 to take action in dealing with such violations or failures. See “Item 3. Key Information—D. Risk Factors—Risks
Related to Our Corporate Structure—If the PRC government deems that the contractual arrangements in relation to the variable interest entity do not comply with PRC
regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could
be subject to severe penalties or be forced to relinquish our interests in those operations.”
Our corporate structure is subject to risks associated with our contractual arrangements with the variable interest entity. If the PRC government deems that our contractual
arrangements with the variable interest entity do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or
the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests
in those operations. Our holding company, our PRC subsidiaries and variable interest entity, and investors of our company face uncertainty about potential future actions
by the PRC government that could affect the enforceability of the contractual arrangements with the variable interest entity and, consequently, significantly affect the
financial performance of the variable interest entity and our company as a whole. For a detailed description of the risks associated with our corporate structure, please
refer to risks disclosed under “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure.”
We face various risks and uncertainties related to doing business in China. For the business operations that are conducted in China, we are subject to complex and
evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, anti-monopoly regulatory actions, and
oversight on cybersecurity and data privacy, as well as the uncertainty associated with the inspection by the Public Company Accounting Oversight Board, or the
PCAOB, on our auditors, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange.
These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer
securities to investors, or cause the value of such securities to significantly decline. For a detailed description of risks related to doing business in China, please refer to
risks disclosed under “Item 3.D. Key Information—Risk Factors—Risks Related to Doing Business in China.”
PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-
based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations,
including data security related regulations, in this nature may cause the value of such securities to significantly decline. For more details, see “Item 3. Key Information—
D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a
material adverse change in our operations and the value of our ADSs.”
Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and
regulations in China, could result in a material adverse change in our operations and the value of our ADSs. For more details, 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.” and “—We may be adversely
affected by the complexity, uncertainties and changes in PRC regulation of blockchain, NFT, and internet-related businesses and companies, and any lack of requisite
approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.”
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Permissions Required from the PRC Authorities for Our Operations
We conduct our business primarily through our subsidiaries, and we have significantly reduced our business operation through the variable interest entity in China. Our
operations in China are governed by PRC laws and regulations. As of the date of this annual report, for our insignificant operations in China, our PRC subsidiaries,
variable interest entity and its subsidiaries have obtained the requisite licenses and permits from the PRC government authorities that are material for the business
operations of our holding company and the variable interest entity in China, including, the Internet Content Provider license. Given the uncertainties of interpretation and
implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses,
permits, filings or approvals for the functions and services of our platform in the future. For more detailed information, see “Item 3. Key Information—D. Risk Factors—
Risks Related to Our Company and Our Industry—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of blockchain, NFT,
and internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on
our business and results of operations.”
Furthermore, under current PRC laws, regulations and regulatory rules, we, our PRC subsidiaries and our consolidated variable interest entity may be required to fulfill
filing procedures and obtain approval from the China Securities Regulatory Commission, or the CSRC, in connection with offering and listing in an overseas market, and
may be required to go through cybersecurity review by the Cyberspace Administration of China, or the CAC. If we fail to obtain the relevant approval or complete other
filing procedures for any future offshore offering or listing, we may face sanctions by the CSRC or other PRC regulatory authorities, which may include fines and
penalties on our operations in China, limitations on our operating privileges in China, restrictions on or prohibition of the payments or remittance of dividends by our
subsidiaries in China, restrictions on or delays to our future financing transactions offshore, or other actions that could have a material and adverse effect on our business,
financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. For more detailed information, see “Item 3. Key Information
—D. Risk Factors—Risks Relating to Doing Business in China—The approval of and filing with the CSRC or other PRC government authorities may be required in
connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval or complete
such filing” and “—Our business is subject to complex and evolving Chinese and international laws and regulations regarding data privacy and cybersecurity. Failure to
protect confidential information of our customers and network against security breaches could damage our reputation and brand and substantially harm our business and
results of operations.”
Cash and Asset Flows through Our Organization
The9 Limited is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiaries incorporated under the laws of
various jurisdictions where we have business presence. As a result, our ability to pay dividends depends upon dividends paid by our subsidiaries, which is subject to
restrictions imposed by the applicable laws and regulations in these jurisdictions. In certain jurisdictions, there are currently no foreign exchange control regulations
which restrict the ability of our subsidiaries in these jurisdictions to distribute dividends to us. However, the relevant regulations may be changed and the ability of these
subsidiaries to distribute dividends to us may be restricted in the future. As for our insignificant operation in PRC, under the PRC laws and regulations, if our existing
PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to
us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance
with PRC accounting standards and regulations. Under the PRC laws and regulations, each of our subsidiaries and the variable interest entity in China is required to make
appropriations to certain statutory reserve funds or may make appropriations to certain discretionary funds, which are not distributable as cash dividends except in the
event of a solvent liquidation of the companies. We do not, however, expect cash transfer from our PRC subsidiaries and the variable interest entity and its subsidiaries to
us, or the other way around.
Company: The9 LTD
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Financial Information Related to Our Consolidated Variable Interest Entity
The following table presents the condensed consolidating schedule of financial position for our consolidated variable interest entity and other entities as of the dates
presented.
Selected Condensed Consolidated Statements of Income Information
For the Year Ended December 31, 2021
Consolidated
Company
Variable
Consolidated
The9 Limited
Subsidiaries
Interest Entity
Eliminations
Total
RMB
Revenues
—
134,596,222
7,261,904
(5,982,986)
135,875,140
Cost of Revenues
—
(93,114,710)
(902,779)
5,982,986
(88,034,503)
Gross (loss) profit
—
41,481,512
6,359,125
—
47,840,637
Operating (expenses) income:
(186,462,351)
(145,411,019)
(32,747,408)
—
(364,620,778)
Other operating income, net
—
—
—
—
—
Income (loss) from operations
(186,462,351)
(103,929,507)
(26,388,283)
—
(316,780,141)
Income (loss) before income tax expense and share of loss in equity
method investments
(275,407,505)
(122,053,789)
(17,638,822)
—
(415,100,116)
Net income (loss)
(411,234,755)
12,048,309
(17,638,822)
—
(416,825,268)
Net income (loss) attributable to shareholders of ordinary shares
(411,234,755)
16,090,546
(16,090,546)
—
(411,234,755)
Total comprehensive income (loss)
(407,250,312)
10,500,033
(16,090,546)
—
(412,840,825)
For the Year Ended December 31, 2020
Consolidated
Company
Variable
Consolidated
The9 Limited
Subsidiaries
Interest Entity
Eliminations
Total
RMB
Revenues
—
—
8,057,148
(7,431,660)
625,488
Cost of Revenues
—
(7,877,560)
(368,236)
7,431,660
(814,136)
Gross (loss) profit
—
(7,877,560)
7,688,912
—
(188,648)
Operating (expenses) income:
(87,638,664)
460,991,157
(36,482,896)
—
336,869,597
Other operating income, net
—
—
27,358
—
27,358
Income (loss) from operations
(87,638,664)
453,113,597
(28,766,626)
—
336,708,307
Income (loss) before income tax expense and share of loss in equity
method investments
(10,024,071)
457,767,275
(44,978,434)
—
402,764,770
Net income (loss)
397,883,388
40,528,784
(44,978,434)
—
393,433,738
Net income (loss) attributable to shareholders of ordinary shares
397,883,388
43,734,607
(44,924,729)
—
396,693,266
Total comprehensive income (loss)
384,983,137
56,892,104
(44,924,729)
—
396,950,512
Company: The9 LTD
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For the Year Ended December 31, 2019
Consolidated
Company
Variable
Consolidated
The9 Limited
Subsidiaries
Interest Entity
Eliminations
Total
RMB
Revenues
—
159,376
3,157,857
(2,975,738)
341,495
Cost of Revenues
—
(2,975,738)
(1,342,266)
2,975,738
(1,342,266)
Gross (loss) profit
—
(2,816,362)
1,815,591
—
(1,000,771)
Operating (expenses) income:
(68,165,230)
(54,601,585)
(39,979,309)
—
(162,746,124)
Other operating income, net
—
—
30,240
—
30,240
Income (loss) from operations
(68,165,230)
(57,417,947)
(38,133,478)
—
(163,716,655)
Income (loss) before income tax expense and share of loss in equity
method investments
(103,312,222)
(38,101,162)
(51,908,096)
—
(193,321,480)
Net income (loss)
(177,795,168)
33,293,943
(51,667,515)
—
(196,168,740)
Net income (loss) attributable to shareholders of ordinary shares
(177,795,168)
38,839,622
(51,667,220)
—
(190,622,766)
Total comprehensive income (loss)
(172,368,564)
27,073,513
(51,667,220)
—
(196,962,271)
Selected Condensed Consolidated Balance Sheets Information
As of December 31, 2021
Consolidated
Company
Variable
Consolidated
The9 Limited
Subsidiaries
Interest Entity
Eliminations
Total
RMB
Cash and cash equivalents
12,243,809
409,961,660
6,215,304
—
428,420,773
Current assets
2,371,074,261
5,182,180,680
486,159,418
(6,988,902,954)
1,050,511,405
Non-current assets
(1,375,912,867)
207,475,667
7,878,993
1,420,365,177
259,806,970
Total assets
995,161,394
5,389,656,347
494,038,411
(5,568,537,777)
1,310,318,375
Current liabilities
218,690,442
5,703,634,638
1,610,873,347
(6,988,902,954)
544,295,473
Non-current liabilities
—
2,196,465
370,877
—
2,567,342
Total liabilities
218,690,442
5,705,831,103
1,611,244,224
(6,988,902,954)
546,862,815
Redeemable noncontrolling interest
—
—
—
—
—
Total equity (deficit)
776,470,952
(316,174,756)
(1,117,205,813)
1,420,365,177
763,455,560
Total liabilities, redeemable noncontrolling interest and equity (deficit)
995,161,394
5,389,656,347
494,038,411
(5,568,537,777)
1,310,318,375
As of December 31, 2020
Consolidated
Company
Variable
Consolidated
The9 Limited
Subsidiaries
Interest Entity
Eliminations
Total
RMB
Cash and cash equivalents
8,545,918
22,143,346
1,006,973
—
31,696,237
Current assets
1,020,761,997
3,867,539,377
10,220,368
(4,856,206,627)
42,315,115
Non-current assets
(1,295,612,695)
5,989,231
136,961
1,295,612,695
6,126,192
Total assets
(274,850,698)
3,873,528,608
10,357,329
(3,560,593,932)
48,441,307
Current liabilities
12,867,549
4,894,102,990
313,608,879
(4,856,206,627)
364,372,791
Non-current liabilities
—
2,464,495
—
—
2,464,495
Total liabilities
12,867,549
4,896,567,485
313,608,879
(4,856,206,627)
366,837,286
Redeemable noncontrolling interest
—
349,046,548
—
—
349,046,548
Total shareholders' equity (deficit)
(287,718,247)
(1,372,085,425)
(303,251,550)
1,295,612,695
(667,442,527)
Total liabilities, redeemable noncontrolling interest and shareholders'
equity
(274,850,698)
3,873,528,608
10,357,329
(3,560,593,932)
48,441,307
Company: The9 LTD
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Selected Condensed Consolidated Cash Flows Information
For the Year Ended December 31, 2021
Consolidated
Company
Variable
Consolidated
The9 Limited
Subsidiaries
Interest Entity
Eliminations
Total
RMB
Net cash provided by (used in) operating activities
(1,230,116,807)
523,182,648
19,245,582
—
(687,688,577)
Net cash provided by (used in) investing activities
—
(134,224,511)
(6,858,562)
—
(141,083,073)
Net cash provided by (used in) financing activities
1,233,814,698
—
(7,178,690)
—
1,226,636,008
For the Year Ended December 31, 2020
Consolidated
Company
Variable
Consolidated
The9 Limited
Subsidiaries
Interest Entity
Eliminations
Total
RMB
Net cash provided by (used in) operating activities
276,543,081
(389,202,264)
6,405,929
—
(106,253,254)
Net cash provided by (used in) investing activities
—
446,277,694
(8,014,486)
—
438,263,208
Net cash (used in) provided by financing activities
(268,141,059)
(37,795,136)
(4,750,000)
—
(310,686,195)
For the Year Ended December 31, 2019
Consolidated
Company
Variable
Consolidated
The9 Limited
Subsidiaries
Interest Entity
Eliminations
Total
RMB
Net cash provided by (used in) operating activities
(34,737,122)
(3,163,276)
(16,274,924)
—
(54,175,322)
Net cash provided by (used in) investing activities
—
60,795,934
83,445
—
60,879,379
Net cash (used in) provided by financing activities
34,881,000
5,491,800
550,000
—
40,922,800
A.
[Reserved]
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. If we are not able to return to profitability or
raise sufficient capital to cover our capital needs, we may not continue as a going concern.
We incurred net losses of RMB196.2 million for the year ended December 31, 2019, as we continued to incur product development and sales and marketing expenses for
our new products and general and administrative expenses while we have not generated significant revenues from our new games or other operations in those periods and
since 2009. We recorded net income of RMB393.4 million for the year ended December 31, 2020, primarily due to gain on disposal of subsidiaries, which was of one-off
nature. We recorded net loss of RMB416.8 million (US$65.4 million) for the year ended December 31, 2021, primarily due to share-based compensation expense and
interest expense (convertible note). Our product development, sales and marketing and general and administrative expenses may increase in the future as we continue to
explore various opportunities of new product and services development and business expansion in order to grow our revenues. 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.
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We recorded negative operating cash flows of RMB54.2 million, RMB106.3 million and RMB687.7 million (US$107.9 million) for the years ended December 31, 2019,
2020 and 2021, respectively. As of December 31, 2019, 2020 and 2021, we recorded cash and cash equivalents of 10.1 million, RMB31.7 million, RMB428.4 million
(US$ RMB67.2 million), respectively. Furthermore, as of December 31, 2019, 2020 and 2021, we recorded net current liabilities of RMB903.6 million, RMB322.1
million and net current asset of RMB506.2 million (US$79.4 million), respectively. Our net current liabilities positions as of December 31, 2019 and 2020 were primarily
due to continuous cash outflow in connection with our product development and sales and marketing activities, and in 2020, partially offset by gain on extinguishment of
convertible notes and gain on disposal of subsidiaries. Our net current asset position as of December 31, 2021 was primarily due to the net cash provided by financing
activities including proceeds from our follow-on offering and issuance of convertible notes in 2021, partially offset by cash used in operating activities mainly related to
our cryptocurrency mining business in 2021. 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,
which may materially and adversely affect our business, prospects, liquidity, financial condition and results of operations.
We had an accumulated deficit of approximately RMB3,403.5 million (US$534.1 million) and total current assets exceeded total current liabilities by approximately
RMB506.2 million (US$79.4 million) as of December 31, 2021. If we are unable to achieve profitability or raise sufficient capital to cover our capital needs, we may not
continue as a going concern. There can be no assurance that we can obtain additional financing. Our ability to obtain additional financing is subject to a number of
factors, which may be beyond our control. See “—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 are transitioning our business focus and our results of operations may be materially and adversely affected.
Historically, we primarily operated and developed proprietary and licensed online games. In 2019, we attempted to transition our business focus to electric vehicles and
we expected to develop our electric vehicles business through a proposed joint venture with Faraday&Future Inc., or F&F. The electric vehicles business did not develop
as we anticipated. Due to such business focus transition, our revenues decreased significantly from RMB17.5 million in 2018 to RMB0.3 million in 2019. Afterwards, we
still operated our gaming business and recorded revenues of RMB0.6 million in 2020. In early 2021, we decided to step into cryptocurrency mining business and started
to devote resources and establish collaboration relationship with industry participants to develop our cryptocurrency mining business. We began cryptocurrency mining
activities in February 2021 and the operation of a Non-Fungible Token platform NFTSTAR in late 2021. We experienced revenue growth for the first half of 2021.
However, as we have limited experience in cryptocurrency mining business and NFT business, our efforts in developing such business may not succeed and we may not
be able to generate sufficient revenue to cover our investment and become profitable. During such process, our results of operations and financial condition may not be
improved in a timely manner, or at all. We cannot assure you that we will successfully transition our business focus and it is possible that we remain in such status for a
certain period of time. During such period, our revenue may be very limited and we may continue to experience material and adverse effect to our results of operations,
financial condition and business prospects.
New lines of business or new products and services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products and services within our existing lines of business. For example, in March 2019, we
entered into a joint venture agreement with F&F to establish a joint venture and serve China with electric vehicles designed and developed by F&F. However, the electric
vehicles business did not develop as we anticipated. Currently, we are developing our cryptocurrency mining business and began cryptocurrency mining activities in
February 2021. As a new entrant into the new lines of business, we face significant challenges, uncertainties and risks, including, among others, with respect to our
ability to:
●
build a well-recognized and respected brand;
●
establish and expand our customer base;
●
improve and maintain our operational efficiency for new lines of business;
●
maintain a reliable, secure, high-performance and scalable technology infrastructure for our new lines of business;
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●
anticipate and adapt to changing market conditions, including technological developments and changes in competitive landscape;
●
navigate an evolving and complex regulatory environment, such as licensing and compliance requirements; and
●
manage the resources and attention of management between our current core business and new lines of business.
Moreover, there can be no assurance that the introduction and development of new lines of business or new products and services would not encounter significant
difficulties or delay or would achieve the profitability as we expect. Failure to successfully manage these risks in the development and implementation of new lines of
business or new products or services could have a material adverse effect on our business, results of operations and prospects. For example, with respect to our plan to
develop our cryptocurrency mining business, we may not be able to acquire cryptocurrency mining machines at a reasonable cost, or at all. Due to our limited experience
with cryptocurrency and its mining activities, we also face challenges and uncertainties relating to the possibility of success of our new business. We cannot assure you
that our efforts in entry into new business sectors, such as our development of cryptocurrency mining business or our NFT business, will succeed. There can be no
assurance that such operations will succeed or revert satisfactory results and our business, financial condition, results of operations and prospects may be materially and
adversely affected.
As we enter into new business sectors, we are also subject to competition from such industry. For example, the cryptocurrency industry is highly competitive despite its
relatively short history. There can be no assurance that we are able to compete effectively with respect to our new businesses. If we fail to establish our strengths or
maintain our competitiveness in those industries, our business prospects, results of operations and financial condition 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 a material decrease in our cash and cash equivalents balance. We will require additional cash resources to fund our working capital and
expenditure needs, such as acquisition costs of cryptocurrency mining machines, electricity expenses, product developments expenses, payment of license fees and
royalties, sales and marketing activities, and investment or acquisition transactions.
Furthermore, we expect to continue to increase our global hash rate of Bitcoin, we expect to further invest into Bitcoin mining machines in order to achieve our business
goal. 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. However, we cannot assure you that such efforts may
succeed. For example, in July 2019, we entered into a convertible note purchase agreement with Jupiter Excel Limited, or Jupiter Excel, pursuant to which we agreed to
sell and Jupiter Excel agreed to purchase 12% convertible notes in an aggregate principal amount of US$30 million, or the 2019 Convertible Notes. The closing of the
transaction was subject to certain closing conditions. Due to unfavorable market conditions and failure to satisfy the closing conditions, the proposed 2019 Convertible
Notes transaction was not closed and the convertible note purchase agreement was terminated in March 2020.
To meet our anticipated working capital needs, we are considering multiple alternatives. See “Item 5. Operating And Financial Review And Prospects—B. Liquidity and
Capital Resources—Cash Flows and Working Capital.” There can be no assurance that we will be able to complete any such transaction on acceptable terms or at all. If
we are unable to obtain the necessary capital, we may need to seek to be acquired by another entity or cease operations.
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Any equity or debt financing may result in dilution to our existing shareholders’ interests or an increase in our debt service obligations. For example, as of the date of this
annual report, we had Warrants outstanding, which represent right to purchase an aggregate number of up to 97,568,850 Class A ordinary shares. In February 2021, in
accordance with the Purchase Agreement, we issued 8,108,100 Class A ordinary shares in aggregate at US$0.1233 per Class A ordinary share and 207,891,840 warrants
in aggregate, each warrant representing the right to purchase one Class A ordinary share, to the Investors. In February 2021, we issued and sold a one-year convertible
note in a principal amount of US$5.0 million to Streeterville Capital LLC, or Streeterville, at an initial conversion price of US$14 per ADS, each ADS representing thirty
Class A ordinary shares, subject to adjustment. We subsequently entered into the Exchange Agreement and convertible note, pursuant to which conversion price was
amended to: ninety percent (90%) multiplied by the lower of (a) the average of the Closing Trade Prices during the five (5) Trading Days immediately preceding the date
of the Lender Conversion Notice, and (b) the Closing Trade Price on the Trading Day immediately preceding the date of the Lender Conversion Notice. The note has
been paid in full in 2021. In February 2021, we entered into a standby equity distribution agreement, or the SEDA, with YA II PN, LTD., a Cayman Islands exempt
limited partnership managed by Yorkville Advisor Global, LP pursuant to which we are able to sell up to US$100.0 million of our ADSs solely at our request at any time
during the 36 months following the date of the SEDA. The SEDA was later terminated and we have re-entered into new SEDA (August SEDA) in August 2021. Pursuant
to the August SEDA, we registered 968,718 ADSs, representing 29,061,540 Class A ordinary shares. An accompanying prospectus supplement dated November 24, 2021
was filed. The net proceeds from the transactions are approximately US$8,924,000, after deducting certain fees due to the finder for this transaction and the estimated
transaction expenses, and will be used for working capital and general corporate purposes. See “Item 5. Operating And Financial Review And Prospects—B. Liquidity
and Capital Resources—Cash Flows and Working Capital.” On February 16, 2021, we entered into a share purchase agreement with each of the four investors in the
cryptocurrencies mining industry, respectively. Pursuant to the share purchase agreements, we should issue 9,231,240 Class A ordinary shares in aggregate to investors
for an aggregate consideration of US$11.5 million. Such transactions were subsequently completed. Pursuant to the share purchase agreements, the registration statement
on Form F-3 covering resale of the investors’ Class A ordinary shares has been filed on May 3, 2021. In March 2021, we issued and sold a one-year convertible note in a
principal amount of US$20.0 million to Streeterville. The convertible note bears interest at a rate of 6.0% per year, computed on the basis of a 360-day year. Streeterville
has the right, at any time after six months have elapsed since the purchase date until the outstanding balance has been paid in full, at its election, to convert all or any
portion of the outstanding balance into ADSs of our company at an initial conversion price per ADS calculated as ninety percent (90%) of the lower of (a) the average of
the closing trade prices during the five (5) trading days immediately preceding the date of the conversion, and (b) the closing trade price on the trading day immediately
preceding the date of the conversion. Beginning on the date that is six months from the note purchase date, Streeterville has the right, exercisable at any time in its sole
and absolute discretion, to redeem any portion of the convertible note up to US$3,360,000 per calendar month. Payment of the redemption amount could be in cash or
our ADSs, provided that any redemptions made in cash which exceed half of the original principal amount will be subject to a ten percent (10%) premium. We have the
right to prepay all or any portion of the outstanding balance, at any time, subject to fifteen percent (15%) premium on the prepaid amount. Each ADS representing thirty
Class A ordinary shares, subject to adjustment. The convertible note has been partially repaid and the remaining outstanding amount is approximately US$16 million, as
of March 30, 2022. In April 2021, we completed an offering of 3,765,100 ADSs, each representing thirty Class A ordinary shares, and warrants to purchase 2,823,825
ADSs, at a public offering price of US$33.20 per ADS and accompanying 0.75 of an ADS warrant. Any conversion of the convertible notes by Streeterville, sales request
pursuant to the SEDA, exercise of the outstanding warrants or any issuance of new shares may cause significant dilution to our existing shareholders’ interest in our
company.
Our ability to make scheduled principal or interest payments or to refinance our indebtedness depends on our future performance, which is subject to economic, financial,
competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make
necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as restructuring debt or obtaining
additional equity capital. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our
debt 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.
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Digital Assets such as Bitcoin are likely to be regulated as securities or investment securities.
Bitcoin is the oldest and most well-known form of digital asset. Bitcoin and other forms of digital assets/cryptocurrencies have been the source of much regulatory
consternation, resulting in differing definitional outcomes without a single unifying statement. When the interests of investor protection are paramount, for example in the
offer or sale of Initial Coin Offering (“ICO”) tokens, the SEC has no difficulty determining that the token offerings are securities under the “Howey” test as stated by the
United States Supreme Court. As such, ICO offerings would require registration under the Securities Act or an available exemption therefrom for offers or sales in the
United States to be lawful. Section 5(a) of the Securities Act provides that, unless a registration statement is in effect as to a security, it is unlawful for any person,
directly or indirectly, to engage in the offer or sale of securities in interstate commerce. Section 5(c) of the Securities Act provides a similar prohibition against offers to
sell, or offers to buy, unless a registration statement has been filed. Although we do not believe our mining activities require registration for us to conduct such activities
and accumulate digital assets the SEC, CFTC, Nasdaq or other governmental or quasi-governmental agency or organization may conclude that our activities involve the
offer or sale of “securities”, or ownership of “investment securities”, and we may face regulation under the Securities Act or the 1940 Act. Such regulation or the
inability to meet the requirements to continue operations, would have a material adverse effect on our business and operations.
The further development and acceptance of digital asset networks and other digital assets, which represent a new and rapidly changing industry, are subject to a
variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of digital asset systems may adversely affect an investment
in us.
Digital assets such as Bitcoins, that may be used, among other things, to buy and sell goods and services are a new and rapidly evolving industry of which the digital
asset networks are prominent, but not unique, parts. The growth of the digital asset industry in general, and the digital asset networks of Bitcoin in particular, are subject
to a high degree of uncertainty. The factors affecting the further development of the digital asset industry, as well as the digital asset networks, include:
●
continued worldwide growth in the adoption and use of Bitcoins and other digital assets;
●
government and quasi-government regulation of Bitcoins and other digital assets and their use, or restrictions on or regulation of access to and operation of the
digital asset network or similar digital assets systems
●
the maintenance and development of the open-source software protocol of the Bitcoin network;
●
changes in consumer demographics and public tastes and preferences;
●
the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using fiat currencies;
●
general economic conditions and the regulatory environment relating to digital assets;
●
the impact of regulators focusing on digital assets and digital securities and the costs associated with such regulatory oversight; and
●
a decline in the popularity or acceptance of the digital asset networks of Bitcoin, or similar digital asset systems, could adversely affect an investment in us.
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If we acquire digital securities, even unintentionally, we may violate the Investment Company Act of 1940 and incur potential third-party liabilities.
The Company intends to comply with the 1940 Act in all respects. To that end, if holdings of cryptocurrencies are determined to constitute investment securities of a kind
that subject the Company to registration and reporting under the 1940 Act, the Company will limit its holdings to less than 40% of its assets. Section 3(a)(1)(C) of the
1940 Act defines “investment company” to mean any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in
securities, and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of Government
securities and cash items) on an unconsolidated basis. Section 3(a)(2) of the 1940 Act defines “investment securities” to include all securities except (A) Government
securities, (B) securities issued by employees’ securities companies, and (C) securities issued by majority-owned subsidiaries which (i) are not investment companies and
(ii) are not relying on the exception from the definition of investment company in section 3(c)(1) or 3(c)(7) of the 1940 Act. As noted above, the SEC has not stated
whether Bitcoin and cryptocurrency is an investment security, as defined in the 1940 Act.
Significant contributors to all or any digital asset network could propose amendments to the respective network’s protocols and software that, if accepted and
authorized by such network, could adversely affect an investment in us.
For example, with respect to bitcoins network, a small group of individuals contribute to the Bitcoin Core project on GitHub.com. This group of contributors is currently
headed by Wladimir J. van der Laan, the current lead maintainer. These individuals can propose refinements or improvements to the bitcoin network’s source code
through one or more software upgrades that alter the protocols and software that govern the bitcoin network and the properties of bitcoin, including the irreversibility of
transactions and limitations on the mining of new bitcoin. Proposals for upgrades and discussions relating thereto take place on online forums. For example, there is an
ongoing debate regarding altering the blockchain by increasing the size of blocks to accommodate a larger volume of transactions. Although some proponents support an
increase, other market participants oppose an increase to the block size as it may deter miners from confirming transactions and concentrate power into a smaller group of
miners. To the extent that a significant majority of the users and miners on the bitcoin network install such software upgrade(s), the bitcoin network would be subject to
new protocols and software that may adversely affect an investment in us. In the event a developer or group of developers proposes a modification to the bitcoin network
that is not accepted by a majority of miners and users, but that is nonetheless accepted by a substantial plurality of miners and users, two or more competing and
incompatible blockchain implementations could result. This is known as a “hard fork.” In such a case, the “hard fork” in the blockchain could materially and adversely
affect the perceived value of digital assets as reflected on one or both incompatible blockchains, which may adversely affect an investment in us.
The open-source structure of the Bitcoin network protocol means that the contributors to the protocol are generally not directly compensated for their contributions
in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could damage the Bitcoin network and an investment in us.
The bitcoin network for example operates based on an open-source protocol maintained by contributors, largely on the Bitcoin Core project on GitHub. As an open
source project, bitcoin is not represented by an official organization or authority. As the bitcoin network protocol is not sold and its use does not generate revenues for
contributors, contributors are generally not compensated for maintaining and updating the bitcoin network protocol. Although the MIT Media Lab’s Digital Currency
Initiative funds the current maintainer Wladimir J. van der Laan, among others, this type of financial incentive is not typical. The lack of guaranteed financial incentive
for contributors to maintain or develop the bitcoin network and the lack of guaranteed resources to adequately address emerging issues with the bitcoin network may
reduce incentives to address the issues adequately or in a timely manner. Changes to a digital asset network which we are mining on may adversely affect an investment
in us.
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If a malicious actor or botnet obtains control in excess of 50% of the processing power active on any digital asset network, including the Bitcoin network, it is
possible that such actor or botnet could manipulate the blockchain in a manner that adversely affects an investment in us.
If a malicious actor or botnet (a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers) obtains a
majority of the processing power dedicated to mining on any digital asset network, including the Bitcoin network, it may be able to alter the blockchain by constructing
alternate blocks if it is able to solve for such blocks faster than the remainder of the miners on the blockchain can add valid blocks. In such alternate blocks, the malicious
actor or botnet could control, exclude or modify the ordering of transactions, though it could not generate new digital assets or transactions using such control. Using
alternate blocks, the malicious actor could “double-spend” its own digital assets (i.e., spend the same digital assets in more than one transaction) and prevent the
confirmation of other users’ transactions for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of the
processing power or the digital asset community does not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible.
Such changes could adversely affect an investment in us.
The approach towards and possible crossing of the 50% threshold indicate a greater risk that a single mining pool could exert authority over the validation of digital asset
transactions. To the extent that the digital assets ecosystems do not act to ensure greater decentralization of digital asset mining processing power, the feasibility of a
malicious actor obtaining in excess of 50% of the processing power on any digital asset network (e.g., through control of a large mining pool or through hacking such a
mining pool) will increase, which may adversely impact an investment in us.
If the award of digital assets for solving blocks and transaction fees for recording transactions are not sufficiently high to incentivize miners, miners may cease
expending hash rate to solve blocks and confirmations of transactions on the blockchain could be slowed temporarily. A reduction in the hash rate expended by
miners on any digital asset network could increase the likelihood of a malicious actor obtaining control in excess of fifty percent (50%) of the aggregate hash rate
active on such network or the blockchain, potentially permitting such actor to manipulate the blockchain in a manner that adversely affects an investment in us.
Bitcoin miners record transactions when they solve for and add blocks of information to the blockchain. When a miner solves for a block, it creates that block, which
includes data relating to (i) the solution to the block, (ii) a reference to the prior block in the blockchain to which the new block is being added and (iii) all transactions
that have occurred but have not yet been added to the blockchain. The miner becomes aware of outstanding, unrecorded transactions through the data packet transmission
and propagation discussed above. Typically, Bitcoin transactions will be recorded in the next chronological block if the spending party has an internet connection and at
least one minute has passed between the transaction’s data packet transmission and the solution of the next block. If a transaction is not recorded in the next chronological
block, it is usually recorded in the next block thereafter.
As the award of new digital assets for solving blocks declines, and if transaction fees are not sufficiently high, miners may not have an adequate incentive to continue
mining and may cease their mining operations. For example, the primary cryptocurrencies for which we mine, Bitcoin, are subject to “halving,” which is the process by
which the cryptocurrency reward for solving a block is cut in half–hence, “halving.” The current fixed reward on the Bitcoin network for solving a new block is 6.25
Bitcoins per block; the reward decreased from 12.5 Bitcoin. It is estimated that it will halve again in about two years. While Bitcoin prices have had a history of price
fluctuations around the halving of their respective cryptocurrency rewards, there is no guarantee that the price change will be favorable or would compensate for the
reduction in mining reward. This reduction may result in a reduction in the aggregate hash rate of the Bitcoin network as the incentive for miners will decrease. If a
corresponding and proportionate increase in the trading price of these cryptocurrencies does not follow these anticipated halving events, the revenue we earn from our
mining operations would see a corresponding decrease, which would have a material adverse effect on our business and operations.
Moreover, miners ceasing operations would reduce the aggregate hash rate on the Bitcoin network, which would adversely affect the confirmation process for
transactions (i.e., temporarily decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty for block solutions) and
make the Bitcoin network more vulnerable to a malicious actor obtaining control in excess of fifty percent (50%) of the aggregate hash rate on the Bitcoin network.
Periodically, the Bitcoin network has adjusted the difficulty for block solutions so that solution speeds remain in the vicinity of the expected ten (10) minute confirmation
time targeted by the Bitcoin network protocol.
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We believe that from time to time there will be further considerations and adjustments to the Bitcoin network, and others regarding the difficulty for block solutions.
More significant reductions in aggregate hash rate on digital asset networks could result in material, though temporary, delays in block solution confirmation time. Any
reduction in confidence in the confirmation process or aggregate hash rate of any digital asset network may negatively impact the value of digital assets, which will
adversely impact an investment in us.
To the extent that the profit margins of digital asset mining operations are not high, operators of digital asset mining operations are more likely to immediately sell
their digital assets earned by mining in the digital asset exchange market, resulting in a reduction in the price of digital assets that could adversely impact an
investment in us.
Over the past six years, digital asset mining operations have evolved from individual users mining with computer processors, graphics processing units and first-
generation servers. Currently, new processing power brought onto the digital asset networks is predominantly added by incorporated and unincorporated
“professionalized” mining operations. Professionalized mining operations may use proprietary hardware or sophisticated machines. They require the investment of
significant capital for the acquisition of this hardware, the leasing of operating space (often in data centers or warehousing facilities), incurring of electricity costs and the
employment of technicians to operate the mining farms. As a result, professionalized mining operations are of a greater scale than prior miners and have more defined,
regular expenses and liabilities. These regular expenses and liabilities require professionalized mining operations to more immediately sell digital assets earned from
mining operations on the digital asset exchange market, whereas it is believed that individual miners in past years were more likely to hold newly mined digital assets for
more extended periods. The immediate selling of newly mined digital assets greatly increases the supply of digital assets on the digital asset exchange market, creating
downward pressure on the price of each digital asset.
The extent to which the value of digital assets mined by a professionalized mining operation exceeds the allocable capital and operating costs determines the profit
margin of such operation. A professionalized mining operation may be more likely to sell a higher percentage of its newly mined digital assets rapidly if it is operating at
a low profit margin—and it may partially or completely cease operations if its profit margin is negative. In a low profit margin environment, a higher percentage could be
sold into the digital asset exchange market more rapidly, thereby potentially reducing digital asset prices. Lower digital asset prices could result in further tightening of
profit margins, particularly for professionalized mining operations with higher costs and more limited capital reserves, creating a network effect that may further reduce
the price of digital assets until mining operations with higher operating costs become unprofitable and remove mining power from the respective digital asset network.
The network effect of reduced profit margins resulting in greater sales of newly mined digital assets could result in a reduction in the price of digital assets that could
adversely impact an investment in us.
The cost of obtaining new and replacement miners and parts has historically been capital intensive, and is likely to continue to be very capital intensive, which may
have a material and adverse effect on our business and results of operations.
Our mining operations can only be successful and ultimately profitable if the costs, including hardware and electricity costs, associated with mining cryptocurrencies are
lower than the price of the cryptocurrencies we mine when we sell them. Our miners experience ordinary wear and tear from operation and may also face more
significant malfunctions caused by factors which may be beyond our control. Additionally, as the technology evolves, we may acquire newer models of miners to remain
competitive in the market. Over time, we replace those miners which are no longer functional with new miners purchased from third-party manufacturers, who are
primarily based in Asia.
For example, in March 2021, the Group’s wholly-owned subsidiary NBTC Limited signed a Bitcoin mining machine purchase agreement with Bitmain Technologies
Limited. Pursuant to the purchase agreement, the Company will purchase 24,000 Antminer S19j Bitcoin mining machines, which are scheduled to deliver starting from
November 2021, for a total consideration of US$82.8 million payable in installments according to the agreed time schedule. As of the date of this annual report, the
group has already paid US$74 million. The miners will eventually become obsolete or will degrade due to ordinary wear and tear from usage, and may also be lost or
damaged due to factors outside of our control. Once this happens, these new miners will need to be repaired or replaced along with other equipment from time to time for
us to stay competitive. This upgrading process requires substantial capital investment, and we may face challenges in doing so on a timely and cost-effective basis based
on availability of new miners and our access to adequate capital resources. If we are unable to obtain adequate numbers of new and replacement miners at scale, we may
be unable to remain competitive in our highly competitive and evolving industry. If this happens, we may not be able to mine cryptocurrency as efficiently or in similar
amounts as our competition and, as a result, our business and financial results could suffer. This could, in turn, materially and adversely affect the trading price of our
securities and our investors could lose part or all of their investment.
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The price of new miners may be linked to the market price of Bitcoin and other cryptocurrencies, and, if the current relatively high market price of Bitcoin persists,
our costs of obtaining new and replacement miners may increase, which may have a material and adverse effect on our financial condition and results of operations.
Reports have been released that the prices of new miners are adjusted according to the price of Bitcoin. As a result, the cost of new machines can be unpredictable, and
could also be significantly higher than our historical cost for new miners. Similarly, as Bitcoin prices have risen, we have observed significant increase in the demand for
miners. As a result, at times, we may obtain Bitmain miners and other hardware from Bitmain or from third parties at higher prices, to the extent they are available. For
example, in the first quarter of 2021, we have observed a significant appreciation in the market price of Bitcoin, as well as an increase in the per-unit price of the new
Bitmain Antminer model S19j miners we purchased during this same period. While we cannot know definitively if these two phenomena are linked, we have seen a
measurable increase in the prices for new miners offered by Bitmain.
As disclosed in this annual report, our financial condition and results of operations are dependent on our ability to sell the Bitcoin we mine at a price greater than our
costs to produce that Bitcoin. As the price for new miners we buy increases, our cost to produce a single Bitcoin also increases, therefore requiring a corresponding
increase in the price of Bitcoin for us to maintain our results of operations. We have observed significant fluctuations in market prices for Bitcoin, to the extent that we
are unable to reasonably predict future prices for the Bitcoin we mine.
We incur significant up-front capital costs each time we acquire new miners, and, if future prices of Bitcoin are not sufficiently high, we may not realize the benefit of
these capital expenditures. If this occurs, our business, results of operations, and financial condition could be materially and adversely affected, which may have a
negative impact on the trading price of our securities, which may have a materially adverse impact on investors’ investment in our Company.
Our mining operating costs could outpace our mining revenues, which could seriously harm our business or increase our losses.
Our mining operations are costly and our expenses may increase in the future. This expense increase may not be offset by a corresponding increase in revenue. Our
expenses may be greater than we anticipate, and our investments to make our business more efficient may not succeed and may outpace monetization efforts. Increases in
our costs without a corresponding increase in our revenue would increase our losses and could seriously harm our business and financial performance.
There is a possibility of cryptocurrency mining algorithms transitioning to proof of stake validation and other mining related risks, which could make us less
competitive and ultimately adversely affect our business and the value of our stock.
Proof of stake is an alternative method in validating cryptocurrency transactions. Should the algorithm shift from a proof of work validation method to a proof of stake
method, mining would likely require less energy, which may render any company that maintains advantages in the current climate (for example, from lower priced
electricity, processing, real estate, or hosting) less competitive. We, as a result of our efforts to optimize and improve the efficiency of our cryptocurrency mining
operations, may be exposed to the risk in the future of losing the benefit of our capital investments and the competitive advantage we hope to gain from this as a result,
and may be negatively impacted if a switch to proof of stake validation were to occur. Such events could have a material adverse effect on our ability to continue as a
going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any
Bitcoin or other cryptocurrencies we mine or otherwise acquire or hold for our own account.
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Because our miners are designed specifically to mine Bitcoin, our future success will depend in large part upon the value of Bitcoin, and any sustained decline in its
value could adversely affect our business and results of operations.
Our operating results will depend in large part upon the value of Bitcoin because it is the primary cryptocurrency we currently mine. Specifically, our revenues from our
Bitcoin mining operations are based upon two factors: (1) the number of Bitcoin rewards we successfully mine and (2) the value of Bitcoin. In addition, our operating
results are directly impacted by changes in the value of Bitcoin, because under the value measurement model, we measure at fair value on the date received. Fair value of
the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific definitive
guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised
significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards Board
(“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations.
This means that our operating results will be subject to daily increases or decreases in the value of Bitcoin. Furthermore, our business strategy focuses almost entirely on
producing Bitcoin (as opposed to other cryptocurrencies), and our current application-specific integrated circuit (“ASIC”) miners principally utilize the “SHA-256
algorithm,” which is designed primarily for mining Bitcoin. We therefore, cannot use these miners to mine other cryptocurrencies, such as ether, that are not mined
utilizing this algorithm. If other cryptocurrencies overtake Bitcoin in terms of acceptance, the value of Bitcoin could decline. Further, if Bitcoin were to switch its proof
of work algorithm from SHA-256 to another algorithm for which our miners would not be suited or if the value of Bitcoin were to decline for other reasons, particularly
if such decline were significant or over an extended period of time, we would likely incur very significant costs in retooling or replacing our existing miners with miners
better suited for this new protocols and our operating results could be adversely affected. This could result in a material adverse effect on our ability to continue as a
going concern or to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations, and thus harm investors.
Our mining operations, including the facilities in which our miners are operated, may experience damages, including damages that are not covered by insurance.
Our current mining operation in various countries is and any future mines we establish will be, subject to a variety of risks relating to physical condition and operation,
including, but not limited to:
●
the presence of construction or repair defects or other structural or building damage;
●
any noncompliance with or liabilities under applicable environmental, health or safety regulations or requirements or building permit requirements;
●
any damage resulting from natural disasters, such as hurricanes, earthquakes, fires, floods and windstorms; and
●
claims by employees and others for injuries sustained at our properties.
For example, our or our partners’ mining facilities could be rendered inoperable, temporarily or permanently, as a result of a fire or other natural disaster or by a terrorist
or other attack on the mine. The security and other measures we take to protect against these risks may not be sufficient. Additionally, mining facilities could be
materially adversely affected by a power outage or loss of access to the electrical grid or loss by the grid of cost-effective sources of electrical power generating capacity.
Given the power requirement, it would not be feasible to run miners on back-up power generators in the event of a power outage. Insurance which we may purchase from
the market may not cover the replacement cost of any lost or damaged miners, or any interruption of our mining activities; therefore our insurance may not be adequate to
cover the losses we suffer as a result of any of these events. In the event of an uninsured loss, including a loss in excess of insured limits, at any of the mining facilities in
our network, such mining facilities may not be adequately repaired in a timely manner or at all and we may lose some or all of the future revenues anticipated to be
derived from such mines. The potential impact on our business may be magnified as we further expand operations in various countries.
We are subject to risks associated with our need for significant electrical power.
Our Bitcoin mining operations have required significant amounts of electrical power, and, as we continue to expand our mining fleet, we anticipate our demand for
electrical power will continue to grow. If we are unable to continue to obtain sufficient electrical power to operate our miners on a cost-effective basis, we may not realize
the anticipated benefits of our significant capital investments in new miners.
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Additionally, our mining operations could be materially adversely affected by prolonged power outages. Although our miners may be powered by backup generators on a
temporary basis, it would not be feasible or cost-effective to run miners on back-up power generators for extended periods of time. Therefore, we may have to reduce or
cease our operations in the event of an extended power outage, or as a result of the unavailability or increased cost of electrical power. If this were to occur, our business
and results of operations could be materially and adversely affected, and investors in our securities could be harmed.
To the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transaction fee will not be recorded on
the blockchain until a block is solved by a miner who does not require the payment of transaction fees. Any widespread delays in the recording of transactions could
result in a loss of confidence in that digital asset network, which could adversely impact an investment in us.
To the extent that any miners cease to record transaction in solved blocks, such transactions will not be recorded on the blockchain. Currently, there are no known
incentives for miners to elect to exclude the recording of transactions in solved blocks; however, to the extent that any such incentives arise (e.g., a collective movement
among miners or one or more mining pools forcing Bitcoin users to pay transaction fees as a substitute for or in addition to the award of new Bitcoins upon the solving of
a block), actions of miners solving a significant number of blocks could delay the recording and confirmation of transactions on the blockchain. Any systemic delays in
the recording and confirmation of transactions on the blockchain could result in greater exposure to double-spending transactions and a loss of confidence in certain or all
digital asset networks, which could adversely impact an investment in us.
The acceptance of digital asset network software patches or upgrades by a significant, but not overwhelming, percentage of the users and miners in any digital asset
network could result in a “fork” in the respective blockchain, resulting in the operation of two separate networks until such time as the forked blockchains are
merged. The temporary or permanent existence of forked blockchains could adversely impact an investment in us.
Digital asset networks are open source projects and, although there is an influential group of leaders in, for example, the Bitcoin network community known as the “Core
Developers,” there is no official developer or group of developers that formally controls the Bitcoin network. Any individual can download the Bitcoin network software
and make any desired modifications, which are proposed to users and miners on the Bitcoin network through software downloads and upgrades, typically posted to the
Bitcoin development forum on GitHub.com. A substantial majority of miners and Bitcoin users must consent to those software modifications by downloading the altered
software or upgrade that implements the changes; otherwise, the changes do not become a part of the Bitcoin network. Since the Bitcoin network’s inception, changes to
the Bitcoin network have been accepted by the vast majority of users and miners, ensuring that the Bitcoin network remains a coherent economic system; however, a
developer or group of developers could potentially propose a modification to the Bitcoin network that is not accepted by a vast majority of miners and users, but that is
nonetheless accepted by a substantial population of participants in the Bitcoin network. In such a case, and if the modification is material and/or not backwards
compatible with the prior version of Bitcoin network software, the consequence would be what is known as a “fork” of the network, resulting in two separate Bitcoin
networks, one running the pre-modification software program and the other running the modified version (i.e., a second “Bitcoin” network). The effect of such a fork
would be the existence of two versions of the cryptocurrency running in parallel, yet lacking interchangeability and necessitating exchange-type transaction to convert
currencies between the two forks. Additionally, it may be unclear following a fork which fork represents the original asset and which is the new asset.
Such a fork in the blockchain typically would be addressed by community-led efforts to merge the forked blockchains, and several prior forks have been so merged.
Different metrics adopted by industry participants to determine which is the original asset include: referring to the wishes of the core developers of a cryptocurrency,
blockchains with the greatest amount of hashing power contributed by miners or validators; or blockchains with the longest chain. This kind of split in the Bitcoin
network could materially and adversely impact an investment in us and, in the worst-case scenario, harm the sustainability of the Bitcoin network’s economy.
We may not be able to realize the economic benefit of a fork, either immediately or ever, which could adversely affect an investment in our securities. If we hold a
cryptocurrency at the time of a hard fork into two cryptocurrencies, industry standards would dictate that we would be expected to hold an equivalent amount of the old
and new assets following the fork. However, we may not be able, or it may not be practical, to secure or realize the economic benefit of the new asset for various reasons.
For instance, we may determine that there is no safe or practical way to custody the new asset, that trying to do so may pose an unacceptable risk to our holdings in the
old asset, or that the costs of taking possession and/or maintaining ownership of the new cryptocurrency exceed the benefits of owning the new cryptocurrency.
Additionally, laws, regulation or other factors may prevent us from benefitting from the new asset even if there is a safe and practical way to custody and secure the new
asset.
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The digital asset exchanges on which digital assets trade are relatively new and, in most cases, largely unregulated and may therefore be more exposed to fraud and
failure than established, regulated exchanges for other products. To the extent that the digital asset exchanges representing a substantial portion of the volume in
digital asset trading are involved in fraud or experience security failures or other operational issues, such digital asset exchanges’ failures may result in a reduction
in the price of some or all digital assets and can adversely affect an investment in us.
The digital asset exchanges on which the digital assets trade are new and, in most cases, largely unregulated. Furthermore, many digital asset exchanges (including
several of the most prominent U.S. dollar denominated digital asset exchanges) do not provide the public with significant information regarding their ownership
structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to,
digital asset exchanges, including prominent exchanges handling a significant portion of the volume of digital asset trading.
A lack of stability in the digital asset exchange market and the closure or temporary shutdown of digital asset exchanges due to fraud, business failure, hackers or
malware, or government-mandated regulation may reduce confidence in the digital asset networks and result in greater volatility in digital asset values. These potential
consequences of a digital asset exchange’s failure could adversely affect an investment in us.
Political or economic crises may motivate large-scale sales of digital assets, which could result in a reduction in some or all digital assets’ values and adversely affect
an investment in us.
As an alternative to fiat currencies that are backed by central governments, digital assets such as Bitcoins, which are relatively new, are subject to supply and demand
forces based upon the desirability of an alternative, decentralized means of buying and selling goods and services, and it is unclear how such supply and demand will be
impacted by geopolitical events. Nevertheless, political or economic crises may motivate large-scale acquisitions or sales of digital assets either globally or locally.
Large-scale sales of digital assets would result in a reduction in their value and could adversely affect an investment in us.
Our ability to adopt technology in response to changing security needs or trends poses a challenge to the safekeeping of our digital assets.
The history of digital asset exchanges has shown that exchanges and large holders of digital assets must adapt to technological change in order to secure and safeguard
their digital assets. We largely rely on cold storage solution to safeguard our digital assets from theft, loss, destruction or other issues relating to hackers and
technological attack. Our digital assets will also be moved to various exchanges in order to exchange them for fiat currency during which time we will be relying on the
security of such exchanges to safeguard our digital assets. We believe that it may become a more appealing target of security threats as the size of our Bitcoin holdings
grow. To the extent that either our designated custodian of crypto assets or we are unable to identify and mitigate or stop new security threats, our digital assets may be
subject to theft, loss, destruction or other attack, which could adversely affect an investment in us.
Security threats to us could result in, a loss of our digital assets, or damage to the reputation and our brand, each of which could adversely affect an investment in
us.
Security breaches, computer malware and computer hacking attacks have been a prevalent concern in the digital asset exchange markets, for example since the launch of
the Bitcoin network. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional
malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses, could harm our
business operations or result in loss of our digital assets. Any breach of our infrastructure could result in damage to our reputation which could adversely affect an
investment in us. Furthermore, we believe that, as our assets grow, it may become a more appealing target for security threats such as hackers and malware.
We primarily rely on Coinbase Custody cold storage to safeguard our digital assets from theft, loss, destruction or other issues relating to hackers and technological
attack. Nevertheless, our designated custodian’s security system may not be impenetrable and may not be free from defect or immune to acts of God, and any loss due to
a security breach, software defect or act of God will be borne by the Company.
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The security system and operational infrastructure may be breached due to the actions of outside parties, error or malfeasance of an employee of ours, or otherwise, and,
as a result, an unauthorized party may obtain access to our, private keys, data or Bitcoins. Additionally, outside parties may attempt to fraudulently induce employees of
ours to disclose sensitive information in order to gain access to our infrastructure. As the techniques used to obtain unauthorized access, disable or degrade service, or
sabotage systems change frequently, or may be designed to remain dormant until a predetermined event and often are not recognized until launched against a target, we
may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security system occurs, the market
perception of the effectiveness of our security system could be harmed, which could adversely affect an investment in us.
In the event of a security breach, we may be forced to cease operations, or suffer a reduction in assets, the occurrence of each of which could adversely affect an
investment in us.
A loss of confidence in our security system, or a breach of our security system, may adversely affect us and the value of an investment in us.
We will take measures to protect us and our digital assets from unauthorized access, damage or theft; however, it is possible that the security system may not prevent the
improper access to, or damage or theft of our digital assets. A security breach could harm our reputation or result in the loss of some or all of our digital assets. A
resulting perception that our measures do not adequately protect our digital assets could result in a loss of current or potential shareholders, reducing demand for our
Class A ordinary shares or the ADSs and causing our shares to decrease in value.
Digital Asset transactions are irrevocable and stolen or incorrectly transferred digital assets may be irretrievable. As a result, any incorrectly executed digital asset
transactions could adversely affect an investment in us.
Digital asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the transaction or, in
theory, control or consent of a majority of the processing power on the respective digital asset network. Once a transaction has been verified and recorded in a block that
is added to the blockchain, an incorrect transfer of digital assets or a theft of digital assets generally will not be reversible, and we may not be capable of seeking
compensation for any such transfer or theft. Although our transfers of digital assets will regularly be made to or from vendors, consultants, services providers, etc., it is
possible that, through computer or human error, or through theft or criminal action, our digital assets could be transferred from us in incorrect amounts or to unauthorized
third parties. To the extent that we are unable to seek a corrective transaction with such third party or are incapable of identifying the third party which has received our
digital assets through error or theft, we will be unable to revert or otherwise recover incorrectly transferred Company digital assets. To the extent that we are unable to
seek redress for such error or theft, such loss could adversely affect an investment in us.
The limited rights of legal recourse against us, and our lack of insurance protection expose us and our shareholders to the risk of loss of our digital assets for which
no person is liable.
We have limited insurance coverage, including that covering our crypto assets held in the custody accounts at custodians of the crypto assets such as Coinbase Custody,
subject to the policy caps. A loss may be suffered with respect to our digital assets which is not covered by insurance and for which no person is liable in damages which
could adversely affect our operations and, consequently, an investment in us.
Digital assets held by us are not subject to FDIC or SIPC protections.
We do not hold our digital assets with a banking institution or a member of the Federal Deposit Insurance Corporation (“FDIC”) or the Securities Investor Protection
Corporation (“SIPC”) and, therefore, our digital assets are not subject to the protections enjoyed by depositors with FDIC or SIPC member institutions.
We may not have adequate sources of recovery if our digital assets are lost, stolen or destroyed.
If our digital assets are lost, stolen or destroyed under circumstances rendering a party liable to us, the responsible party may not have the financial resources sufficient to
satisfy our claim. For example, as to a particular event of loss, the only source of recovery for us might be limited, to the extent identifiable, other responsible third
parties (e.g., a thief or terrorist), any of which may not have the financial resources (including liability insurance coverage) to satisfy a valid claim of ours.
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The sale of our digital assets to pay expenses at a time of low digital asset prices could adversely affect an investment in us.
We may sell our digital assets to pay expenses on an as-needed basis, irrespective of then-current prices. Consequently, our digital assets may be sold at a time when the
prices on the respective digital asset exchange market are low, which could adversely affect an investment in us.
Regulatory changes or actions may restrict the use of Bitcoins or the operation of the Bitcoin network in a manner that adversely affects an investment in us.
Until recently, little or no regulatory attention has been directed toward Bitcoin and the Bitcoin network by U.S. federal and state governments, foreign governments and
self-regulatory agencies. As Bitcoin has grown in popularity and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies (e.g., the CFTC, the
Commission, FinCEN and the Federal Bureau of Investigation) have begun to examine the operations of the Bitcoin network, Bitcoin users and the Bitcoin exchange
market.
Digital assets currently face an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such as the European Union, China and
Russia. While certain governments such as China, where PRC authorities has declared that virtual currencies do not have the same legal status as legal currency, most
regulatory bodies have expressed intention to regulate crypto assets, although any determinations on regulation of Bitcoin, the Bitcoin network and Bitcoin users are not
definite as of the date of this report.
The effect of any future regulatory change on us, Bitcoins, or other digital assets is impossible to predict, but such change could be substantial and adverse to us and
could adversely affect an investment in us.
It may be illegal now, or in the future, to acquire, own, hold, sell or use digital assets in one or more countries, and ownership of, holding or trading in our securities
may also be considered illegal and subject to sanction.
Although currently digital assets are not regulated or are lightly regulated in most countries, including the United States. In September 2021, PRC authorities issued the
new regulations which made it clear that virtual currencies do not have the same legal status as legal currency, and virtual currency-related activities are illegal financial
activities, strictly prohibiting new virtual currency mining projects, and accelerating the orderly withdrawal of the stock of projects. Provision of services by overseas
virtual currency exchanges to residents in China via the internet is also considered to be an illegal financial activity. Subject to the new regulations, it is forbidden to
invest in incremental projects and to develop virtual currency mining projects in any name. The virtual currency mining activities have been treated as the eliminated
industry, and listed as the eliminated industries into Catalogue for Guiding Industry Restructuring (2019 version). One or more countries such as Russia may take
regulatory actions in the future that severely restricts the right to acquire, own, hold, sell or use digital assets or to exchange digital assets for fiat currency. Such an action
may also result in the restriction of ownership, holding or trading in our securities. Such restrictions may adversely affect an investment in us.
The loss or destruction of a private key required to access a digital asset may be irreversible. Our loss of access to our private keys or our experience of a data loss
relating to our Company’s digital assets could adversely affect an investment in our Company.
Digital assets are controllable only by the possessor of both the unique public key and private key relating to the local or online digital wallet in which the digital assets
are held. We are required by the operation of digital asset networks to publish the public key relating to a digital wallet in use by us when it first verifies a spending
transaction from that digital wallet and disseminates such information into the respective network. We safeguard and keep private the private keys relating to our digital
assets by primarily utilizing Coinbase Custody’s cold storage solution; to the extent a private key is lost, destroyed or otherwise compromised and no backup of the
private key is accessible, we will be unable to access the digital assets held by it and the private key will not be capable of being restored by the respective digital asset
network. Any loss of private keys relating to digital wallets used to store our digital assets could adversely affect an investment in us.
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Because many of our digital assets are held by digital asset exchanges, we face heightened risks from cybersecurity attacks and financial stability of digital asset
exchanges.
We may transfer our digital asset from our wallet to digital asset exchanges prior to selling them. Digital assets not held in our wallet are subject to the risks encountered
by digital asset exchanges including a DDoS Attack or other malicious hacking, a sale of the digital asset exchange, loss of the digital assets by the digital asset exchange
and other risks similar to those described herein. We maintain a custodian agreement with Coinbase exchange that hold our digital assets. These digital asset exchanges
provide only limited insurance over all crypto assets under their custody, and may lack the resources to protect against hacking and theft. If this were to occur, we may be
materially and adversely affected.
Fluctuations in the price of Bitcoin may significantly influence the market price of our Class A ordinary shares or the ADSs
To the extent investors view the value of our Class A ordinary shares or the ADSs as linked to the value or change in the value of our Bitcoin, fluctuations in the price of
Bitcoin may significantly influence the market price of our Class A ordinary shares or the ADSs.
We depend on third-party companies to perform functions critical to our business, and any failure or increased cost on their part could have a material adverse effect
on our business.
We depend on third-party companies to perform functions critical to our business. We depend on hosting service providers to conduct cryptocurrency mining. Difficulties
with any of our significant partners or third parties involved in our business, regardless of the reason, could have a material adverse effect on our financial results,
business and prospects.
If we or our third-party service providers experience a security breach or cyberattack and unauthorized parties obtain access to our Bitcoin, we may lose some or all
of our Bitcoin and our financial condition and results of operations could be materially adversely affected
Security breaches and cyberattacks are of particular concern with respect to our Bitcoin. Bitcoin and other blockchain-based cryptocurrencies have been, and may in the
future be, subject to security breaches, cyberattacks, or other malicious activities. A successful security breach or cyberattack could result in a partial or total loss of our
Bitcoin in a manner that may not be covered by insurance or indemnity provisions of the custody agreement with a custodian who holds our Bitcoin. Such a loss could
have a material adverse effect on our financial condition and results of operations.
Our international business efforts could adversely affect us.
We operate and conduct business in different countries and regions. International transactions are subject to inherent risks and challenges that could adversely affect us,
including:
●
the need to develop new supplier and manufacturer relationships;
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the need to comply with additional U.S. and foreign laws and regulations;
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changes in international laws, regulatory requirements, taxes and tariffs;
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our limited experience with different local cultures and standards;
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geopolitical events, such as war and terrorist attacks; and
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the additional resources and management attention required for such expansion.
Our international business could expose us to penalties for non-compliance with laws applicable to international business and trade, which could have a material adverse
effect on our business. Compliance with such laws and regulations will result in additional costs and may necessitate changes to our business practices, which may
adversely affect our business. To the extent that we make purchases or sales denominated in foreign currencies, we would have foreign currency risks, which could have
a material adverse effect on our financial results, business and prospects.
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Our international business may face uncertainty in the tax implications.
We may be subject to various tax obligations associated with mining in countries where we have hosting agreements for our machines in the future, including the so-
called tax on mining in Kazakhstan, effectively a surcharge on the electricity price per kW/h. Although crypto assets obtained through crypto mining operations are not
currently taxed in jurisdictions such as Russia, we cannot guarantee the case will always be true in the future. If relevant governments promulgate new tax regimes that
will subject our operation to additional tax liabilities, our business operations might be materially affected.
We are facing the legal risks associated with our non-fungible tokens or NFTs.
In late 2021, we formally stepped into the NFT business. An NFT is a cryptographic tool which is capable of proving ownership and authenticity of an underlying asset,
typically in digital form. Similarly to their cryptocurrency counterparts, such as Bitcoin, NFTs are created and recorded using blockchain technology. Digital asset and
blockchain platforms can be used to create NFTs. Those NFTs can then be bought and sold on marketplaces that are linked to the underlying blockchain technology. A
fundamental distinction between NFTs and cryptocurrency lies in the fact that NFTs are not fungible, meaning each NFT is unique and therefore not interchangeable with
any other NFT. Each NFT contains a unique identification and metadata that makes it a one-of-a-kind asset. The growing interest in NFTs is further driven by the
potential for creating new revenue streams. NFTs, and the blockchain technology on which they are founded, offer asset owners the opportunity to generate significant
revenues in a new and innovative way, for example, by creating and selling fractions of assets as digital representations. Assets which would have previously proved
difficult, if not impossible, to sell, such as the tweets or the source code referred to above, can be monetized through issuing NFTs. Asset owners can even sell an NFT in
respect of the digital representation of a physical asset, while still owning (or separately selling) the underlying asset at the same time.
We may face issues arising from the ownership rights of NFTs. As with any other contract of sale, it is crucial that a purchaser of an NFT carefully considers the terms
governing the relevant token prior to purchase, including what rights are being acquired and what rights will remain with the seller. While the purchaser of an NFT buys,
and then owns, the token, owning an NFT does not equate to owning the underlying asset itself. As such, the purchaser of an NFT will not necessarily enjoy rights such
as copyright of the underlying asset, which often remains with the creator of the NFT. Smart contract technology can be embedded into NFTs, for example, to prohibit the
transfer of the NFT until certain conditions are met or to protect the minter’s rights to royalties such that, each time the NFT is resold, the minter automatically receives a
royalty fee.
An NFT and the underlying asset it represents are separate assets. While the NFT will contain information about its link to the underlying asset and the NFT holder’s title
to the NFT, should the underlying asset be destroyed, lost or stolen, the NFT could be rendered worthless. It is therefore important to ensure that there is some guarantee
as to the safety of the underlying physical asset and allocation of risk in the contractual documentation.
While NFTs exist to authenticate provenance and title, and although they benefit from the blockchain technology, which creates clear, timestamped audit trails of
ownership, the risk of fraud persists, particularly in light of the anonymity of blockchain. Fraudsters could mint an NFT relating to a work that is not their own and
without the creator’s permission. Likewise, with respect to copyright, minters of NFTs could falsely claim to own copyright in respect of the underlying asset.
Where NFTs are traded across global platforms, we may have to deal with the legal and regulatory treatments across different jurisdictions. However, since NFTs are a
relatively new asset class, much of the legal and regulatory framework surrounding NFTs is still under development across the globe. Many NFTs would be considered as
unregulated tokens since they do not meet the definition of either electronic money or security tokens. However, it is possible that certain types of NFT could constitute a
type of regulated financial instrument such that it falls within the regulatory scheme. Careful analysis of the classification and regulation of each NFT transaction is
therefore required. Furthermore, the considerable sums that are often spent on NFTs, coupled with the fact that sellers and buyers of NFTs often remain anonymous, can
make NFTs attractive to those interested in laundering money. We, as an operator of an NFT platform, may incur significant costs in the compliance with our applicable
regulatory duties.
The success of our NFT business depends on our ability to secure license agreements with individual stars to use their likeness for the purpose of creating NFTs. The
market can be competitive, given the fact that there are other companies pursuing similar business. If we cannot successfully secure the cooperation with the individual
stars, we may not be able to execute on growth and would need to redesign business model.
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We do not plan to focus on our gaming business in the foreseeable future, and our operating results may suffer accordingly.
The gaming industry is a highly competitive and dynamic market. We have previously made significant investment in developing our own proprietary games, primarily
mobile games. However, we do not plan to continue allocating major resources for cooperation with Voodoo on the publishing and operations of casual games in China
due to negative assessment of business success. We have significantly reduced our gaming operation. For example, we ceased to operate Knight Forever and Q Jiang San
Guo in 2019 and Pop Fashion in 2020. Our business, financial condition and results of operations may be adversely affected.
We currently depend on a limited number of games, and we may not be able to successfully implement our growth strategies.
We cooperate with Voodoo to publish and operate its casual games in China. However, we have significantly reduced our gaming operation and we may not target to
obtain licenses to games to further grow our business. We have invested significant time and resources in developing our proprietary online games, including a new
mobile game that we were developing based on the intellectual property relating to CrossFire, or the CrossFire New Mobile Game. As of the date of this annual report,
such license has expired and we no longer plan to negotiate with Smilegate Entertainment Inc., or Smilegate to re-gain the license for such game development. 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 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 recover our market share and profitability as we operate in a highly competitive industry with numerous online game operators.
There are numerous online game operators in China. Due to the change of our business focus, we may not be able to devote the same degree of resources as our
competitors do to designing, developing, licensing or acquiring new games, undertaking extensive marketing campaigns, adopting aggressive pricing policies, paying
high compensation to game developers or compensating independent game developers. Our competitors may introduce new business methods, technologies or gaming
platforms from time to time. If these new business methods, technologies or gaming platforms are more attractive to customers than what we offer, 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, technologies or gaming platforms implemented by them. 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.
We and our joint ventures may no longer focus on obtaining licenses to games to expand our gaming business, our future results of operations and profitability may
be materially impacted.
In addition to developing and offering our own proprietary games, we and our joint ventures also offer games licensed from game licensors. However, it may cease to be
our focus of business operation. Historically, we have operated a number of games licensed from game licensors, most of which already expired or terminated, and may
operate additional games licensed from game licensors in the future. In September 2020, we entered into a master cooperation and publishing agreement with Voodoo, a
French game developer and publisher, to cooperate on the publishing and operations of casual games in China. Currently, the collaboration has not formally ended but
our focus in the foreseeable future is no longer the gaming business. There is no assurance that we or our joint ventures will be able to acquire new online game licenses
or favorable terms or at all, or that we or our joint ventures will be able to renew the game licenses upon their expiration. We may not target to obtain licenses to games to
further grow our business.
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We and our joint ventures may no longer renew existing licenses or obtain new online game licenses, and this fact may materially and adversely affect our business,
financial condition and results of operations. Online game developers may not grant or continue to grant licenses to us or our joint ventures due to commercial or other
reasons. For example, our exclusive license from Smilegate to publish and operate CrossFire 2 in China was terminated in 2017 due to the slowdown of massively
multiplayer online game market. In July 2019, we entered in an amendment to the amended and restated license agreement dated October 31, 2017 with Smilegate and
other parties thereto to extend the license period for game development till October 31, 2020, which already expired. We no longer plan to negotiate with Smilegate to re-
gain the license for such game development. Additionally, in connection with the game license, we may be subject to certain conditions or milestones relating to, among
others, payment, game operations and profitability. If we or our joint ventures are unable to maintain a satisfactory relationship with the online game developers that have
licensed games to us or our joint ventures, 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 our joint ventures, 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 our joint ventures,
or grant us or our joint ventures a license for any new online games that they will develop or make available to us or our joint ventures expansion packs for existing
games. Any failure to obtain or renew online game licenses from online game operators could harm our future results of operations or the growth of our business.
We may no longer consider to pursue re-gaining license for CrossFire New Mobile Game, launching or operating CrossFire New Mobile Game or other licensed
games in China, and our future results of operations may be materially and adversely affected.
We have invested a significant amount of financial and personnel resources in development of our proprietary CrossFire New Mobile Game. In July 2019, we entered in
an amendment to the amended and restated license agreement dated October 31, 2017 with Smilegate and other parties thereto to extend the license period for game
development till October 31, 2020. The license period for CrossFire New Mobile Game has expired. We no longer plan to negotiate with Smilegate to re-gain the license
for such game development. Our past investment into and devotion to the development of CrossFire New Mobile Game may be futile.
Similarly, we may not be able to successfully launch or operate other licensed games in China, such as the ones we are cooperating with Voodoo to publish and operate.
For the games that are launched, we may not be able to operate the games successfully, generate results as we anticipated, gain market popularity or make profit. Our
failure to launch and operate other licensed games successfully may impair licensors’ confidence in us, they may render their cooperation with us ineffective and
unsatisfactory, which may materially and adversely affect our business, results of operations, financial conditions and prospects. We have decided to gradually exit the
gaming operation and may not target to obtain licenses to games to further grow our gaming business.
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, including
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.
Due to change of business focus, we no longer, in the foreseeable future, seek to obtain and maintain requisite approvals or fulfill other requisite registration or filing
procedures required by the relevant PRC governmental authorities in a timely manner, or at all, directly or through third parties. We may not be able to continue the
operation of such games. Our business, financial condition and results of operations may be materially and adversely affected.
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Our business may be adversely affected by the COVID-19 pandemic.
Since the beginning of 2020, outbreaks of COVID-19 have resulted in the temporary closure of many corporate offices, retail stores, and manufacturing facilities across
China. Substantially all of our employees are located in Shanghai. Our employees in Shanghai were unable to go to our offices for an extended period. Normal economic
life throughout China was sharply curtailed. The population in most of the major cities was locked down to a greater or lesser extent and opportunities for discretionary
consumption were extremely limited. While many of the restrictions on movement within China have been relaxed, there is great uncertainty as to the future progress of
the disease. Relaxation of restrictions on economic and social life may lead to new cases which may lead to the re-imposition of restrictions. In addition, the highly-
transmissible Delta and Omicron variant of COVID-19 have caused authorities in various countries to reimpose restrictions such as mask mandates, curfews and
prohibitions on large gatherings. There remain significant uncertainties surrounding COVID-19, including the existing and new variants of COVID-19, and its further
development as a global pandemic, including the effectiveness of vaccine programs against existing and any new variants of COVID-19, and their impacts on our
customers’ budget and spending more broadly. The extent of any business disruption and the related impact on our financial results and outlook cannot be reasonably
estimated at this time.
The quarantining requirements and work-from-home situation may materially and adversely disrupt our operating efficiency and productivity and cause delay in our
business operations. If we fail to timely accomplish our business goals due to such disruptions, our business may be materially and adversely affected. The global spread
of COVID-19 pandemic in a significant number of countries around the world has resulted in, and may intensify, global economic distress, and the extent to which it may
affect our results of operations, financial condition and cash flow will depend on future developments, which are highly uncertain and cannot be predicted.
COVID-19 has caused delays in the development of the data centers where we plan to deploy our mining machines. Our foreign strategic partners face similar delays in
their respective countries.
Our business, financial condition and results of operations may be adversely affected by the downturn in the global or Chinese economy.
COVID-19 had a severe and negative impact on the Chinese and the global economy in the first quarter of 2020. Whether this will lead to a prolonged downturn in the
economy is still unknown. Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous challenges. There is considerable
uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of
the world’s leading economies, including the United States and China, even before 2020. Unrest, terrorist threats and the potential for war in the Middle East and
elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the
surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United
States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as
well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in
the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.
Our equity investments or establishment of joint ventures and any material disputes with our investment or joint venture partners may have an adverse effect on our
financial results, business prospects and 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 mining data center
developers, online game developers, operators or application platforms, or establish joint venture with business partners, to seek business growth opportunities. For
example, in March 2019, we entered into a joint venture agreement with F&F. The immediate objective of this joint venture was to exclusively manufacture and
distribute certain electric car model designed and developed by F&F in China. The electric vehicles business did not develop as we anticipated. In addition, in May 2019,
we entered into a joint venture agreement with Shenzhen EN-plus Technologies Co., Ltd., or EN+, to establish a joint venture to engage in sales of electric vehicle
charging equipment, investment, construction and operation of charging stations, and provision of operational services relating to charging equipment and platforms for
electric vehicles. Currently, we do not expect to pursue such joint venture opportunity with EN+.
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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 ventures
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.
Our investments may also be subject to market conditions and therefore are uncertain whether our resources and expenses devoted are able to be converted into revenue.
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
operating or impairment losses, 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.”
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.
We rely on third parties for certain services and licenses for our business, including game platforms and distributors for the distribution of our games, and other services
and licenses for our operations. For example, we rely on third-party licenses for some of the software underlying our technology platform, and on China Telecom’s
Internet data centers for hosting our servers. See “Item 4. Information on the Company—B. Business Overview—Pricing, Distribution and Marketing.”
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 licenses 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. 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.
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.
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Our business may be harmed if our technology becomes obsolete or if our system infrastructure fails to operate effectively.
The industries we operate in are subject to rapid technological change. We need to anticipate the emergence of new technologies in cryptocurrency mining and online
games, assess their acceptance and make appropriate investments. If we are unable to do so, new technologies in cryptocurrency mining and online game programming or
operations could render our cryptocurrency mining inefficient or our games obsolete or unattractive. In addition, our business may be harmed if we are unable to upgrade
our systems fast enough to accommodate increasing computing power and fluctuations in 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 and processing time,
affecting data transmission and efficiency. These factors could, among other things, cause our cryptocurrency mining activities to become inefficient or 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 all aspects of our business operation 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.
Some of our employees were previously employed at other companies, including our current and potential competitors. 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.
Variability in intellectual property laws may adversely affect our intellectual property position.
Intellectual property laws, and patent laws and regulations in particular, have been subject to significant variability either through administrative or legislative changes to
such laws or regulations or changes or differences in judicial interpretation, and it is expected that such variability will continue to occur. Additionally, intellectual
property laws and regulations differ among states, and countries. Variations in the patent laws and regulations or in interpretations of patent laws and regulations in the
United States and other countries may diminish the value of our intellectual property and may change the impact of third-party intellectual property on us. Accordingly,
we cannot predict the scope of patents that may be granted to us, the extent to which we will be able to enforce our patents against third parties, or the extent to which
third parties may be able to enforce their patents against us.
Our business is subject to complex and evolving Chinese and international laws and regulations regarding data privacy and cybersecurity. Failure to protect
confidential information of our customers and network against security breaches could damage our reputation and brand and substantially harm our business and
results of operations.
As the regulations regarding data privacy and cybersecurity are quickly evolving in China and globally, we may become subject to new laws and regulations applying to
the solicitation, collection, processing or use of personal or consumer information that could affect how we store, process and share data with our customers, suppliers
and third-party merchants.
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For example, in December 2012, the Standing Committee of the PRC National People’s Congress promulgated the Decision on Strengthening Network Information
Protection, or the Network Information Protection Decision, to enhance the legal protection of information security and privacy on the internet. The Network Information
Protection Decision also requires internet operators to take measures to ensure confidentiality of information of users. In July 2013, the MIIT promulgated the Provisions
on Protection of Personal Information of Telecommunication and Internet Users to regulate the collection and use of users’ personal information in the provision of
telecommunication service and internet information service in China. In August 2015, the Standing Committee of the National People’s Congress promulgated the Ninth
Amendment to the Criminal Law, which became effective in November 2015 and amended the standards of crime of infringing citizens’ personal information and
reinforced the criminal culpability of unlawful collection, transaction, and provision of personal information. It further provides that any ICP provider that fails to fulfill
the obligations related to internet information security administration as required by applicable laws and refuses to rectify upon orders will be subject to criminal liability.
In November 2016, the Standing Committee of the National People’s Congress promulgated the PRC Cyber Security Law, which requires, among others, that network
operators take security measures to protect the network from unauthorized interference, damage and unauthorized access and prevent data from being divulged, stolen or
tampered with. Network operators are also required to collect and use personal information in compliance with the principles of legitimacy, properness and necessity, and
strictly within the scope of authorization by the subject of personal information unless otherwise prescribed by laws or regulations. Significant capital, managerial and
human resources are required to comply with legal requirements, enhance information security and to address any issues caused by security failures. The Civil Code
promulgated in 2020 also provides specific provisions regarding the protection of personal information.
On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, which took effect in September 2021. The Data
Security Law, among others, provides for a security review procedure for the data activities that may affect national security. On July 30, 2021, the state council
promulgated the Regulations on Protection of Critical Information Infrastructure, which became effective on September 1, 2021. Pursuant to the Regulations on
Protection of Critical Information Infrastructure, critical information infrastructure shall mean any important network facilities or information systems of the important
industry or field such as public communication and information service, energy, transportation, water conservation, finance, public services, e-government affairs and
national defense science, which may endanger national security, people’s livelihood and public interest in case of damage, function loss or data leakage. In addition,
relevant administration departments of each critical industry and sector, or Protection Departments, shall be responsible to formulate eligibility criteria and determine the
critical information infrastructure operator in the respective industry or sector. The operators shall be informed about the final determination as to whether they are
categorized as critical information infrastructure operators. As of the date of this annual report, no detailed rules or implementation has been issued by any authority and
we have not been informed as a critical information infrastructure operator by any government authorities. Furthermore, the exact scope of “critical information
infrastructure operators” under the current regulatory regime remains unclear, and the PRC government authorities may have wide discretion in the interpretation and
enforcement of these laws. Therefore, it is uncertain whether we would be deemed as a critical information infrastructure operator under PRC law. A final version of the
Draft Measures is adopted and the definition of “critical information infrastructure operators” remains unclear. If we are deemed as a critical information infrastructure
operator under the PRC cybersecurity laws and regulations, we must fulfill certain obligations as required under the PRC cybersecurity laws and regulations, including,
among others, storing personal information and important data collected and produced within the PRC territory during our operations in China, which we have fulfilled in
our business, and we may be subject to review when purchasing internet products and services. On December 28, 2021, thirteen ministries and commissions, including
the National Internet Information Office, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of
Public Security, the Ministry of National Security, the Ministry of Finance, the Ministry of Commerce, the People’s Bank of China, the State Administration for Market
Regulation, the State Administration of Radio and Television, the China Securities Regulatory Commission, the State Secret Service, and the State Cryptography
Administration, issued the Measures for Cybersecurity Review (2021), which emphasized that operators of “critical information infrastructure” or data processors
holding over one million users’ personal information shall apply with the Cybersecurity Review Office for a cybersecurity review before any public offering at a foreign
stock exchange.
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On November 14, 2021, the CAC released the Regulations on the Network Data Security (Draft for Comments), or the Draft Regulations, and will accept public
comments until December 13, 2021. The Draft Regulations provide that data processors refer to individuals or organizations that autonomously determine the purpose
and the manner of processing data. In accordance with the Draft Regulations, data processors shall apply for a cybersecurity review for the following activities: (i)
merger, reorganization or division of Internet platform operators that have acquired a large number of data resources related to national security, economic development
or public interests to the extent that affects or may affect national security; (ii) listing abroad of data processors which process over one million users’ personal
information; (iii) the listing of data processors in Hong Kong which affects or may affect national security; or (iv) other data processing activities that affect or may affect
national security. However, there have been no clarifications from the authorities as of the date of this annual report as to the standards for determining such activities that
“affects or may affect national security.” See “Item 4.B. Information on the Company—Business Overview—Regulations.” As of the date of this annual report, the Draft
Measures and the Draft Regulations were released for public comment only, and their respective provisions and the anticipated adoption or effective date may be subject
to change with substantial uncertainty. The Draft Measures and the Draft Regulations remain unclear on whether the relevant requirements will be applicable to
companies that have been listed in the United States and Hong Kong, such as us. We cannot predict the impact of the Draft Measures and the Draft Regulations, if any, at
this stage, and we will closely monitor and assess any development in the rule-making process. If the enacted versions of the Draft Measures and the Draft Regulations
mandate clearance of cybersecurity review and other specific actions to be completed by China-based companies listed on a U.S. stock exchange and Hong Kong
Exchanges, such as us, we face uncertainties as to whether such clearance can be timely obtained, or at all. As of the date of this annual report, we have not been involved
in any formal investigations on cybersecurity review made by the CAC on such basis. However, if we are not able to comply with the cybersecurity and network data
security requirements in a timely manner, or at all, we may be subject to government enforcement actions and investigations, fines, penalties, suspension of our non-
compliant operations, or removal of our app from the relevant application stores, among other sanctions, which could materially and adversely affect our business and
results of operations. In addition to the cybersecurity review, the Draft Regulations requires that data processors processing “important data” or listed overseas shall
conduct an annual data security assessment by itself or commission a data security service provider to do so, and submit the assessment report of the preceding year to
the municipal cybersecurity department by the end of January each year. If a final version of the Draft Regulations is adopted, we may be subject to review when
conducting data processing activities and annual data security assessment and may face challenges in addressing its requirements and make necessary changes to our
internal policies and practices in data processing. Based on the foregoing, our PRC legal counsel does not expect that, as of the date of this annual report, the current
applicable PRC laws on cybersecurity would have a material adverse impact on our business.
On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law, which integrates the
scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. We do not collect user personal information. We
do not collect any sensitive personal information or other excessive personal information that is not related to the corresponding services. We update our privacy policies
from time to time to meet the latest regulatory requirements of the CAC and other authorities and adopt technical measures to protect data and ensure cybersecurity in a
systematic way. Nonetheless, the Personal Information Protection Law raises the protection requirements for processing personal information, and many specific
requirements of the Personal Information Protection Law remain to be clarified by the CAC, other regulatory authorities, and courts in practice. We may be required to
make further adjustments to our business practices to comply with the personal information protection laws and regulations. See “Item 4.B. Information on the Company
—Business Overview—Regulations.”
The PRC Cyber Security Law, the Data Security Law and Civil Code are relatively new and subject to interpretation by the regulators. Although we only gain access to
user information that is necessary for, and relevant to, the services provided, the data we obtain and use may include information that is deemed as “personal
information”, “network data” or “important data” under the PRC Cyber Security Law, the Civil Code and related data privacy and protection laws and regulations. As
such, we have adopted a series of measures to ensure that we comply with relevant laws and regulations in the collection, use, disclosure, sharing, storage, and security of
user information and other data. The Data Security Law also stipulates that the relevant authorities will formulate the catalogues for important data and strengthen the
protection of important data, and state core data, i.e. data having a bearing on national security, the lifelines of national economy, people’s key livelihood and major
public interests, shall be subject to stricter management system. “Item 4.B. Information on the Company—Business Overview—Regulations.” The exact scopes of
important data and state core data remain unclear and may be subject to further interpretation. If any data that we are in possession of constitutes important data or state
core data, we may be required to adopt stricter measures for protection and management of such data.
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In addition, we may need to comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S., Europe and
elsewhere. For example, the European Union adopted the General Data Protection Regulation, or the GDPR, which became effective on May 25, 2018. The GDPR
imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored.
Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR) and
regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks.
We generally comply with industry standards and are subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may
place restrictions on the conduct of our business and the manner in which we interact with our customers. Any failure to comply with applicable regulations could also
result in regulatory enforcement actions against us, and misuse of or failure to secure personal information could also result in violation of data privacy laws and
regulations, proceedings against us by governmental authorities or other authorities, damage to our reputation and credibility and could have a negative impact on
revenues and profits.
Significant capital and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply
with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used by hackers and others engaged in online
criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by us to prevent information security breaches or to comply
with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable
information or other customer data, could cause our customers to lose trust in us and could expose us to legal claims. Any perception by the public that online
transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of our business.
Our operating results may fluctuate due to various factors, and therefore may not be indicative of our future results.
Our operating results have experienced 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 crypto price fluctuations, mining difficulty, market sentiment in the crypto space, the timing of new game launches, the expiration or
termination 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, 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 business and prospect depend 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.”
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If we are unable to attract, train and retain key individuals and highly skilled employees, our business may be adversely affected.
Our business relies on our ability 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.
We have limited business insurance coverage in China and other areas.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. Additionally, we cease
to possess significant operating assets located in China. 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.
Our mining machines are located in the U.S., Canada, Russia and Kazakhstan. We are in the process to obtain insurance on our mining machines. We currently rely on
the data center operators to insure their data centers, including, among others, our mining machines. Operators of data centers are holders of their own insurance policies.
We cannot guarantee that the data center operators have fulfilled their obligations to comply with the insurance coverage requirements.
Some of our subsidiaries, variable interest entity and its subsidiaries, 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, variable interest entity and its subsidiaries, and joint ventures 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.
Uncertainty and instability resulting from the conflict between Russia and Ukraine could negatively impact our business, financial condition and operations.
We conduct certain of our mining operations in Russia by entering into hosting agreements pursuant to which our machines are co-located and operated in data centers in
Russia. Our mining business in Russia contributed to approximately 0.06% of our revenue in 2021. While crypto mining operations and data-center operations currently
are not directly restricted by economic sanctions imposed on Russia by the United States and other countries, we cannot assure you that our ability to continue using and
paying for hosting services provided by Russian partners will not be materially affected by any such sanctions or other restrictions in the future.
The U.S. government and other governments in jurisdictions in which we operate may swiftly impose expansive economic sanctions that may have a material impact on
our operations and require us to take, or refrain from taking, specific actions, including, but not limited to, ceasing agreements or mining operations involving Russia or
transporting our mining machines out of Russia. Russia is considering a number of severe measures aimed at mitigating the effect of sanctions imposed against it by the
U.S., EU, UK and other governments in connection with the Russia-Ukraine conflict, including nationalization and seizures of assets held by foreign businesses under
certain circumstances. In addition, existing Russian legal frameworks may be unfairly or unevenly enforced, and courts may decline to enforce legal protections covering
our investments and business partnerships in Russia altogether. In the future, the U.S. government or other governmental authorities may designate certain of our Russian
partners as individuals or entities as subject to sanctions. As a result, we might be prohibited from doing businesses with such partners. The Russian government’s ability
to raise funds, including cryptocurrency, has been restricted. If the Russia-Ukraine conflict continues, the value of cryptocurrency, such as Bitcoin, which our Russian
operation concerns, may be materially affected.
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On April 20, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) added to its list of Specially Designated Nationals (the “SDN
List”) certain companies operating in Russia’s virtual currency mining industry, including BitRiver AG (“BitRiver”). In the past, we partnered with BitRiver to carry out
our mining business in Russia. Our mining business with BitRiver, our sole mining partner in Russia, contributed to approximately 0.06% of our revenue in 2021. OFAC
included BitRiver on the SDN List pursuant to Executive Order 14024, for operating or having operated in the technology sector of the Russian Federation’s economy.
BitRiver’s Russia-based subsidiaries were put on the SDN List, also pursuant to Executive Order 14024, for being owned or controlled by, or for having acted or
purported to act for or on behalf of, directly or indirectly, BitRiver. Any entity in which BitRiver, or any of its designated subsidiaries, has a 50% or greater, direct or
indirect, ownership interest is also subject to U.S. sanctions. Such sanctions may materially affect our mining operations in Russia, and we have decided to terminate our
partnership with BitRiver. We plan to (i) transfer our mining machines outside of Russia, (ii) dispose of our mining machines, or (iii) for those mining machines not
transferred or disposed of, sign hosting agreements with entities located outside of Russia. If we are not able to successfully mitigate some or all disruptions due to our
termination of such relationship and the relocation or disposal of our mining machines, there could be a material adverse impact on our business, financial condition and
results of operations.
We could be liable for breaches of security of third-party online payment channels, which may have a material adverse effect on our reputation and business.
Currently, a portion of our online game operation revenues are generated from sales through third-party online payment platforms. In such transactions, secured
transmission of confidential information, such as customers’ credit card numbers and expiration dates, personal information and billing addresses, over public networks,
in some cases including our website, is essential to maintain consumer confidence. While we have not experienced any material breach of our security measures to date,
we cannot assure you that our current security measures are adequate. We do not have control over the security measures of our third-party online payment vendors and
we cannot assure you that these vendors’ security measures are adequate or will be adequate with the expected increased usage of online payment systems. Security
breaches of the online payment systems that we use could expose us to litigation and possible liability for failing to secure confidential customer information and could
harm our reputation, ability to attract customers and ability to encourage customers to purchase in-game items.
A material weakness in our internal control over financial reporting has been identified, and if we fail to maintain an effective system of internal control over
financial reporting, we may not be able to accurately report our financial results, meet our reporting obligations or prevent fraud.
We are required to assess the effectiveness of our disclosure controls and procedures and internal control over financial reporting. In addition, our independent registered
public accounting firm has conducted an audit of our internal control over financial reporting. As defined in standards established by the United States Public Company
Accounting Oversight Board, or the PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely
basis. In connection with the audit of our consolidated financial statements for the year ended December 31, 2021, we and our independent registered public accounting
firm identified material weaknesses as of December 31, 2021, in accordance with the standards established by the Public Company Accounting Oversight Board of the
United States, or PCAOB.
The material weaknesses that were identified relate to a) we failed to maintain and implement controls over our period-end closing and financial reporting process in a
timely manner, and b) we lack accounting personnel with knowledge of U.S. GAAP and SEC financial reporting requirements, which resulted in a number of adjustments
detected and or proposed by our auditor.
Following the identification of these material weaknesses, our management commenced implementation of a remediation plan. For details, see “Item 15. Controls and
Procedures.” We have implemented and are continuing to implement a number of measures to address the material weakness identified. However, the implementation of
these measures may not fully address the material weakness in our internal control over financial reporting. We will continue to update and implement these measures.
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In documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we
may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over
financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have
effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could
suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported
financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs.
Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential
delisting from the Nasdaq, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
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.
In preparing our consolidated financial statements for the fiscal year ended December 31, 2020 and 2021, we and our independent registered public accounting firms
identified material weakness in our internal control over financial reporting, in accordance with the standards established by the Public Company Accounting Oversight
Board of the United States, or PCAOB. As defined in the standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis. For the year ended December 31, 2020, the material weakness identified related to our lack of sufficient resources regarding
financial reporting and accounting personnel with understanding of U.S. GAAP, in particular, to address complex U.S. GAAP technical accounting issues, related
disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC. For the year ended December 31, 2021, the following material
weaknesses have been identified and are included in management’s assessment: a) we failed to maintain and implement controls over our period-end closing and
financial reporting process in a timely manner, and b) we lack accounting personnel with knowledge of U.S. GAAP and SEC financial reporting requirements, which
resulted in a number of adjustments detected and or proposed by our auditor. The material weakness, if not timely remedied, may lead to significant misstatements in our
consolidated financial statements in the future. For example, due to such material weakness, in connection with the presentation of our unaudited condensed consolidated
financial statements as of and for the six months ended June 30, 2020, we determined that we did not correctly apply the accounting policies relating to the
extinguishment of convertible note and therefore did not present our financial information in our unaudited condensed consolidated financial statements as of and for the
six months ended June 30, 2020 correctly. We later restated the unaudited condensed consolidated financial statements as of and for the six months ended June 30, 2020
to present the correct financial information. There can be no assurance that we are able to maintain effective internal control and there is no guarantee that similar error
will not happen again.
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Following the identification of the material weakness, we have taken measures to remedy the material weakness. We are hiring additional qualified financial and
accounting staff with working experience of U.S. GAAP and SEC reporting requirements. We will establish clear roles and responsibilities for accounting and financial
reporting staff to address accounting and financial reporting issues. Furthermore, we will continue to further expedite and streamline our reporting process and develop
our compliance process, including establishing a comprehensive policy and procedure manual, to allow early detection, prevention and resolution of potential compliance
issues, and establishing an ongoing program to provide sufficient and appropriate training for financial reporting and accounting personnel, especially training related to
U.S. GAAP and SEC reporting requirements. We intend to conduct regular and continuous U.S. GAAP accounting and financial reporting programs and send our
financial staff to attend external U.S. GAAP training courses. We also intend to hire additional resources to strengthen the financial reporting function and set up a
financial and system control framework. However, we cannot assure you that all these measures will be sufficient to remediate our material weakness in time, or at all.
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 reporting 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.
Changes in accounting standards may adversely affect our financial statements
A change in accounting standards or practices may have a significant effect on our results of operations and may affect our reporting of transactions completed before the
change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to
existing rules or the application thereof and changes to current practices may adversely affect our reported financial results or the way we conduct our business. For
example, Accounting Standards Codification 606, “Revenue from Contracts with Customers,” or ASC 606, became effective on January 1, 2018. We adopted ASC 606
on January 1, 2018. Effective from January 1, 2019, we adopted ASC 842, a new accounting standard on the recognition of right-of-use assets and lease liabilities issued
by FASB, and have applied this accounting standard on a modified retrospective basis and have elected not to restate comparative periods. As a result, we recorded
operating lease right-of-assets of RMB9.3 million, current portion of operating lease liabilities of RMB3.4 million and non-current portion of operating lease liabilities of
RMB6.3 million as of December 31, 2019. Effective from January 1, 2020, we adopted ASC 326, Credit Losses. The adoption of ASC 326 did not have significant
impact on our consolidated financial statements and related disclosures as a result. There may be other standards that become effective in the future that may have a
material impact on our consolidated financial statements and will result in a significant gross up of both our assets and liabilities.
We face risks related to natural disasters and health epidemics.
In addition to the impact of COVID-19, our business could be materially and adversely affected by natural disasters, other health epidemics or other public safety
concerns affecting the PRC, and particularly Shanghai. Natural disasters may give rise to server interruptions, breakdowns, system failures, technology platform failures
or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to operate our
platforms and provide services and solutions. Our business could also be adversely affected if our employees are affected by health epidemics. In addition, our results of
operations could be adversely affected to the extent that any health epidemic harms the Chinese economy in general. Our headquarters is located in Shanghai, where most
of our directors and management and the majority of our employees currently reside. Most of our system hardware and back-up systems are hosted in facilities located in
Shanghai. Consequently, if any natural disasters, health epidemics or other public safety concerns were to affect Shanghai, our operation may experience material
disruptions, which may materially and adversely affect our business, financial condition and results of operations.
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Risks Related to Our Corporate Structure
If the PRC government deems that the contractual arrangements in relation to the variable interest entity do not comply with PRC regulatory restrictions on foreign
investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties
or be forced to relinquish our interests in those operations.
Foreign ownership of certain of our businesses including value-added telecommunication services is subject to restrictions under current PRC laws and regulations. For
example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider (excluding e-commerce,
domestic multi-party communications, data collection and transmission services and call centers) and the main foreign investor in the foreign-invested
telecommunication enterprise must have experience in providing value-added telecommunications services overseas and maintain a good track record.
We are a Cayman Islands company and our PRC subsidiaries are considered foreign-invested enterprises. To comply with PRC laws and regulations, we conduct our
operations in China through a series of contractual arrangements entered into the variable interest entity in China and their PRC subsidiaries, including Shanghai IT.
In the opinion of our PRC legal counsel, (i) the ownership structures of the variable interest entity in China and the PRC subsidiaries that have entered into contractual
arrangements with the variable interest entity, including Shanghai IT, comply with all existing PRC laws and regulations; and (ii) the contractual arrangements between
the PRC subsidiaries, including Shanghai IT, the variable interest entity and its respective shareholders governed by PRC law are valid, binding and enforceable, and will
not result in any violation of PRC laws or regulations currently in effect.
However, we are a Cayman Islands holding company with no equity ownership in the variable interest entity and we conduct our operations in China primarily through
the variable interest entity with which we have maintained contractual arrangements. Investors in our Class A ordinary shares or the ADSs thus are not purchasing equity
interest in the variable interest entity in China but instead are purchasing equity interest in a Cayman Islands holding company. If the PRC government deems that our
contractual arrangements with the variable interest entity do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these
regulations or the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish
our interests in those operations. We may not be able to repay the notes and other indebtedness, and our shares may decline in value or become worthless, if we are
unable to assert our contractual control rights over the assets of our PRC subsidiaries. Our holding company in the Cayman Islands, the variable interest entity, and
investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with
the variable interest entity and, consequently, significantly affect the financial performance of the variable interest entity and our company as a group.
Our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations
and rules; accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any other new
PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of the variable interest entity
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 to take action in dealing with such violations or failures, including:
●
revoking the business licenses of such entities;
●
discontinuing or restricting the conduct of any transactions between certain of our PRC subsidiaries and variable interest entity;
●
imposing fines, confiscating the income from the variable interest entity, or imposing other requirements with which we or the variable interest entity may not
be able to comply;
●
requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with the variable interest entity and
deregistering the equity pledges of the variable interest entity, which in turn would affect our ability to consolidate, derive economic interests from, or exert
effective control over the variable interest entity; or
●
restricting or prohibiting our use of the proceeds of any of our financing outside China to finance our business and operations in China.
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The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition, it is unclear what impact the
PRC government actions would have on us and on our ability to consolidate the financial results of the variable interest entity in our consolidated financial statements, if
the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of
these government actions causes us to lose our right to direct the activities of the variable interest entity or our right to receive substantially all the economic benefits and
residual returns from the variable interest entity and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be
able to consolidate the financial results of the variable interest entity in our consolidated financial statements. Either of these results, or any other significant penalties that
might be imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.
Although we believe we, our PRC subsidiaries and the variable interest entity comply with current PRC laws and regulations, we cannot assure you that the PRC
government would agree that our contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with
requirements or policies that may be adopted in the future. The PRC government has broad discretion in determining rectifiable or punitive measures for non-compliance
with or violations of PRC laws and regulations. If the PRC government determines that we or the variable interest entity do not comply with applicable law, it could
revoke the variable interest entity’s business and operating licenses, require the variable interest entity to discontinue or restrict the variable interest entity’s operations,
restrict the variable interest entity’s right to collect revenues, block the variable interest entity’s websites, require the variable interest entity to restructure our operations,
impose additional conditions or requirements with which the variable interest entity may not be able to comply, impose restrictions on the variable interest entity’s
business operations or on their customers, or take other regulatory or enforcement actions against the variable interest entity that could be harmful to their business. Any
of these or similar occurrences could significantly disrupt our or the variable interest entity’s business operations or restrict the variable interest entity from conducting a
substantial portion of their business operations, which could materially and adversely affect the variable interest entity’s business, financial condition and results of
operations. If any of these occurrences results in our inability to direct the activities of any of the variable interest entity that most significantly impact its economic
performance, and/or our failure to receive the economic benefits from any of the variable interest entity, we may not be able to consolidate these entities in our
consolidated financial statements in accordance with U.S. GAAP.
Contractual arrangements in relation to the variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or the
variable interest entity owes additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We
could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements in relation to the variable interest entity were not
entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the
taxable income of the variable interest entity in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of
expense deductions recorded by the variable interest entity for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiaries’
tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on the variable interest entity for the adjusted but unpaid taxes
according to the applicable regulations. Our financial position could be materially and adversely affected if the variable interest entity’s tax liabilities increase or if it is
required to pay late payment fees and other penalties.
Our current corporate structure and business operations may be affected by the Foreign Investment Law.
On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law, or the FIL, which took effect on January 1, 2020 and replaced the existing
laws regulating foreign investment in China, namely, the Sino-Foreign Equity Joint Venture Law, the Sino-Foreign Cooperative Joint Venture Law and the Wholly
Foreign-owned Enterprise Law, or Existing FIE Laws, together with their implementation rules and ancillary regulations. The FIL embodies an expected PRC regulatory
trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal
requirements for both foreign and domestic investments. See “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulation on
Foreign Investment.”
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Uncertainties still exist in relation to interpretation and implementation of the FIL, especially with respect to, including, among other things, the nature of variable
interest entity contractual arrangements and specific rules regulating the organization form of foreign-invested enterprises within the five-year transition period. While
FIL does not define contractual arrangements as a form of foreign investment explicitly, we cannot assure you that future laws and regulations will not provide for
contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that our control over the variable interest entity through contractual
arrangements will not be deemed as foreign investment in the future. The Special Administrative Measures on Access of Foreign Investment (Negative List) (Edition
2020), or the 2020 Negative List, was jointly issued by the Ministry of Commerce, or the MOC, and the National Development and Reform Commission, or the NDRC,
on June 23, 2020, which took effect on July 23, 2020, and the Special Administrative Measures on Access of Foreign Investment (Negative List) (Edition 2021), or the
2021 Negative List, was jointly issued by the MOC, and the NDRC, on December 27, 2021, which took effect on January 1, 2022. The 2020 Negative List and the 2021
Negative List stipulate the special administrative measures on access of foreign investment. Industries not listed in the 2020 Negative List and the 2021 Negative List are
generally deemed as falling into categories of “encouraged” or “permitted” unless specifically restricted by other PRC laws. Our current business operations in China
falls in the “prohibited” industry for foreign investment. However, even though FIL does not define contractual arrangements as a form of foreign investment explicitly,
there can be no assurance that our contractual arrangements will be valid and legal at all times. In the event that any possible implementing regulations of the FIL, any
other future laws, administrative regulations or provisions deem contractual arrangements as a way of foreign investment, our contractual arrangements may be deemed
as invalid and illegal, we may be required to unwind the variable interest entity contractual arrangements and/or dispose of any affected business. Also, if future laws,
administrative regulations or provisions mandate further actions to be taken with respect to existing contractual arrangements, we may face substantial uncertainties as to
whether we can complete such actions in a timely manner, or at all. Furthermore, under the FIL, foreign investors or the foreign investment enterprise should be imposed
legal liabilities for failing to report investment information in accordance with the requirements. In addition, the FIL provides that foreign invested enterprises established
according to the existing laws regulating foreign investment may maintain their structure and corporate governance within a five-year transition period, which means that
we may be required to adjust the structure and corporate governance of certain of our PRC subsidiaries in such transition period. Failure to take timely and appropriate
measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate
governance and business operations.
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 exempted 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, the variable interest entity, to
hold and maintain the licenses necessary for the operation of our online games in China.
In July 2006, the MIIT issued a notice entitled “Notice on Strengthening Management of Foreign Investment in Operating Value-Added Telecommunication Services,” or
the 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 MII Notice and submit status reports to MIIT before November 1, 2006. Since the 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 MII Notice. All relevant
transfers have been completed and relevant approvals have been obtained.
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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. In addition, on February 4, 2016, the GAPPRFT and the MIIT jointly issued the Administrative Measures on
Network Publication, or the Network Publication Measures, which took effect in March 2016. Pursuant to the Network Publication Measures, wholly foreign-owned
enterprises, Sino-foreign equity joint ventures and Sino-foreign cooperative enterprises shall not engage in the provision of web publishing services, including online
game services. Project cooperation involving internet publishing services between an internet publishing service provider and a wholly foreign-owned enterprise, Sino-
foreign equity joint venture, or Sino-foreign cooperative enterprise within China or an overseas organization or individual shall be subject to prior examination and
approval by the GAPPRFT. It is unclear whether the authorities will deem the variable interest entity structure as a kind of such “manners of cooperation” by foreign
investors to gain control over or participate in domestic online game operators, and it is not clear whether GAPPRFT and MIIT have regulatory authority over the
ownership structures of online game companies based in China and online game operation in China.
Subject to the interpretation and implementation of the GAPP Circular and the Network Publication Measures, the ownership structure and the business operation models
of our PRC subsidiaries and variable interest entity 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. 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 the variable interest entity 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 there is a lack of clear statutory interpretation on the implementation of these circulars and rules, there is no assurance that MOFCOM will
have the same view as we do when applying these national security review-related circulars and rules.
We have been further advised by our PRC counsel, Grandall Law Firm, that if we, any of our PRC subsidiaries or variable interest entity are found to be in violation of
any existing or future PRC laws or regulations, including the MII Notice, the GAPP Circular and the Network Publication Measures, 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;
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limiting our business expansion in China by way of entering into contractual arrangements;
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imposing fines or other requirements with which we may not be able to comply;
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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 and operating licenses in China, which may not be as effective in providing operational control as direct
ownership.
Because the PRC government restricts our ownership of ICP, Internet culture operation and Internet publishing businesses in China, we primarily depend on Shanghai IT,
in which we have no ownership interest, to operate our online game business and other ICP related businesses, and hold and maintain the requisite licenses. We have
relied and expect to continue to rely on contractual arrangements to obtain effective control over Shanghai IT. Such contractual arrangements may not be as effective as
direct ownership in providing us with control over Shanghai IT. 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. We have historically derived significant revenues from Shanghai IT. For the year ended December 31, 2019, 2020 and 2021, Shanghai IT
contributed 53.5%, 100% and 0.5%, 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.
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.
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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 market regulation pursuant to the 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 Hui Ling Computer
Technology Consulting (Shanghai) Co., Ltd., or Shanghai Hui Ling, 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 Market Regulation (formerly known as the 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.
The principal shareholders of the variable interest entities have potential conflicts of interest with us, which may adversely affect our business.
Qi Wang and Wei Ji, two of our employees, are the principal shareholders of Shanghai IT, the variable interest entity. Thus, there may be conflicts of interest between
their respective duties to our company as employees and their respective shareholder interests in the variable interest entity. 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 contractual arrangements with the variable interest entity 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 the variable interest entity, which
could adversely affect us by: (i) increasing the tax liability of the variable interest entity without reducing our other PRC subsidiaries’ tax liability, which could further
result in late payment fees and other penalties to the variable interest entity for underpaid taxes; or (ii) limiting the abilities of the variable interest entity to maintain
preferential tax treatments and other financial incentives.
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Risks Related to Doing Business in China
Our business may be adversely affected by public opinion and government policies in China.
Due to the population of mobile internet and higher degree of user loyalty to mobile games, easy access to personal computers and mobile devices, 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. 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. In October 2019, GAPPRFT issued the Notice by the General
Administration of Press and Publication of Preventing Minors from Indulging in Online Games, or Anti-indulgence Notice, which imposed an array of restrictive
measures to prevent underage users to indulge in online games. For example, game operators are not allowed to provide underage users with any form of access to online
games during the period from 22:00 p.m. each day to 8:00 a.m. of the next day and the total length of time for game operators to provide underage users with access to
online games cannot exceed three hours a day during statutory holidays or 1.5 hours a day on days other than statutory holidays. In addition, online transactions are
capped monthly at RMB200 or RMB400, depending on a minor’s age. 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 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 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 slowed down since 2012 and 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. The various economic and policy measures the
PRC government enacts to forestall economic downturns or shore up the PRC economy could affect our business.
Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of
productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China 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. 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.
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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 Tourism (formerly known as the Ministry of Culture), or MCT, 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 MCT 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 MCT 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 game 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. 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. 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.
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.
MCT 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.
MCT 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 to complete filings for online games, including 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.
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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.
As these regulations are 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.
The PCAOB may be unable to inspect or fully investigate our auditor in relation to their audit work performed for our financial statements. If the PCAOB is unable
to conduct such inspection, our investors would be deprived of the benefits of such inspection.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are
traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is subject to laws in the
United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Our current independent
registered public accounting firm, RBSM LLP (“RBSM”), whose audit report is included in this annual report on Form 20-F, is headquartered in New York, New York,
and has been inspected by the PCAOB on a regular basis. The PCAOB currently has access to inspect the working papers of our auditor. Our auditor is not headquartered
in mainland China or Hong Kong and was not identified in the report as a firm subject to the PCAOB determinations announced on December 16, 2021 and as of the
filing date of this annual report. Notwithstanding the foregoing, in the future, if either there is any regulatory change or step taken by the PRC regulators that does not
permit RBSM to provide audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation or the PCAOB expands the scope of the
Determination so that we are subject to the HFCA Act, as the same may be prohibited under the HFCA Act. It is possible that the PCAOB is unable to conduct inspection
of audit working papers related to us without the approval of the Chinese authorities. If this is the case, we and investors in our ADSs are deprived of the benefits of such
PCAOB inspections. The inability of the PCAOB to conduct inspection of audit working paper related to us also makes it more difficult to evaluate the effectiveness of
our independent registered public accounting firm’s audit procedures or quality control procedures performed in their audit on our financial statements as compared to
auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our ADSs to lose confidence in our audit
procedures and reported financial information and the quality of our financial statements.
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If the PCAOB is unable to conduct such inspections, our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies
Accountable Act, or the HFCA Act, in 2024, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted,
may materially and adversely affect the value of your investment.
The Holding Foreign Companies Accountable Act, or the HFCA Act, was signed into law on December 18, 2020. The HFCA Act states if the SEC determines that we
have filed audit reports issued by an independent registered public accounting firm that has not been subject to inspection of the PCAOB for three consecutive years
beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United
States. On December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCAA, pursuant to which the SEC
will identify an issuer as a “Commission Identified Issuer” if the issuer has filed an annual report containing an audit report issued by a registered public accounting firm
that the PCAOB has determined it is unable to inspect or investigate completely, and will then impose a trading prohibition on an issuer after it is identified as a
Commission-Identified Issuer for three consecutive years. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is
unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong SAR. Our auditor is not headquartered in
mainland China or Hong Kong and was not identified in the report as a firm subject to the PCAOB determinations announced on December 16, 2021 and as of the filing
date of this annual report. Our auditor has been inspected by the PCAOB on a regular basis. The PCAOB currently has access to inspect the working papers of our
auditor. Notwithstanding the foregoing, in the future, if either there is any regulatory change or step taken by the PRC regulators that does not permit RBSM to provide
audit documentations located in China or Hong Kong to the PCAOB for inspection or investigation or the PCAOB expands the scope of the Determination so that we are
subject to the HFCA Act, as the same may be prohibited under the HFCA Act. It is possible that the PCAOB is unable to conduct inspection of audit working papers
related to us without the approval of the Chinese authorities.
Whether the PCAOB will be able to conduct inspection of audit working papers related to us before the issuance of our financial statements on Form 20-F for the year
ending December 31, 2023 which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of factors out of our, and our auditor’s,
control. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a non-U.S. exchange or that a market
for our shares will develop outside of the United States. Such a prohibition would substantially impair your ability to sell or purchase our ADSs when you wish to do so,
and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our
ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.
On June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the
HFCA Act from three years to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision. If
this provision is enacted into law and the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act is reduced from three
years to two, then our shares and ADSs could be prohibited from trading in the United States in 2023. Furthermore, on December 2, 2021, the SEC adopted final
amendments implementing the disclosure and submission requirements under the HFCA Act, pursuant to which the SEC will identify a “Commission-Identified Issuer”
if an issuer has filed an annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or
investigate completely because of a position taken by an authority in the foreign jurisdiction, and will then impose a trading prohibition on an issuer after it is identified
as a Commission-Identified Issuer for three consecutive years.
We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of blockchain, NFT, and internet-related businesses and companies,
and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.
The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in
the internet industry. These internet-related laws and regulations are evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in
certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.
We only have contractual control over our websites. We do not directly own the websites due to the restriction of foreign investment in businesses providing value-added
telecommunication services in China, including internet information provision services. This may significantly disrupt our business, subject us to sanctions, compromise
enforceability of related contractual arrangements, or have other harmful effects on us.
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The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council
announced the establishment of a new department, the State Internet Information Office (with the involvement of the State Council Information Office, the MIIT, and the
Ministry of Public Security). The primary role of this new agency is to facilitate the policy-making and legislative development in this field, to direct and coordinate with
the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry.
Shanghai IT, the variable interest entity operating our online gaming business, may be deemed to be providing commercial internet information services and transaction
processing services, which would require Shanghai IT to obtain an ICP License.
An ICP License is a value-added telecommunications business operating license required for provision of commercial internet information services. As of the date of this
annual report, Shanghai IT has applied and obtained an ICP License. Furthermore, as we are providing mobile applications to mobile device users, it is uncertain if
Shanghai IT will be required to obtain a separate value-added telecommunications business operating license with respect to the services provided through mobile
devices in addition to the ICP License. Although we believe that not obtaining such separate license is in line with the current market practice, there can be no assurance
that we will not be required to apply for an operating license for our mobile applications in the future.
The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, issued by the MIIT in July
2006, prohibits domestic telecommunication service providers from leasing, transferring or selling telecommunications business operating licenses to any foreign
investor in any form, or providing any resources, sites or facilities to any foreign investor for its illegal operation of a telecommunications business in China. According
to this circular, either the holder of a value-added telecommunication services operation permit or its shareholders must directly own the domain names and trademarks
used by such license holders in their provision of value-added telecommunication services. The circular also requires each license holder to have the necessary facilities,
including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. Shanghai IT currently owns the relevant
domain names and trademarks in connection with our value-added telecommunications business and has the necessary personnel to operate our websites. If an ICP
License holder fails to comply with the requirements and also fails to remedy such non-compliance within a specified period of time, the MIIT or its local counterparts
have the discretion to take administrative measures against such license holder, including revoking its ICP License.
The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have
created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China,
including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain
our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new
laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among
other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected
portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.
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The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of
our ADSs.
We conduct our business globally through our subsidiaries in the U.S., Kazakhstan, Hong Kong and Singapore, and we have significantly reduced our business operation
through the variable interest entity in China. Our operations in China are governed by PRC laws and regulations. The PRC government has significant oversight and
discretion over the conduct of our business, and it may influence our operations, which could result in a material adverse change in our operation and/or the value of our
ADSs. Also, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign
investment in China-based issuers. For example, on July 6, 2021, the relevant PRC government authorities made public the Opinions on Strictly Scrutinizing Illegal
Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the
supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to
deal with the risks and incidents faced by China-based overseas-listed companies. On July 10, 2021, the CAC issued a revised draft of the Measures for Cybersecurity
Review, or the Drafted Measures, for public comments, which required that, among others, operators of “critical information infrastructure” or data processors holding
over one million users’ personal information shall apply with the Cybersecurity Review Office for a cybersecurity review before any public offering at a foreign stock
exchange. On December 28, 2021, the thirteen ministries and commissions including the National Internet Information Office, the National Development and Reform
Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of National Security, the Ministry of Finance, the
Ministry of Commerce, the People’s Bank of China, the State Administration for Market Regulation, the State Administration of Radio and Television, the China
Securities Regulatory Commission, the State Secret Service, the State Cryptography Administration issued the Measures for Cybersecurity Review(2021), emphasized
that operators of “critical information infrastructure” or data processors holding over one million users’ personal information shall apply with the Cybersecurity Review
Office for a cybersecurity review before any public offering at a foreign stock exchange. On November 14, 2021, the CAC released the Regulations on the Network Data
Security, or the Draft Regulations, for public comments, which stipulates, among others, that a prior cybersecurity review is required for listing abroad of data processors
which process over one million user’ personal information, and the listing of data processors in Hong Kong which affects or may affect national security. Since the Draft
Regulations are in the process of being formulated and the Opinions and the adopted Measures remain unclear on how it will be interpreted, amended and implemented
by the relevant PRC governmental authorities, it remains uncertain how PRC governmental authorities will regulate overseas listing in general and whether we are
required to obtain any specific regulatory approvals from the CSRC, the CAC or any other PRC governmental authorities for our offshore offerings. If the CSRC, the
CAC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for our future offshore offerings, we may be unable
to obtain such approvals in a timely manner, or at all, and such approvals may be rescinded even if obtained. Any such circumstance could significantly limit or
completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. In addition,
implementation of industry-wide regulations directly targeting our operations could cause the value of our securities to significantly decline. Therefore, investors of our
company and our business face potential uncertainty from actions taken by the PRC government affecting our business.
We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have. Although
currently substantially all of our revenue is generated from our subsidiaries outside of PRC, any limitation on the ability of our PRC subsidiaries to make payments
to us could have a material adverse effect on our ability to conduct our business.
We are a holding company, and we may rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements,
including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. After the middle of 2021, substantially
all of our revenue is generated from our subsidiaries outside of PRC. However, any limitation on the ability of our PRC subsidiaries to make payments to us may still
have a material adverse effect on our ability to conduct our business. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the
debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our PRC subsidiaries to adjust their
taxable income under the contractual arrangements they currently have in place with our consolidated variable interest entity in a manner that would materially and
adversely affect their ability to pay dividends and other distributions to us. See “—Risks Related to Our Corporate Structure—Our contractual arrangements with the
variable interest entity may result in adverse tax consequences to us.”
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Under PRC laws and regulations, our PRC subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated after-
tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least
10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered
capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus
funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make
investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
Future movements in exchange rates between the U.S. dollar and the RMB may adversely affect the value of our ADSs.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the
U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and
economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or depreciate significantly in
value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi
and the U.S. dollar in the future.
Any significant appreciation or depreciation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any
dividends payable on, our ADSs in U.S. dollars. Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we
have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging
transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition,
our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result,
fluctuations in exchange rates may have a material adverse effect on your investment.
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, we no longer derive a significant portion of our revenues from China and most of our revenues are not denominated in RMB. For the limited portion of
revenues that are denominated in RMB, restrictions on currency exchange in China limit our ability to utilize revenues 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 or designated banks 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 and filing procedures of SAFE or authorized banks, as applicable. 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 regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or
prevent us from making loans or additional capital contributions to our PRC subsidiaries and the variable interest entity, which could materially and adversely affect
our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in China through our PRC subsidiaries and the variable interest entity. We may make loans to our PRC
subsidiaries and the variable interest entity subject to the approval from or registration with governmental authorities and limitation on amount, we may make additional
capital contributions to our wholly foreign-owned subsidiaries in China, we may establish new PRC subsidiaries and make capital contributions to these new PRC
subsidiaries, or we may acquire offshore entities with business operations in China in an offshore transaction.
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Most of the aforementioned ways of making loans or investments in PRC entities are subject to PRC regulations and approvals. For example, any loans to our PRC
subsidiaries and the variable interest entity are subject to applicable foreign loan registrations with the local counterpart of SAFE and limitation on amount under PRC
law. If we decide to finance our wholly owned PRC subsidiary by means of capital contributions, these capital contributions are subject to filing and registration with
certain PRC government authorities, including MOFCOM or its local counterparts and the SAMR through its Enterprise Registration System, the National Enterprise
Credit Information Publicity System and the local counterpart of SAFE. In addition, an FIE shall use its capital pursuant to the principle of authenticity and self-use
within its business scope.
SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Mode of Management of Settlement of Foreign Exchange Capital of
Foreign Invested Enterprises, or SAFE Circular 19, effective June 2015 and amended on December 2019, in replacement of a former regulation. According to SAFE
Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that
RMB capital may not be used for the issuance of RMB entrusted loans (unless otherwise permitted in the business license), the repayment of inter-enterprise loans or the
repayment of bank loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated
registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign
currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether
SAFE will permit such capital to be used for equity investments in China in actual practice. SAFE promulgated the Notice of the State Administration of Foreign
Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016,
which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated
registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises.
Specifically, SAFE Circular 16 provides that the capital of an FIE shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the
business scope of such FIE or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments in
financial management other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated
enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except
for the foreign-invested real estate enterprises). Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and
SAFE Circular 16 may significantly limit our ability to transfer any foreign currency we hold to our PRC subsidiaries, which may adversely affect our liquidity and our
ability to fund and expand our business in China. On October 23, 2019, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further
Promoting the Convenience of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all foreign-invested companies to use
Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable
laws, and complies with the negative list on foreign investment. On April 10, 2020, the SAFE promulgated the Circular on Optimizing Administration of Foreign
Exchange to Support the Development of Foreign-related Business, or SAFE Circular 8, under which eligible enterprises are allowed to make domestic payments by
using their capital funds, foreign loans and the income under capital accounts of overseas listing without providing the evidentiary materials concerning authenticity of
each expenditure in advance, provided that their capital use shall be authentic and conforms to the prevailing administrative regulations on the use of income under
capital accounts. However, since the SAFE Circular 28 and SAFE Circular 8 are relatively new, it is unclear how SAFE and competent banks will carry them out in
practice.
Because we control the variable interest entity through contractual arrangements, we are not able to make capital contribution to the variable interest entity and its
subsidiaries; however, we may provide financial support to them by loans. Under relevant PRC laws and regulations, loans to the variable interest entity directly from the
Cayman entity shall not exceed 200% of the net assets of the relevant variable interest entity, whereas loans from our PRC subsidiaries, subject to relevant PRC laws and
regulations concerning foreign currency, are not subject to amount limitations. Even though Renminbi capital, foreign debt and repatriated funds raised through overseas
listing may be used at the discretion of the foreign-invested enterprise pursuant to SAFE Circular 19 and SAFE Circular 16, it is still not clear whether our PRC
subsidiaries, as foreign invested enterprises, are allowed to extend intercompany loans to the variable interest entity.
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you
that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, or at all, with respect to future
loans by us to our PRC subsidiaries or the variable interest entity or its subsidiaries or with respect to future capital contributions by us to our PRC subsidiaries. If we fail
to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially
and adversely affect our liquidity and our ability to fund and expand our business.
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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.
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.
PRC regulation of direct investment and loans by offshore holding companies to PRC entities may delay or limit us from using offshore assets, including the
proceeds of our initial public offering and other offering, to make additional capital contributions or loans to our PRC subsidiary.
We are an offshore holding company conducting our operations in China through our PRC subsidiaries, variable interest entity and its subsidiaries. We may make loans to
our PRC subsidiary, variable interest entity and its subsidiaries, subject to the approval from governmental authorities and limitation of amount, or we may make
additional capital contributions to our PRC subsidiary.
Any loans to our PRC subsidiaries in China, which are treated as foreign-invested enterprises under PRC laws, are subject to foreign exchange loan registrations. In
addition, a foreign-invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of a foreign invested
enterprise shall not be used for the following purposes: (i) direct or indirect payment beyond the business scope of the enterprises or the payment prohibited by relevant
laws and regulations; (ii) direct or indirect investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant
laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses
related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).In light of the various requirements imposed by PRC
regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary
registration or obtain the necessary approval on a timely basis, or at all. If we fail to complete the necessary registration or obtain the necessary approval, our ability to
make loans or equity contributions to our PRC subsidiary may be negatively affected, which could adversely affect our PRC subsidiary’s liquidity and its ability to fund
its working capital and expansion projects and meet its obligations and commitments.
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Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan
participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notice of the State Administration of Foreign Exchange on the Relevant Issues Concerning the Administration of Foreign
Exchange for Domestic Individuals’ Participation in Equity Incentive Programs of Overseas Listed Companies, or Circular 7. Under Circular 7, PRC residents who
participate in stock incentive plan in an overseas publicly-listed company are required to register with SAFE or its local branches and complete certain other procedures.
Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed
company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan
on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the
purchase and sale of corresponding stocks or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock
incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. We and our PRC
employees who have been granted stock incentive awards are be subject to these regulations. However, neither our PRC plan participants nor we have completed such
requisite registration and other procedures. In addition, we cannot assure you that we will be able to complete the relevant registration for new employees who participate
in such stock incentive plan in the future in a timely manner or at all. Failure of our PRC plan participants to complete their SAFE registrations may subject these PRC
residents or us to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary, limit our PRC subsidiary’s ability to
distribute dividends to us, or otherwise materially adversely affect our business. We also face regulatory uncertainties that could restrict our ability to adopt additional
incentive plans for our directors and employees under PRC law.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct our business primarily through our subsidiaries, and we have gradually and significantly reduced our business operation through the variable interest entity in
China. Our PRC subsidiaries are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly-foreign-
owned enterprises. We entered into a series of contractual arrangements with the variable interest entity in PRC to exercise effective control over these entities. Almost
all of the agreements under those contractual arrangements 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. PRC
legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China for the past decades. 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.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be
protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion
in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level
of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could
materially and adversely affect our business and results of operations. Furthermore, the PRC legal system is based, in part, on government policies and internal rules,
some of which are not published in a timely manner, or at all, but which may have retroactive effect. As a result, we may not always be aware of any potential violation
of these policies and rules. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business and impede our ability to
continue our operations.
PRC government has significant oversight over the conduct of our business and it has recently indicated an intent to exert more oversight over offerings that are
conducted overseas and/or foreign investment in China-based issuers. Any such action could significantly limit or completely hinder our ability to offer or continue to
offer securities to investors and cause the value of such securities to significantly decline or be worthless.
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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 FIL
becomes effective in the future.
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.
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You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named
in this annual report based on foreign laws.
We are an exempted company incorporated under the laws of the Cayman Islands. We no longer conduct substantially all of our operations in China and substantially all
of our assets are no longer located in China. However, all our senior executive officers reside within China for a significant portion of the time. As a result, it may be
difficult for you to effect service of process upon us or our management residing in China. In addition, China does not have treaties providing for reciprocal recognition
and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments
of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.
It may be difficult for overseas regulators to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For
example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China.
Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement
cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual
and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no
overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretation of
or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence
collection activities within China may further increase difficulties faced by you in protecting your interests. See also “—General Risks Related to Our Shares, ADSs and
Warrants—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated
under Cayman Islands law” for risks associated with investing in us as a Cayman Islands company.
Our subsidiaries in China are subject to restrictions on paying dividends or making other payments.
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.”
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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 decrease.
Our subsidiaries and the variable interest entity 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 PRC, 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 and was amended on February 24, 2017 and December 29, 2018, which unified the tax rate
generally applicable to both domestic and foreign-invested enterprises in the PRC. Our subsidiaries and the variable interest entity in the PRC are generally subject to
EIT at a statutory rate of 25%. Shanghai IT, the variable interest entity which holds a High and New Technology Enterprise, or HNTE, qualification is entitled to enjoy a
15% preferential EIT rate till November 23, 2020. As the HNTE qualification has expired in 2020, Shanghai IT was no longer entitled to enjoy preferential EIT.
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. Under the Administrative Measures for Non-
Resident Taxpayer to Enjoy Treatments under Tax Treaties, which became effective in January 2020, non-resident taxpayers shall determine whether they are eligible for
treaty benefits and file a relevant report and materials with the tax authorities. Meanwhile, the reduced withholding tax rate also applies if the conditions stipulated by
other tax rules and regulations are met.
In February 2018, the State Administration of Taxation, or SAT issued the Announcement of the State Administration of Taxation on Issues Relating to “Beneficial
Owner” in Tax Treaties on issues relating to “beneficial owner” in tax treaties, or Circular No. 9, which took effect on April 1, 2018. Circular No. 9 provides detailed
guidance to determine whether the applicant engages in substantive business activities to constitute a “beneficial owner”. When determining the applicant’s status of the
“beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation, whether
the applicant is obligated to pay more than 50% of his or her income in the past twelve months to residents in third country or region, whether the business operated by
the applicant constitutes the actual business activities, and whether the other country or region to the tax treaties does not levy any tax or grant tax exemption on relevant
incomes at all or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. If the
non-resident taxpayer does not apply to the withholding agent for the tax treaty benefits, or such taxpayer does not satisfy the criteria to be entitled to tax treaty benefits,
the withholding agent should withhold tax pursuant to the provisions of PRC tax laws. 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 was amended in April 2015, June 2016 and June 2018. SAT Bulletin 45 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.
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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 variable interest entity, 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 variable interest entity 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 tax reforms in various regions in China and we may be subject to similar tax treatments elsewhere in China.
On March 23, 2016, the Ministry of Finance and the SAT jointly issued the Circular on the Pilot Program for Overall Implementation of the Collection of Value Added
Tax Instead of Business Tax, or Circular 36, which took effect on May 1, 2016. Pursuant to Circular 36, all companies operating in construction, real estate, finance,
modern service or other sectors which were required to pay business tax are required to pay value added tax, or VAT, in lieu of business tax. As a result of Circular 36, the
services provided by Shanghai IT, Shanghai Hui Ling, Wuxi QuDong, Shencai, Leixian and Jiu gang, as general VAT payers are subject to VAT at the rate of 6%, and the
services provided by our other PRC subsidiaries and variable interest entity as small-scale VAT payers are subject to VAT at the rate of 3%. While as general VAT payers
may reduce their VAT payable amount by the VAT which they paid in connection with their purchasing activities, or the Input VAT, those companies as small-scale VAT
payers may not reduce their VAT payable amount by their Input VAT. As a result, some of our subsidiaries and the variable interest entity may be subject to more
unfavorable tax treatment as a result of the tax 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 SAT issued, on February 3, 2015, 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.
According to SAT Circular 7, where the payer fails to withhold tax in a sufficient amount, the transferor can declare and pay such tax to the tax authority by itself within
the statutory time period. Late payment of applicable tax will subject the transferor to default interest.
On October 17, 2017, the SAT released the Public Notice Regarding Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public
Notice 37, which further elaborates the relevant implementation rules regarding the calculation, reporting and payment obligations of the withholding tax by the non-
resident enterprises.
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Under SAT Circular 7 and SAT Public Notice 37, 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 and SAT Public Notice 37, 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 and SAT Public Notice 37.
Since we may pursue acquisition 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.
The approval of and filing with the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if
required, we cannot predict whether or for how long we will be able to obtain such approval or complete such filing.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and
amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC
persons or entities to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On
December 24, 2021, the China Securities Regulatory Commission (“CSRC”) issued a draft of the Provisions of the State Council on the Administration of Overseas
Securities Offering and Listing by Domestic Companies, for public comments, or the Draft Provisions, and the CSRC issued a draft of Administration Measures for the
Filing of Overseas Securities Offering and Listing by Domestic Companies, or the Draft Administration Measures, for public comments. Pursuant to the above two draft
regulations, the CSRC will supervise and manage overseas listing and refinancing activities of domestic enterprises. If a domestic enterprise issues a direct listing abroad,
the issuer shall perform the filing procedures and report the relevant information. In the case of overseas indirect issuance and listing of domestic enterprises, the issuer
shall designate a major domestic operating entity to carry out the filing procedures and report the relevant information. According to the CSRC’s response to reporters,
the goal is that the incremental companies and new refinancing companies must make filings procedures, and there is a relatively long interim period for stock
companies. Therefore, there is a possibility that we will be required to make relevant filings and it may have a material impact on the listing for us. The interpretation and
application of the regulations remain unclear, and our offshore offerings may ultimately require approval of the CSRC. If the CSRC approval is required, it is uncertain
whether we can or how long it will take us to obtain the approval and, even if we obtain such CSRC approval, the approval could be rescinded. Any failure to obtain or
delay in obtaining the CSRC approval for any of our offshore offerings, or a rescission of such approval if obtained by us, would subject us to sanctions imposed by the
CSRC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends
outside of China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results of operations.
On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These
opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and
proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based
overseas-listed companies. As a follow-up, on December 24, 2021, the CSRC issued a draft of the Provisions of the State Council on the Administration of Overseas
Securities Offering and Listing by Domestic Companies, or the Draft Provisions, and the CSRC issued a draft of Administration Measures for the Filing of Overseas
Securities Offering and Listing by Domestic Companies, or the Draft Administration Measures, for public comments.
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The Draft Provisions and the Draft Administration Measures propose to establish a new filing-based regime to regulate overseas offerings and listings by domestic
companies. According to the Draft Provisions and the Draft Administration Measures, an overseas offering and listing by a domestic company, whether directly or
indirectly, shall be filed with the CSRC. Specifically, the examination and determination of an indirect offering and listing will be conducted on a substance-over-form
basis, and an offering and listing shall be considered as an indirect overseas offering and listing by a domestic company if the issuer meets the following conditions: (i)
the operating income, gross profit, total assets, or net assets of the domestic enterprise in the most recent fiscal year was more than 50% of the relevant line item in the
issuer’s audited consolidated financial statement for that year; and (ii) senior management personnel responsible for business operations and management are mostly PRC
citizens or are ordinarily resident in the PRC, and the main place of business is in the PRC or carried out in the PRC. According to the Draft Administration Measures,
the issuer or its affiliated domestic company, as the case may be, shall file with the CSRC for its initial public offering, follow-on offering and other equivalent offing
activities. Particularly, the issuer shall submit the filing with respect to its initial public offering and listing within three business days after its initial filing of the listing
application, and submit the filing with respect to its follow-on offering within three business days after completion of the follow-on offering. Failure to comply with the
filing requirements may result in fines to the relevant domestic companies, suspension of their businesses, revocation of their business licenses and operation permits and
fines on the controlling shareholder and other responsible persons. The Draft Administration Measures also sets forth certain regulatory red lines for overseas offerings
and listings by domestic enterprises. For more details of the Draft Provisions and the Draft Administration Measures, please refer to Regulation—Regulations on
Overseas Offering and Listing.
As of the date of this annual report, the Draft Provisions and the Draft Administration Measures were released for public comment only. There are uncertainties as to
whether the Draft Provisions and the Draft Administration Measures would be further amended, revised or updated. Substantial uncertainties exist with respect to the
enactment timetable and final content of the Draft Provisions and the Draft Administration Measures. As the CSRC may formulate and publish guidelines for filings in
the future, the Draft Administration Measures does not provide for detailed requirements of the substance and form of the filing documents. In a Q&A released on its
official website, the respondent CSRC official indicated that the proposed new filing requirement will start with new companies and the existing companies seeking to
carry out activities like follow-on financing. As for the filings for the existing companies, the regulator will grant adequate transition period and apply separate
arrangements. The Q&A also addressed the contractual arrangements and pointed out that if relevant domestic laws and regulations have been observed, companies with
compliant VIE structure may seek overseas listing after completion of the CSRC filings. Nevertheless, it does not specify what qualify as compliant VIE structures and
what relevant domestic laws and regulations are required to be complied with. Given the substantial uncertainties surrounding the latest CSRC filing requirements at this
stage, we cannot assure you that we will be able to complete the filings and fully comply with the relevant new rules on a timely basis, if at all.
Relatedly, on December 27, 2021, the NDRC and the Ministry of Finance, or the MOC, jointly issued the Special Administrative Measures (Negative List) for Foreign
Investment Access (2021 Version), or the 2021 Negative List, which will become effective on January 1, 2022. Pursuant to such Special Administrative Measures, if a
domestic company engaging in the prohibited business stipulated in the 2021 Negative List seeks an overseas offering and listing, it shall obtain the approval from the
competent governmental authorities. Besides, the foreign investors of the company shall not be involved in the company’s operation and management, and their
shareholding percentage shall be subject, mutatis mutandis, to the relevant regulations on the domestic securities investments by foreign investors. As the 2021 Negative
List is relatively new, there remain substantial uncertainties as to the interpretation and implementation of these new requirements, and it is unclear as to whether and to
what extent listed companies like us will be subject to these new requirements. If we are required to comply with these requirements and fail to do so on a timely basis, if
at all, our business operation, financial conditions and business prospect may be adversely and materially affected.
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In addition, we cannot assure you that any new rules or regulations promulgated in the future will not impose additional requirements on us. If it is determined in the
future that approval and filing from the CSRC or other regulatory authorities or other procedures, including the cybersecurity review under the enacted version of the
revised Measures for Cybersecurity Review and the draft of Regulations on the Network Data Security, are required for our offshore offerings, it is uncertain whether we
can or how long it will take us to obtain such approval or complete such filing procedures and any such approval or filing could be rescinded or rejected. Any failure to
obtain or delay in obtaining such approval or completing such filing procedures for our offshore offerings, or a rescission of any such approval or filing if obtained by us,
would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to seek CSRC approval or filing or other government authorization for our
offshore offerings. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our
operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially and
adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our listed securities. The CSRC or other PRC
regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offshore offerings before settlement and delivery of the shares offered.
Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and
delivery may not occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or
accomplish the required filing or other regulatory procedures for our prior offshore offerings, we may be unable to obtain a waiver of such approval requirements, if and
when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding such approval requirement could materially and adversely
affect our business, prospects, financial condition, reputation, and the trading price of our listed securities.
General Risks Related to Our Shares, ADSs and Warrants
Our ADSs may be delisted from the Nasdaq Capital Market as a result of our failure of meeting the Nasdaq Capital Market continued listing requirements.
Our ADSs are currently listed on the Nasdaq Capital Market under the symbol “NCTY.” We must continue to meet the requirements set forth in Nasdaq Listing Rule
5550 to remain listing on the Nasdaq Capital Market. The listing standards of the Nasdaq Capital Market provide that a company, in order to qualify for continued listing,
must maintain a minimum ADS price of US$1.00 and satisfy standards relative to minimum shareholders’ equity, minimum market value of publicly held shares, or
MVPHS, minimum MVLS, and various additional requirements. On October 3, 2018, we received a letter from the Listing Qualifications Department of Nasdaq,
pursuant to which Nasdaq informed us that due to our failure to regain compliance with the continued listing requirement of US$50 million minimum MVLS for the
Nasdaq Global Market as set in the Nasdaq Listing Rule 5450(b)(2)(A), our ADSs would be delisted from the Nasdaq Global Market unless measures are taken prior to a
certain timeline. We later transferred our listing venue to Nasdaq Capital Market with which we fully comply with the continued listing standards. On March 6, 2020, we
received a letter from the Listing Qualifications Department of Nasdaq, notifying us that the minimum bid price per ADS was below US$1.00 for a period of 30
consecutive business days and we did not meet the minimum bid price requirement set forth in Rule 5550(a)(2) of the Nasdaq Listing Rules. Due to the tolling of
compliance period through June 30, 2020, as determined by Nasdaq, we had until November 16, 2020, to regain compliance with Nasdaq’s minimum bid price
requirement. On April 13, 2020, we received a letter from the Listing Qualifications Department of Nasdaq, notifying us that we no longer met the continued listing
standards of MVLS for the Nasdaq Capital Market, as set forth in the Nasdaq Listing Rule 5550(b)(2) because the market value of our securities listed on Nasdaq for the
last 30 consecutive business days was below the minimum MVLS requirement of US$35.0 million. Pursuant to the Rule 5810(c)(3)(C) of the Nasdaq Listing Rules, we
have a compliance period of 180 calendar days, or until October 12, 2020, to regain compliance with Nasdaq’s minimum MVLS requirement. On August 5, 2020, we
received a notification letter from Nasdaq stating that we have regained compliance with the minimum MVLS requirement. On November 2, 2020, we received a
notification letter from Nasdaq stating that we have regained compliance with the minimum bid price requirement. On November 12, 2020, we received a letter from the
Listing Qualifications Department of Nasdaq, notifying us that we no longer met the continued listing standards of MVLS for the Nasdaq Capital Market, as set forth in
the Nasdaq Listing Rule 5550(b)(2) because the market value of our securities listed on Nasdaq for the last 30 consecutive business days was below the minimum MVLS
requirement of US$35.0 million. Pursuant to the Rule 5810(c)(3)(C) of the Nasdaq Listing Rules, we have a compliance period of 180 calendar days, or until May 11,
2021, to regain compliance with Nasdaq’s minimum MVLS requirement. On January 21, 2021, we received a notification letter from Nasdaq stating that we have
regained compliance with the minimum MVLS requirement. If we fail to satisfy Nasdaq Capital Market’s continued listing requirements going forward and fail to regain
compliance on a timely basis, our ADSs could be delisted from Nasdaq Capital Market.
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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 our 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.
As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than U.S.
public companies.
We are a “foreign private issuer” as defined in the SEC rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to
companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act that regulate disclosure obligations and procedural
requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our officers and
directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases
and sales of our securities. Further, we are not required to comply with Regulation FD, which restricts the selective disclosure of material information. Moreover, we are
not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies. Accordingly, there may be less publicly
available information concerning our company than there is for U.S. public companies.
As a foreign private issuer, we file annual reports on Form 20-F within four months of the close of each fiscal year ended December 31 and reports on Form 6-K relating
to certain material events promptly after we publicly announce these events. However, because of the above exemptions for foreign private issuers, our shareholders are
not afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.
While we are a foreign private issuer, we are not subject to certain Nasdaq corporate governance listing standards applicable to U.S. listed companies. We are entitled to
rely on a provision in the Nasdaq corporate governance listing standards that allows us to elect to follow Cayman Islands “home county” corporate law with regard to
certain aspects of corporate governance. This allows us to follow certain corporate governance practices that differ in significant respects from the corporate governance
requirements applicable to U.S. companies listed on the Nasdaq. For example, in each of November 2015 and August 2016, our board of directors approved an increase
in the total number of ordinary shares reserved for issuance under our then effective stock option plan, for which we have followed “home country practice” in lieu of
obtaining a shareholder approval pursuant to Nasdaq Market Rule 5635(c). In June 2020, we also followed “home country practice” in lieu of obtaining a shareholder
approval pursuant to Nasdaq Market Rule 5635(a) with respect to issuance of securities in excess of 20% of our total issued and outstanding shares prior to such issuance.
We also followed “home country practice” in lieu of the requirement under Nasdaq rule 5635(d) to seek shareholder approval in connection with certain transactions
involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for common stock) at a price less than
certain references price equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance. We may also rely on other
exemptions available to foreign private issuers in the future, and to the extent that we choose to do so in the future, our shareholders may be afforded less protection than
they otherwise would under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.
We believe we were a passive foreign investment company for our taxable year ended December 31, 2021, which could subject United States holders of the ADSs or
ordinary shares to significant adverse United States federal income tax consequences.
A non-U.S. corporation will be a “passive foreign investment company,” or PFIC, for any taxable year if either (1) at least 75% of its gross income for such year consists
of certain types of passive income, or (2) at least 50% of the value of its assets (generally determined on the basis of a quarterly average) during such year is attributable
to assets that produce 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.
Based on the market price of our ADSs and the nature and composition of our assets, we believe that we were a PFIC for U.S. federal income tax purposes for our
taxable year ended December 31, 2021, and we will very likely be a PFIC for our current taxable year unless the market price of our ADSs increases and/or we invest a
substantial amount of the cash and other passive assets we hold in assets that produce or are held for the production of active income. Further, as previously disclosed,
although not free from doubt, we believed that we were a PFIC for U.S. federal income tax purposes for prior years. In addition, it is possible that one or more of our
subsidiaries were also PFICs for such years for U.S. federal income tax purposes.
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If we are treated as a PFIC for any taxable year during which a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—U.S. Federal Income
Taxation”) holds our ADSs or ordinary shares, such U.S. Holders will generally be subject to reporting requirements and may incur significantly increased U.S. income
tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent
such gain or distribution is treated as an “excess distribution” under the U.S. federal income tax rules. Further, a U.S. Holder will generally be treated as holding an
equity interest in a PFIC in the first taxable year of the U.S. Holder’s holding period in which we become classified as a PFIC and in subsequent taxable years even if we
cease to be a PFIC in subsequent taxable years. See “Item 10. Additional Information—E. Taxation—U.S. Federal Income Taxation—Passive Foreign Investment
Company Rules.”
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.
Substantial future sales or the perception of sales of our ADSs or ordinary shares could adversely affect the price of our ADSs.
If our shareholders sell or are perceived by the market to 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 or are perceived by the market to sell a substantial amount of Class A ordinary shares,
the prevailing market price for our ADSs could be adversely affected.
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.
In early 2021, we have experienced extreme price volatility. During the year 2021 up to the date of this annual report, the closing trade price of our ADSs ranged from
US$2.4 to US$82.9 per ADS. Such extreme price volatility was probably attributable to our decision to step into cryptocurrency mining business. Due to such extreme
price volatility, the risks exposure to and the possibilities of short squeeze also increased.
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 operating results;
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the market price of cryptocurrency;
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the development of our cryptocurrency mining business;
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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;
●
changes in the economic performance or market valuations of other Internet companies;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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fluctuations in the exchange rates between the U.S. dollar and the RMB;
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addition or departure of key personnel; and
●
pending and potential litigation.
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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.
The Warrants are speculative in nature.
The Warrants offered by us do not confer any rights of ordinary share ownership on their holders, such as voting rights or the right to receive dividends, but rather merely
represent the right to acquire our Class A ordinary shares at a fixed price.
In October 2020, we completed an offering by issuing 70,500,000 Class A ordinary shares and 27,025,000 Warrants to purchase 2,702,500 ADSs, each ADS representing
thirty Class A ordinary shares and each warrant exercisable for the purchase of 0.1 ADS, including 3,525,000 Warrants to purchase an additional 352,500 ADSs, each
ADS representing thirty Class A ordinary shares, pursuant to the over-allotment option granted to the underwriter to purchase additional warrants to cover over-
allotments. In connection with such offering, we also issued Representative’s Warrants to purchase 117,500 ADSs, each representing thirty Class A ordinary shares, to
the underwriter of the offering. The numbers of the ADSs and the exercise price of the Warrants have reflected the adjustments as the result of the change in ADS-to-
Class A ordinary shares ratio from each ADS representing three Class A ordinary shares to each ADS representing thirty Class A ordinary shares effected on October 19,
2020. Most of the Warrants and Representative Warrants were exercised by cash and other means in 2021. As of the date of this annual report, each Warrant represent the
right of the holders thereof to purchase 0.1 ADS at an exercise price of US$3.7 per ADS, each ADS representing thirty Class A ordinary shares. The numbers of the
ADSs and the exercise price of the Warrants have reflected the adjustments as the result of the change in ADS-to-Class A ordinary shares ratio from each ADS
representing three Class A ordinary shares to each ADS representing thirty Class A ordinary shares effected on October 19, 2020.
On January 25, 2021, we entered into a Purchase Agreement with the holding entities of several investors in the cryptocurrencies mining industry, including Jianping
Kong, the former Director and Co-Chairman of Canaan Inc. (Nasdaq: CAN), a Bitcoin mining machine manufacturer listed on Nasdaq, Qifeng Sun, Li Zhang and
Enguang Li, based on the pre-agreed legally-binding term sheet. Those investors are collectively referred to as the Investors in this annual report. Pursuant to the
Purchase Agreement, we issued 8,108,100 Class A ordinary shares in aggregate at US$0.1233 per Class A ordinary share and 207,891,840 warrants in aggregate, each
warrant representing the right to purchase one Class A ordinary share, to the Investors in February 2020. The warrants are divided into four equal tranches: Tranche I
Warrants, Tranche II Warrants, Tranche III Warrants and Tranche IV Warrants. The exercise price of each of the Tranche I Warrants, Tranche II Warrants and Tranche III
Warrants is US$0.1233 per Class A ordinary share while the exercise price of the Tranche IV Warrants is US$0.2667 per Class A ordinary share. Each tranche of the
warrants will only be exercisable upon the satisfaction of its respective condition in connection with the market capitalization of our company reaching US$100 million,
US$300 million, US$500 million and US$1 billion within the timeframes of 6 months, 12 months, 24 months and 36 months from its issuance date, respectively. In
addition, the Tranche III Warrants will be automatically forfeited with nil consideration in the event that the Tranche II Warrants fail to become exercisable within the
specified timeframe and the Tranche IV Warrants will be automatically forfeited with nil consideration in the event that Tranche II or the Tranche III Warrants fail to
become exercisable within the specified timeframe. The Investors shall make payment of the purchase price and the exercise price for the warrants in (i) cash, (ii)
cryptocurrencies, or (iii) a combination of both, at our election. Pursuant to the Purchase Agreement, upon the satisfaction of the market capitalization condition of
Tranche III Warrants, the Investors will be entitled to collectively appoint one director to our board of directors. Such appointment right will automatically terminate on
the later of (i) the third anniversary of the closing date, and (ii) the date on which the Investors collectively hold less than 5% of our total number of ordinary shares on a
fully diluted basis. The transaction was closed in February 2021 and we received the total purchase price for 8,108,100 Class A ordinary shares of US$1.0 million fully in
cash. As of the date of this annual report, none of the Tranche I Warrants, Tranche II Warrants, Tranche III Warrants or Tranche IV Warrants was exercised. The Investors
are expected to devote cryptocurrencies mining industry resources to us for our development of cryptocurrencies mining business.
In April 2021, we completed an offering of 3,765,100 ADSs, each representing thirty Class A ordinary shares, and warrants to purchase 2,823,825 ADSs, at a public
offering price of US$33.20 per ADS and accompanying 0.75 of an warrant. The warrants offered in this offering has a term of three years and are exercisable by the
holder at US$36.00 per ADS at any time after the date of issuance. The underwriter exercised its over-allotment option that we granted to it and we further issued and
sold 564,760 ADSs, each representing thirty Class A ordinary shares, and warrants to purchase 423,574 ADSs to cover over-allotments. As of the date of this annual
report, each Warrant represent the right of the holders thereof to purchase one ADS at an exercise price of US$36.00 per ADS, each ADS representing thirty Class A
ordinary shares.
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There is no public market for the Warrants offered by us and we do not expect one to develop.
There is presently no established public trading market for the Warrants offered by us and we do not expect a market to develop. In addition, we do not intend to apply to
list the Warrants or on any securities exchange or nationally recognized trading system, including the Nasdaq. Without an active market, the liquidity of the Warrants will
be limited.
Purchasers of our Warrants will not have any rights of common shareholders until such Warrants are exercised.
The Warrants offered by us do not confer any rights of common share ownership on their holders, such as voting rights or the right to receive dividends, but rather merely
represent the right to acquire common shares at a fixed price.
Our dual-class share structure with different voting rights will limit your ability to influence corporate matters and could discourage others from pursuing any
change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
We have a dual-class share structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary shares
and our Class B ordinary shares shall at all times vote together as one class on all resolutions submitted to a vote by our shareholders. Each Class A ordinary share shall
entitle the holder thereof to one vote on all matters subject to vote at our general meetings, and each Class B ordinary share shall entitle the holder thereof to fifty votes
on all matters subject to vote at our general meetings. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while
Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B
ordinary share by the holder of such Class B ordinary share to any person who is not an affiliate of such shareholder, such Class B ordinary share shall be automatically
and immediately converted into one Class A ordinary share.
Mr. Jun Zhu, our chairman and chief executive officer, beneficially owns all of our outstanding Class B ordinary shares. As of February 28, 2022, Mr. Jun Zhu
beneficially owned approximately 69% of the aggregate voting power of our company. As a result of the dual-class share structure and the concentration of ownership,
holders of our Class B ordinary shares have considerable influence over matters such as decisions regarding mergers, consolidations and the sale of all or substantially all
of our assets, election of directors and other significant corporate actions. They may take actions that are not in the best interest of us or our other shareholders. This
concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the
opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of our ADSs. This concentrated control will limit your ability
to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A
ordinary shares and ADSs may view as beneficial. In addition, we may incur incremental compensation expenses to the holders of Class B ordinary shares as a result of
their becoming entitled to high votes on each Class B ordinary share.
The dual-class structure of our ordinary shares may adversely affect the trading market for our ADSs.
S&P Dow Jones and FTSE Russell have changed their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to
exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such
indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our
ordinary shares may prevent the inclusion of our ADSs representing Class A ordinary shares in such indices and may cause shareholder advisory firms to publish
negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could
result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital
structure could also adversely affect the value of our ADSs.
Our shareholders may not have the same protections generally available to stockholders of other Nasdaq-listed companies because we are currently a “controlled
company” within the meaning of the Nasdaq Listing Rules.
Because Mr. Jun Zhu holds a majority of the total outstanding voting power in our company for the election of our board of directors, we are a “controlled company”
within the meaning of Nasdaq Listing Rule 5615(c). As a controlled company, we qualify for, and our board of directors, the composition of which is controlled by Mr.
Jun Zhu, may rely upon, exemptions from several of Nasdaq’s corporate governance requirements, including requirements that:
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a majority of the board of directors consist of independent directors;
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●
compensation of officers be determined or recommended to the board of directors by a majority of its independent directors or by a compensation committee
comprised solely of independent directors; and
●
director nominees be selected or recommended to the board of directors by a majority of its independent directors or by a nominating committee that is
composed entirely of independent directors.
Accordingly, to the extent that we may choose to rely on one or more of these exemptions, our shareholders would not be afforded the same protections generally as
shareholders of other Nasdaq-listed companies for so long as Mr. Zhu is able to control the composition of our board and our board determines to rely upon one or more
of such exemptions.
The rights of our shareholders may differ from the rights typically offered to shareholders of a U.S. corporation.
We are incorporated under the laws of the Cayman Islands. The rights of holders of our Class A ordinary shares and, therefore, certain of the rights of holders of our
ADSs, are governed by Cayman Islands law, including the provisions of the Companies Act (As Revised) of the Cayman Islands, or the “Companies Act,” and by our
Third Amended and Restated Memorandum and Articles of Association. These rights differ in certain respects from the rights of shareholders in typical U.S.
corporations. See “Item 10. Additional Information—B. Memorandum and Articles of Association—Differences in Corporate Law” for a description of certain key
differences between the provisions of the Companies Act applicable to us and, for example, the Delaware General Corporation Law relating to shareholders’ rights and
protections.
Our Third Amended and Restated Memorandum and Articles of Association contain anti-takeover provisions that could have a material adverse effect on the rights
of holders of our Class A ordinary shares and ADSs.
Our Third Amended and Restated Memorandum and Articles of Association contain provisions to limit the ability of others to acquire control of our company or cause us
to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our dual-class voting
structure gives disproportionate voting power to the holders of our Class B ordinary shares. In addition, our board of directors will have the authority, without further
action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional
or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights associated with our Class A ordinary shares, including Class A ordinary shares represented by ADS.
Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If
our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and
ADSs may be materially and adversely affected.
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 Third Amended and Restated Memorandum and Articles of Association and by the Companies Act and common law of the
Cayman Islands. The rights of our shareholders and the fiduciary duties 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.
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Our currently effective memorandum and articles of association provide that the United States District Court for the Southern District of New York (or, if the United
States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New York)
is the exclusive judicial forum within the U.S. for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal
securities laws of the United States, which could limit the ability of holders of our Class A ordinary shares, the ADSs or other securities to obtain a favorable judicial
forum for disputes with us, our directors and officers, the depositary, and potentially others.
Our Third Amended and Restated Memorandum and Articles of Association provide that the United States District Court for the Southern District of New York (or, if the
United States District Court for the Southern District of New York lacks subject matter jurisdiction over a particular dispute, the state courts in New York County, New
York) is the exclusive forum within the United States for the resolution of any complaint asserting a cause of action arising out of or relating in any way to the federal
securities laws of the United States, regardless of whether such legal suit, action, or proceeding also involves parties other than our company. The enforceability of
similar federal court choice of forum provisions in other companies’ organizational documents has been challenged in legal proceedings in the United States, and it is
possible that a court could find this type of provision to be inapplicable or unenforceable. If a court were to find the federal choice of forum provision contained in our
Third Amended and Restated Memorandum and Articles of Association to be inapplicable or unenforceable in an action, we may incur additional costs associated with
resolving such action in other jurisdictions. If upheld, the forum selection clause in our Third Amended and Restated Memorandum and Articles of Association may limit
a security-holder’s ability to bring a claim against us, our directors and officers, the depositary, and potentially others in his or her preferred judicial forum, and this
limitation may discourage such lawsuits. Holders of our shares or the ADSs will not be deemed to have waived our compliance with the federal securities laws and the
regulations promulgated thereunder pursuant to the exclusive forum provision in our Third Amended and Restated Memorandum and Articles of Association.
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 an exempted company incorporated in the Cayman Islands, substantially all of our assets are located in the U.S. For assets located in China, we conduct a
substantial portion of our operations through our wholly-owned subsidiaries and variable interest entity 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.
You may not be able to exercise your right to vote.
As a holder of ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You may give voting
instructions to the depositary of our ADSs to vote the underlying Class A ordinary shares represented by your ADSs. Otherwise, you will not be able to exercise your
right to vote with respect to the underlying Class A ordinary shares represented by your ADSs unless you withdraw the shares and become the registered holder of such
shares prior to the record date for the general meeting. However, you may not receive sufficient advance notice of a shareholders’ meeting to enable you to withdraw the
underlying Class A ordinary shares represented by your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote
directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. Pursuant to our Third 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 the underlying Class A ordinary shares represented by your ADSs. In addition, the depositary and its agents are not
responsible for failing to carry out your voting instructions or for the manner of carrying out your 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 direct how the underlying Class A ordinary shares represented by your ADSs are voted and you may have
no legal remedy if the underlying Class A ordinary shares represented by your ADSs are not voted as you requested.
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If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading
volume could decline.
The trading market for our ADSs depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any
control over these analysts or the content that they publish about us. If our financial performance fails to meet analyst estimates or one or more of the analysts who cover
us downgrade our ADSs or change their opinion of our ADSs, our ADS price would likely decline. If one or more of these analysts cease coverage of our company or fail
to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our ADS price or trading volume to decline.
Because we do not expect to pay dividends in the foreseeable future, you must rely on a price appreciation of our ADSs for return on your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not
expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.
Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders
may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands
company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company
being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount
and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if
any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the
return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in
value in the future or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose
your entire investment in our ADSs.
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 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.
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ADS holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the
plaintiff(s) in any such action.
The deposit agreement governing the ADSs provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have
against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and
circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in
connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a
contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement. In
determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and
voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal
counsel regarding the jury waiver provision before investing in the ADSs.
If you or any other ADS holders bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims
under federal securities laws, you may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against
us and / or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable
trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results
that could be less favorable to the plaintiffs in any such action.
Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial.
No provision of the deposit agreement or ADSs serves as a waiver by any ADS holder or by us or the depositary of compliance with any substantive provision of the U.S.
federal securities laws and the rules and regulations promulgated thereunder.
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 an exempted 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 Technology Consulting (Shanghai) Co., Ltd., or The9 Computer,
previously a direct wholly-owned subsidiary of GameNow in China that we disposed in February 2020. We now conduct our operations through NBTC Limited, a direct
wholly-owned subsidiary in Hong Kong, and NFTSTAR, a direct wholly-owned subsidiary in Hong Kong, and Shanghai Hui Ling, a direct wholly-owned subsidiary of
GameNow in China.
Due to the current restrictions on foreign ownership of ICP and Internet culture operation in China, currently, we primarily rely on Shanghai IT, one of the variable
interest entity, in holding certain licenses and approvals necessary for our business online game operations through a series of contractual arrangements with Shanghai IT
and its shareholders. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Arrangements with Variable Interest Entity” for
details of the contractual arrangements with Shanghai IT and its shareholders. We do not hold any equity interest in Shanghai IT.
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Our ADSs, each currently representing thirty Class A ordinary shares, are listed on the Nasdaq Capital Market. Our ADSs are traded under the symbol “NCTY.” Our
ADSs had been listed on the Nasdaq Global Market from December 15, 2004 to October 2018. Effective October 19, 2020, we effected a change of the ratio of the ADS
to our Class A ordinary shares from one ADS representing three Class A ordinary shares to one ADS representing thirty Class A ordinary shares. The change in the ratio
of the ADS to our Class A ordinary shares had no impact on our underlying Class A ordinary shares, and no Class A ordinary shares were issued or cancelled in
connection with the change in the ratio of the ADS to our Class A ordinary shares. As a result of such ADS ratio change, the exercise rate and the exercise price of the
Warrants were adjusted from each Warrant representing the right of the holders thereof to purchase one ADS at an exercise price of US$0.37 per ADS, each ADS then
representing three Class A ordinary shares, to each Warrant representing the right of the holders thereof to purchase 0.1 ADS at an exercise price of US$3.7 per ADS,
each ADS representing thirty Class A ordinary shares, effective at the closing of business on October 19, 2020. We completed another offering in April 2021, with each
Warrant representing the right of the holders thereof to purchase one ADS at an exercise price of US$36.00 per ADS, each ADS representing thirty Class A ordinary
shares.
In March 2019, we signed a joint venture agreement with F&F to establish a joint venture to manufacture, market, distribute, and sell electric vehicles in China. We
subsequently amended the joint venture agreement in June, July and September 2019, respectively. Pursuant to the joint venture agreement and the amendments with
F&F, we are obligated to make a total of US$600.0 million in total capital contribution to the joint venture which are payable in three installments as follows: (i) the first
installment in the amount of US$200.0 million shall be contributed in in accordance with the payment schedule of license fees to be agreed in the license agreement with
F&F, (ii) the second installment in the amount of US$200.0 million shall be contributed within two months (subject to an extension for one month at our discretion) after
the definitive arrangement relating to the use right in a piece of land in China, and (iii) the third installment in the amount of US$200.0 million shall be contributed
within two months (subject to an extension for one month at our discretion) after the achievement of certain car model design milestone by F&F. In March 2019, we
borrowed an interest-free loan in a principal amount of US$5.0 million from Ark Pacific Associates Limited. In April 2019, the entire principal amount was paid out by
Ark Pacific Associates Limited to F&F as non-refundable deposit, upon our request and on our behalf. In November 2020, we converted our initial deposit of US$5.0
million with F&F into 2,994,011 Class B ordinary shares of FF Intelligent Mobility Global Holdings Ltd. (formerly known as Smart King Limited), the holding company
of F&F that operates its electric vehicles business, at a pre-agreed conversion price set forth in the joint venture agreement. As a result of such conversion, the capital
commitment in the joint venture agreement was deemed to be released. In July 2021, F&F Intelligent Mobility Global Holdings Ltd. completed a merger with a SPAC
company and became a public company F&F Intelligent Electric Inc. (Nasdaq: FFIE). The Group owns 423,053 shares of FFIE after the merger.
We undertook a corporate restructure to facilitate the sale of the equity interests in certain subsidiaries that collectively held the properties previously mortgaged to secure
the Convertible Notes. In September 2019, we entered into a definitive agreement with Kapler Pte. Ltd, or Kapler, an indirect subsidiary of Keppel Corporation Limited,
a multi-business company providing solutions for sustainable urbanization, pursuant to which 100% equity interest in several then subsidiaries of our company in China,
namely China The9 Interactive (Shanghai) Ltd., The9 Computer and Shanghai Kaie Information Technology Co., Ltd., or Shanghai Kaie, that collectively own
Zhangjiang Micro-electronic Port Block #3 were sold to Kapler in exchange for consideration of RMB493.0 million. Other assets and liabilities previously held by the
subsidiaries sold were transferred to Shanghai Hui Ling. We terminated the contractual arrangements between The9 Computer and Shanghai IT, and Shanghai Hui Ling
entered into new contractual arrangements with Shanghai IT, replacing The9 Computer. The share pledge over the equity interest in The9 Computer to secure the
Convertible Notes was released and de-registered in May 2019. This transaction was completed in February 2020.
On May 6, 2019, we held an extraordinary general meeting at which our shareholders approved, among other things, to adjust our authorized share capital and to adopt a
dual-class share structure, consisting of Class A ordinary shares and Class B ordinary shares. Each Class A ordinary share is entitled to one vote per share on all matters
subject to vote at general meetings of our company. Each Class B ordinary share is entitled to fifty (50) votes per share on all matters subject to vote at general meetings
of our company. The issued and outstanding ordinary shares then held by Incsight Limited, a British Virgin Islands business company, which is wholly owned by Mr. Jun
Zhu, our chairman and chief executive officer, and the issued and outstanding ordinary shares then held by Mr. Jun Zhu himself, were re-designated and re-classified as
Class B ordinary shares. All other ordinary shares then issued and outstanding were re-designated and re-classified as Class A ordinary shares. On the same date, we
amended and restated our then effective Amended and Restated Memorandum of Association and Articles of Association in their entirety and adopted our Second
Amended and Restated Memorandum and Articles of Association which reflect, among other things, the changes to our capital structure. As a result of such changes,
Mr. Jun Zhu holds the majority of our outstanding voting power and we became a “controlled company” as defined under Nasdaq Stock Market Rules.
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In May 2019, we entered into a joint venture agreement with EN+, to establish a joint venture to engage in sales of electric vehicle charging equipment, investment,
construction and operation of charging stations, and provision of operational services relating to charging equipment and platforms for electric vehicles. Pursuant to the
joint venture agreement, we will make a cash investment of RMB50.0 million in the joint venture in exchange for 80% equity interest in the joint venture, and EN+ will
contribute its current and future proprietary electric vehicle charging technologies to the joint venture in exchange for 20% equity interest of the joint venture. Currently,
we do not expect to pursue such joint venture opportunity with EN+.
In May 2019, we incorporated The9 EV Limited in Hong Kong, and The9 EV Limited holds 50% interest in FF The9 China Joint Venture Limited, the joint venture we
established with F&F under the laws of Hong Kong in September 2019. We currently do not expect to pursue such joint venture opportunity.
In June 2019, we and our wholly-owned subsidiary entered into a share purchase agreement with Comtec Windpark Renewable (Holdings) Co., Ltd, a wholly-owned
subsidiary of Comtec Solar Systems Group Limited (SEHK: 00712). Pursuant to the share purchase agreement, we issued 3,444,882 Class A ordinary shares to purchase
9.9% equity interest in Zhenjiang Kexin Power System Design and Research Company, or Zhenjiang Kexin, a lithium battery management system and power storage
system supplier. We do not expect to pursue such investment and such investment has been written off.
In July 2019, we entered into a convertible note purchase agreement with Jupiter Excel Limited, pursuant to which we agreed to sell and Jupiter agreed to purchase 12%
convertible notes in an aggregate principal amount of US$30 million. The 2019 Convertible Notes would be funded in two tranches. The principal amount of tranche A
and tranche B of the 2019 Convertible Notes would be US$10 million and US$20 million, respectively. The closing of the transaction was subject to certain closing
conditions. Due to unfavorable market conditions and failure to satisfy the closing conditions, the proposed transaction was not closed and the convertible note purchase
agreement was terminated in March 2020.
In July 2019, we entered in an amendment to the amended and restated license agreement dated October 31, 2017 with Smilegate and other parties thereto to extend the
license period for game development till October 31, 2020. The license period for CrossFire New Mobile Game has expired and we no longer plan to negotiate with
Smilegate to re-gain the license for such game development. See “Item 3. Key Information D. Risk Factors— Risks Related to Our Company and Our Industry— We and
our joint ventures may no longer focus on obtaining licenses to games to expand our gaming business, our future results of operations and profitability may be materially
impacted,” and “Item 3. Key Information—D. Risk Factors— Risks Related to Our Company and Our Industry—We may no longer consider to pursue re-gaining license
for CrossFire New Mobile Game, launching or operating CrossFire New Mobile Game or other licensed games in China, and our future results of operations may be
materially and adversely affected.”In February 2020, we issued and sold (i) a one-year convertible note in a principal amount of US$500,000, (ii) 70,000 ADSs, and
(iii) 3,300,000 Class A ordinary shares, for an aggregate consideration of US$500,000 to Iliad Research and Trading, L.P., or Iliad. The convertible note bears interest at a
rate of 6.0% per year, compounded daily. The convertible note was fully repaid and settled in December 2020. In accordance with the convertible note, upon repayment
of the convertible note, we have repurchased the 3,300,000 Class A ordinary shares previously issued to Iliad for nominal consideration.
On March 6, 2020, we received a letter from the Listing Qualifications Department of Nasdaq, notifying us that the minimum bid price per ADS, each then representing
three Class A ordinary shares of the Company, was below US$1.00 for a period of 30 consecutive business days and we did not meet the minimum bid price requirement
set forth in Rule 5550(a)(2) of the Nasdaq Listing Rules. Due to the tolling of compliance period through June 30, 2020, as determined by Nasdaq, we had until
November 16, 2020, to regain compliance with Nasdaq’s minimum bid price requirement. On November 2, 2020, we received a notification letter from Nasdaq stating
that we have regained compliance with the minimum bid price requirement.
On April 13, 2020, we received a letter from the Listing Qualifications Department of Nasdaq, notifying us that we no longer met the continued listing standards of
MVLS for the Nasdaq Capital Market, as set forth in the Nasdaq Listing Rule 5550(b)(2) because the market value of our securities listed on Nasdaq for the last 30
consecutive business days was below the minimum MVLS requirement of US$35.0 million. Pursuant to the Rule 5810(c)(3)(C) of the Nasdaq Listing Rules, we have a
compliance period of 180 calendar days, or until October 12, 2020, to regain compliance with Nasdaq’s minimum MVLS requirement. On August 5, 2020, we received a
notification letter from Nasdaq stating that we have regained compliance with the minimum MVLS requirement.
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In December 2018, we failed to repay the senior convertible notes issued and sold by us in December 2015 upon the maturity date and later entered into a deed of
settlement and several amendments with Splendid Days, the holder of the Convertible Notes in relation to the repayment schedule for the overdue Convertible Notes. On
May 29, 2020, we entered into a Settlement Deed with Splendid Days and other parties named therein relating to Convertible Notes repayment. Pursuant to the
Settlement Deed, the interest rate on the Convertible Notes was retrospectively lowered from 12% to 7% per annum for the period commencing from the original
Convertible Notes issuance date until February 21, 2020, the date on which interest stopped to accrue on the Convertible Notes. We settled approximately US$50.0
million of the total outstanding amount due to Splendid Days and its affiliates primarily relating to Convertible Notes in aggregate by cash and further settled the
remaining portion on June 12, 2020 by an initial issuance of 32,400,000 Class A ordinary shares to Splendid Days. In accordance with the terms and conditions set forth
in the Settlement Deed, the interest-free loan of US$5.0 million extended by Ark Pacific Associates Limited, an affiliate of Splendid Days, was waived in
December 2020. In April 2022 we have negotiated and intend to sign another settlement deed pursuant to which we agreed to pay Splendid Days and a third-party total of
approximately US$8.6 million in order to settle outstanding claims under the Convertible Notes.
On June 17, 2020, our board of directors and board committees authorized and approved the issuance of an aggregate number of 29,100,000 restricted Class A ordinary
shares of our company to certain directors, officers, employees and consultants of our company as share incentive awards for their services to us pursuant to our Eighth
Amended and Restated 2004 Stock Option Plan. Among those restricted Class A ordinary shares grants, 15,600,000 restricted Class A ordinary shares are subject to
restrictions on transferability that would be removed once certain pre-agreed performance targets are met, and 13,500,000 restricted Class A ordinary shares are subject to
restrictions on transferability for a six-month period that would be removed in installments once certain service period conditions are met. All the restrictions attached to
those shares have been removed upon the satisfaction of the underlying targets and conditions.
In September 2020, we entered into a master cooperation and publishing agreement with Voodoo, a French game developer and publisher, to cooperate on the publishing
and operations of casual games in China. In December 2020, we entered into an amendment to the master cooperation and publishing agreement to adjust the total
consideration thereunder. Pursuant to the master cooperation and publishing agreement and its amendment, we obtained exclusive licenses of several games developed by
Voodoo. Voodoo granted us an exclusive, sub-licensable license to test, perform, market, promote, distribute, reproduce, modify, support and/or otherwise use or exploit
such games directly or through authorized contractors in China for a maximum period of three years, commencing upon the upload and distribution of the underlying
games on any platform. In consideration for the exclusive license granted to us and as a minimum guarantee payment with respect to the first game, as amended by the
amendment to the master cooperation and publishing agreement, we paid US$3.0 million in cash to Voodoo. Pursuant to the master cooperation and publishing
agreement, we may further pay Voodoo an aggregate amount of US$10.0 million in cash based on the agreed timetable, subject to satisfaction of certain conditions
related to delivery of games by Voodoo. Due to uncertainty in the game development, the upfront payment has been fully impaired in the second half of 2020.
In October 2020, we completed an offering by issuing 70,500,000 Class A ordinary shares and 27,025,000 Warrants to purchase 2,702,500 ADSs, each ADS representing
thirty Class A ordinary shares and each warrant exercisable for the purchase of 0.1 ADS, including 3,525,000 Warrants to purchase an additional 352,500 ADSs, each
ADS representing thirty Class A ordinary shares, pursuant to the over-allotment option granted to the underwriter to purchase additional warrants to cover over-
allotments. In connection with such offering, we also issued Representative’s Warrants to purchase 117,500 ADSs, each representing thirty Class A ordinary shares, to the
underwriter of the offering. We received net proceeds of US$8.1 million from such offering. Most of the Warrants and Representative Warrants were exercised by cash
and other means in 2021. In 2021, we received an additional amount of US$9.98 million. The approximate total amount of proceeds from the offering is US$18.6
million.
On November 12, 2020, we received a letter from the Listing Qualifications Department of Nasdaq, notifying us that we no longer met the continued listing standards of
MVLS for the Nasdaq Capital Market, as set forth in the Nasdaq Listing Rule 5550(b)(2) because the market value of our securities listed on Nasdaq for the last 30
consecutive business days was below the minimum MVLS requirement of US$35.0 million. Pursuant to the Rule 5810(c)(3)(C) of the Nasdaq Listing Rules, we have a
compliance period of 180 calendar days, or until May 11, 2021, to regain compliance with Nasdaq’s minimum MVLS requirement. On January 21, 2021, we received a
notification letter from Nasdaq stating that we have regained compliance with the minimum MVLS requirement.
Since February 2021, we started our cryptocurrency mining business in China. From time to time, we have selectively invested in cryptocurrency mining businesses, and
will continue to do so in the future to expand and develop our business. See “Item 4.B. Information on the Company- Business Overview-Cryptocurrency Mining” for
material strategic investments in cryptocurrency mining businesses over the past year.
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On January 25, 2021, we entered into a Purchase Agreement with the holding entities of several investors in the cryptocurrencies mining industry, including Jianping
Kong, the former Director and Co-Chairman of Canaan Inc. (Nasdaq: CAN), a Bitcoin mining machine manufacturer listed on Nasdaq, Qifeng Sun, Li Zhang and
Enguang Li, based on the pre-agreed legally-binding term sheet. Those investors are collectively referred to as the Investors in this annual report. Pursuant to the
Purchase Agreement, we issued 8,108,100 Class A ordinary shares in aggregate at US$0.1233 per Class A ordinary share and 207,891,840 warrants in aggregate, each
warrant representing the right to purchase one Class A ordinary share, to the Investors in February 2020. The warrants are divided into four equal tranches: Tranche I
Warrants, Tranche II Warrants, Tranche III Warrants and Tranche IV Warrants. The exercise price of each of the Tranche I Warrants, Tranche II Warrants and Tranche III
Warrants is US$0.1233 per Class A ordinary share while the exercise price of the Tranche IV Warrants is US$0.2667 per Class A ordinary share. Each tranche of the
warrants will only be exercisable upon the satisfaction of its respective condition in connection with the market capitalization of our company reaching US$100 million,
US$300 million, US$500 million and US$1 billion within the timeframes of 6 months, 12 months, 24 months and 36 months from its issuance date, respectively. In
addition, the Tranche III Warrants will be automatically forfeited with nil consideration in the event that the Tranche II Warrants fail to become exercisable within the
specified timeframe and the Tranche IV Warrants will be automatically forfeited with nil consideration in the event that Tranche II or the Tranche III Warrants fail to
become exercisable within the specified timeframe. The Investors shall make payment of the purchase price and the exercise price for the warrants in (i) cash,
(ii) cryptocurrencies, or (iii) a combination of both, at our election. Pursuant to the Purchase Agreement, upon the satisfaction of the market capitalization condition of
Tranche III Warrants, the Investors will be entitled to collectively appoint one director to our board of directors. Such appointment right will automatically terminate on
the later of (i) the third anniversary of the closing date, and (ii) the date on which the Investors collectively hold less than 5% of our total number of ordinary shares on a
fully diluted basis. The transaction was closed in February 2021 and we received the total purchase price for 8,108,100 Class A ordinary shares of US$1.0 million fully in
cash. As of the date of this annual report, none of the Tranche I Warrants, Tranche II Warrants, Tranche III Warrants or Tranche IV Warrants was exercised. The Investors
are expected to devote cryptocurrencies mining industry resources to us for our development of cryptocurrencies mining business.
In February 2021, we issued and sold (i) a one-year convertible note in a principal amount of US$5,000,000, (ii) 50,000 ADSs, and (iii) 10,000,000 Class A ordinary
shares, for an aggregate consideration of US$5,000,000 to Streeterville. The convertible note bears interest at a rate of 6.0% per year, computed on the basis of a 360-day
year. Streeterville has the right at any time after six months have elapsed since the purchase date until the outstanding balance has been paid in full, at its election, to
convert all or any portion of the outstanding balance into ADSs of our company at an initial conversion price of US$14 per ADS, each ADS representing thirty Class A
ordinary shares, subject to adjustment. Beginning on the date that is six months from the note purchase date, Streeterville has the right, exercisable at any time in its sole
and absolute discretion, to redeem any portion of the convertible note up to US$840,000 per calendar month. Payment of the redemption amount could be in cash or our
ADSs, provided that any redemptions made in cash which exceed half of the original principal amount will be subject to a ten percent (10%) premium. We have the right
to prepay all or any portion of the outstanding balance, at any time, subject to fifteen percent (15%) premium on the prepaid amount. In the event the principal amount
and interest accrued for the convertible note issued to Streeterville are fully repaid, we have the right to repurchase the remaining Class A ordinary shares held by
Streeterville that are unsold at US$0.0001 per share. The convertible notes are repaid in full in 2021.
In February 2021, NBTC Limited, our wholly-owned subsidiary, signed a strategic cooperation framework purchase agreement, or the Cooperation Agreement, with
Shenzhen MicroBT Electronics Technology Co., Ltd., the manufacturer of WhatsMiner bitcoin mining machines. Pursuant to the Cooperation Agreement, upon the
payment of a deposit, NBTC Limited has the right of first offer to purchase 5,000 WhatsMiner bitcoin mining machines from MicroBT within one year, including but not
limited to models M32 and M31S. We completed first batch purchase of 440 WhatsMiner M32 machines in February 2021. In March 2021, NiuLian Technology
(ShaoXing) Co., Ltd., our indirect wholly-owned subsidiary, has signed the second purchase order with MicroBT under the Cooperation Agreement. This second batch of
purchase consists of 482 WhatsMiner M31S+ machines. The hash rate of each of these WhatsMiner M31S+ machines is approximately 80-86TH/s, with the power
consumption of approximately 38-42W/T. These WhatsMiner M31S+ machines had been delivered and The9’s Bitcoin hash rate will be increased by approximately 40
PH/s. NiuLian Technology was sold and deconsolidated by the end of 2021. In addition to the WhatsMiner bitcoin mining machines, we also plan to continue purchasing
different types of cryptocurrency mining machines in the near future.
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In February 2021, we entered into a standby equity distribution agreement, or the SEDA, with YA II PN, LTD., a Cayman Islands exempt limited partnership managed by
Yorkville Advisor Global, LP, or the Purchaser, pursuant to which we are able to sell up to US$100.0 million of our ADSs solely at our request at any time during the 36
months following the date of the SEDA. Pursuant to the SEDA, the preliminary purchase price per ADS, or the Preliminary Purchase Price, shall initially be 90% of the
average of the 3 lowest daily volume weighted average price of our ADSs during the five consecutive trading days immediately prior to the delivery of an advance notice
by us, or the Preliminary Pricing Period (the date of payment of Preliminary Purchase Price being the Preliminary Closing Date), which shall be adjusted to the greater of
(A) 90% of the average of the 3 lowest daily volume weighted average price of our ADSs during the Preliminary Pricing Period and during the five consecutive trading
days commencing on the trading day immediately following the Preliminary Closing Date, or commencing on the Preliminary Closing Date if the ADSs are received by
the Purchaser prior to the close of trading on the Preliminary Closing Date, or the Secondary Pricing Period, or (B) 85% of the average of the five daily volume weighted
average price of our ADSs during the Secondary Pricing Period, or the Final Purchase Price. If the Final Purchase Price is less than the Preliminary Purchase Price, we
shall deliver additional shares to the Purchaser. If the Final Purchase Price is greater than the Preliminary Purchase Price, the Purchaser shall make payment of the
additional amount to us. The purchase would be subject to certain ownership limitations as provided under the SEDA. The Purchaser has agreed that, during the term of
the SEDA, neither the Purchaser nor its affiliates will engage in any short sales or hedging transactions with respect to the Company’s Class A ordinary shares or ADSs.
We intend to use the proceeds from the potential offering of the ADSs pursuant to the SEDA to fund our business growth. On August 27, 2021, the Company and the
Purchaser agreed to terminate the SEDA and entered into a new standby equity distribution agreement (the “August SEDA”). The Company did not issue any securities
pursuant to the SEDA. Pursuant to the August SEDA, the Company will be able to sell up to US$100.0 million of its ADSs solely at the Company’s request at any time
during the 36 months following the date of the August SEDA. The ADSs would be purchased at a price per ADS that is the greater of (i) 85% of the average of the five
daily VWAPs (as defined below) during the pricing period, or (ii) 90% of the average of the 3 lowest daily VWAPs during the pricing period, rounded to the nearest
100th. “VWAP” means, for any trading day, the daily volume weighted average price of the Company’s ADSs for such date on the principal market as reported by
Bloomberg L.P. during regular trading hours.
In February 2021, we entered into purchase agreements with five Bitcoin mining machine owners to purchase Bitcoin mining machines by issuance of our Class A
ordinary shares. Pursuant to the purchase agreements, we issued an aggregate of 26,838,360 Class A ordinary shares in exchange for 26,007 Bitcoin mining machines,
with a total hash rate of approximately 549PH/S, accounting for about 0.36% of the global hash rate of Bitcoin. Majority of these mining machines were initially
deployed in Xinjiang, Sichuan and Gansu in China. The number of Class A ordinary shares issued to each owner was determined based on the fair market value of
Bitcoin mining machines, as apprised by an independent valuation firm prior to the execution of the purchase agreements, at a pre-agreed per share price of
approximately US$0.37 per Class A ordinary share (equivalent to US$11.18 per ADS).
In February 2021, our board of directors and board committees authorized and approved the issuance of an aggregate number of 33,090,000 Class A ordinary shares of
our company to certain directors, executive officers, employees and consultants of our company as share incentive awards for their services to us pursuant to the Option
Plan. Among those Class A ordinary shares grants, 32,190,000 shares were restricted Class A ordinary shares, subject to restrictions on transferability to be removed
upon the satisfaction of the conditions that half of the restricted shares should vest if our market capitalization reaches US$400 million and the other half should vest if
our market capitalization reaches US$500 million. We also granted 900,000 restricted Class A ordinary share units to our directors which are immediately vested and
issued the same number of shares.
In February 2021, we entered into a share purchase agreement with each of the four investors in the cryptocurrencies mining industry, respectively. Pursuant to the share
purchase agreements, we should issue 9,231,240 Class A ordinary shares in aggregate to investors for an aggregate consideration of US$11.5 million. Such transactions
were subsequently completed. Pursuant to the share purchase agreements, we filed a resale registration statement on Form F-3 covering resale of the investors’ Class A
ordinary shares on May 3, 2021.
In February 2021, we entered into a legally binding memorandum of understanding on the acquisition of 70% equity interest in Hangzhou SuanLi Technology Co., Ltd.,
a cryptocurrency cloud mining blockchain Software-as-a-Service company. The acquisition consideration would be approximately US$7 million, subject to due diligence
and valuation to be conducted by an independent valuation firm. We will pay the acquisition consideration by issuance of Class A ordinary shares at a price of US$82.89
per ADS, representing the closing market price of our ADSs prior to the signing of the memorandum of understanding. The deal has not been closed and we currently do
not expect it to be closed due to the due diligence results.
In February 2021, we signed a framework agreement with a Filecoin mining machine vendor to purchase Filecoin mining machines for cash consideration of US$10
million.
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In March 2021, we entered into purchase agreements with five Bitcoin mining machine owners to purchase Bitcoin mining machines by issuance of our Class A ordinary
shares. Pursuant to the purchase agreements, we issued an aggregate of 3,832,830 Class A ordinary shares in exchange for various Bitcoin mining machines including
different brands, such as WhatsMiner, AntMiner and AvalonMiner, with a total number of 8,489 units and a total hash rate of approximately 156PH/S. These Bitcoin
mining machines were initially deployed in Qinghai, Xinjiang and Inner Mongolia in China. The number of Class A ordinary shares issued to each owner was
determined based on the fair market value of Bitcoin mining machines, as apprised by an independent valuation firm prior to the execution of the purchase agreements, at
a pre-agreed per share price of approximately US$0.78 per Class A ordinary share (equivalent to US$23.35 per ADS).
In March 2021, we signed three legally-binding memoranda of understanding with three unrelated Bitcoin mining machine owners to purchase Bitcoin mining machines
by the issuance of Class A ordinary shares. This batch of Bitcoin mining machines includes different brands such as AvalonMiner, AntMiner and WhatsMiner, with an
additional total number of 10,252 units and an additional total hash rate of approximately 192PH/S. According to the memoranda of understanding, we will issue
approximately 5,883,750 Class A ordinary shares (equivalent to 196,125 ADSs) to the sellers based on a per share price of approximately US$1.3 per Class A ordinary
share (equivalent to US$38.51 per ADS) The number of Class A ordinary shares to be issued is subject to certain price adjustment mechanisms to be assessed six months
after the signing of the definitive agreements. We designated an independent valuation firm to conduct examination and assessment of the Bitcoin mining machine fair
market value. We entered into definitive agreement for the total of 5,246 units. After the closing, we issued additional Class A ordinary shares to two shareholders on
November 18, 2021, while the third is still pending the ADS delivery.
In March 2021, our wholly-owned subsidiary NBTC Limited signed a Bitcoin mining machine purchase agreement with Bitmain Technologies Limited. Pursuant to the
purchase agreement, we will purchase 24,000 Antminer S19j Bitcoin mining machines, which are scheduled to deliver starting from November 2021, for a total
consideration of US$82.8 million payable in installments according to the agreed time schedule. As of the date of this annual report, approximately US$74 million has
been paid.
In March 2021, we issued and sold a one-year convertible note in a principal amount of US$20,000,000 to Streeterville for an aggregate consideration of US$20,000,000.
In addition, we are obligated to issue certain number of ADSs to Streeterville as transaction cost. The convertible note bears interest at a rate of 6.0% per year, computed
on the basis of a 360-day year. Streeterville has the right, at any time after six months have elapsed since the purchase date until the outstanding balance has been paid in
full, at its election, to convert all or any portion of the outstanding balance into ADSs of our company at an initial conversion price per ADS calculated as ninety percent
(90%) of the lower of (a) the average of the closing trade prices during the five (5) trading days immediately preceding the date of the conversion, and (b) the closing
trade price on the trading day immediately preceding the date of the conversion. Beginning on the date that is six months from the note purchase date, Streeterville has
the right, exercisable at any time in its sole and absolute discretion, to redeem any portion of the convertible note up to US$3,360,000 per calendar month. Payment of the
redemption amount could be in cash or our ADSs, provided that any redemptions made in cash which exceed half of the original principal amount will be subject to a ten
percent (10%) premium. We have the right to prepay all or any portion of the outstanding balance, at any time, subject to fifteen percent (15%) premium on the prepaid
amount. The convertible note has been partially repaid and the remaining outstanding amount is approximately US$16 million, as of March 30, 2022.
In March 2021, we signed a Filecoin mining machine purchase and hosting agreement amounting to approximately US$2 million with a Filecoin mining service provider.
In February 2021, we signed a US$10 million framework agreement with a Filecoin mining machine vendor to purchase Filecoin mining machines. This new purchase
agreement is with another Filecoin mining machine vendor. Filecoin is an open source, distributed storage and digital payment system. Users can use the preset economic
incentive mechanism to store data to ensure that files are stored and accessed reliably for a long time. Users use the Filecoin in the system to rent hard drive space; and
storage miners are responsible for providing storage space to store files and proving these files have been stored correctly. Based on Filecoin’s technology and the
expected continuous expansion of future application scenarios, as well as the recent positive price trend of Filecoin, we decided to increase the investment in Filecoin and
the effective storage mining power in the Filecoin network, to fulfill its growth strategy in the cryptocurrency mining business.
On March 31, 2021, we entered into an Underwriting Agreement with Maxim Group LLC, as the representative of several underwriters. In April 2021, we completed an
offering of 3,765,100 ADSs, each representing thirty Class A ordinary shares, and warrants to purchase 2,823,825 ADSs, at a public offering price of US$33.20 per ADS
and accompanying 0.75 of an warrant. The warrants offered in this offering has a term of three years and are exercisable by the holder at US$36.00 per ADS at any time
after the date of issuance. The underwriter exercised its over-allotment option that we granted to it and we further issued and sold 564,760 ADSs, each representing thirty
Class A ordinary shares, and warrants to purchase 423,574 ADSs to cover over-allotments. The aggregate net proceeds from this offering was approximately US$135.1
million, after deducting underwriting discounts and commissions and offering expenses.
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In August 2021, we formally stepped into the NFT business. NFTSTAR Singapore Pte. Ltd., our Singapore wholly owned subsidiary, launched a NFT trading and
community platform NFTSTAR (www.nftstar.com). NFTSTAR is a NFT trading and community platform that provides users with purchase, trade, and interactive
activities. NFTSTAR features NFT collections created by global stars licensed IPs. Users can purchase, mint and own stars’ limited NFT collections on the platform.
Each NFT collectible has a unique record on the blockchain, and the users will obtain the ownership of the unique NFT collectible through purchase on the platform, or
through trading on NFTSTAR’s marketplace and other designated third-party marketplaces, such as OpenSea. NFTSTAR accepts general payment methods such as credit
cards to make it easy for mainstream consumers to participate. NFTSTAR Community features stars from various fields, including but not limited to sports,
entertainment, art, and other industries celebrities. Global sports stars are the main partners at the initial launch. We will announce NFTSTAR’s sports stars lineup one by
one. NFTSTAR community aims to create a significant entrance to the future metaverse through NFT collections, trading, and community platform.
In September 2021, our board of directors and board committees authorized and approved the issuance of an aggregate number of 44,290,560 Class A ordinary shares of
our company to certain directors, executive officers, employees and consultants of our company as share incentive awards for their services to us pursuant to the Option
Plan. Among those Class A ordinary shares grants, 44,290,560 shares were restricted Class A ordinary shares, subject to the following vesting condition: restricted shares
shall vest within two years, i.e., 1/24th of all restricted share grants shall vest on the last day of each month after the date of the grant. We also granted 4,950,000
restricted Class A ordinary share units to our directors which are immediately vested and issued the same number of shares.
On December 22, 2021, we passed a special resolution to amend and restate our then effective Amended and Restated Memorandum of Association and Articles of
Association in their entirety and adopted our Third Amended and Restated Memorandum and Articles of Association. Our shareholders approved, among other things, to
adjust voting power of each Class B ordinary share from fifty (50) votes per share to a hundred (100) votes per share on all matters subject to vote at general meetings of
our company. The issued and outstanding ordinary shares then held by Incsight Limited, a British Virgin Islands business company, which is wholly owned by Mr. Jun
Zhu, our chairman and chief executive officer, and the issued and outstanding ordinary shares then held by Mr. Jun Zhu himself, are Class B ordinary shares. All other
ordinary shares currently issued and outstanding are Class A ordinary shares. As a result of such changes, Mr. Jun Zhu holds the majority of our outstanding voting
power and we remain to be a “controlled company” as defined under Nasdaq Stock Market Rules. In addition, we have included the Federal Forum Provision, which
provides that the United States District Court for the Southern District of New York (or, if the United States District Court for the Southern District of New York lacks
subject matter jurisdiction over a particular dispute, the state courts in New York County, New York) is the exclusive judicial forum within the U.S. for the resolution of
any complaint asserting a cause of action arising out of or relating in any way to the federal securities laws of the United States. The Federal Forum Provision could limit
the ability of holders of our Class A ordinary shares, the ADSs or other securities to obtain a favorable judicial forum for disputes with us, our directors and officers, the
depositary, and potentially others.
Our principal executive office is located at 17 Floor, No. 130 Wu Song Road, Shanghai 200080, People’s Republic of China. Our registered office in the Cayman Islands
is located at the offices of CARD Corporate Services Ltd, c/o Collas Crill Corporate Services Limited, Floor 2, Willow House, Cricket Square, PO Box 709, Grand
Cayman KY1-1107 Cayman Islands.
B.
Business Overview
For the year ended December 31, 2021, we operated and developed proprietary and licensed online games. We generated 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 personal computers, mobile devices or TVs. We are also transitioning to cryptocurrencies
mining business.
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Cryptocurrency Mining
On January 25, 2021, we entered into a Purchase Agreement with the holding entities of several investors in the cryptocurrencies mining industry, including Jianping
Kong, the former Director and Co-Chairman of Canaan Inc. (Nasdaq: CAN), a Bitcoin mining machine manufacturer listed on Nasdaq, Qifeng Sun, Li Zhang and
Enguang Li, based on the pre-agreed legally-binding term sheet. Those investors are collectively referred to as the Investors in this annual report. Pursuant to the
Purchase Agreement, we issued 8,108,100 Class A ordinary shares in aggregate at US$0.1233 per Class A ordinary share and 207,891,840 warrants in aggregate, each
warrant representing the right to purchase one Class A ordinary share, to the Investors in February 2020. The warrants are divided into four equal tranches: Tranche I
Warrants, Tranche II Warrants, Tranche III Warrants and Tranche IV Warrants. The exercise price of each of the Tranche I Warrants, Tranche II Warrants and Tranche III
Warrants is US$0.1233 per Class A ordinary share while the exercise price of the Tranche IV Warrants is US$0.2667 per Class A ordinary share. Each tranche of the
warrants will only be exercisable upon the satisfaction of its respective condition in connection with the market capitalization of our company reaching US$100 million,
US$300 million, US$500 million and US$1 billion within the timeframes of 6 months, 12 months, 24 months and 36 months from its issuance date, respectively. In
addition, the Tranche III Warrants will be automatically forfeited with nil consideration in the event that the Tranche II Warrants fail to become exercisable within the
specified timeframe and the Tranche IV Warrants will be automatically forfeited with nil consideration in the event that Tranche II or the Tranche III Warrants fail to
become exercisable within the specified timeframe. The Investors shall make payment of the purchase price and the exercise price for the warrants in (i) cash, (ii)
cryptocurrencies, or (iii) a combination of both, at our election. Pursuant to the Purchase Agreement, upon the satisfaction of the market capitalization condition of
Tranche III Warrants, the Investors will be entitled to collectively appoint one director to our board of directors. Such appointment right will automatically terminate on
the later of (i) the third anniversary of the closing date, and (ii) the date on which the Investors collectively hold less than 5% of our total number of ordinary shares on a
fully diluted basis. The transaction was closed in February 2021 and we received the total purchase price for 8,108,100 Class A ordinary shares of US$1.0 million fully in
cash. As of the date of this annual report, none of the Tranche I Warrants, Tranche II Warrants, Tranche III Warrants or Tranche IV Warrants was exercised. The Investors
are expected to devote cryptocurrencies mining industry resources to us for our development of cryptocurrencies mining business.
In February 2021, we issued and sold (i) a one-year convertible note in a principal amount of US$5,000,000, (ii) 50,000 ADSs, and (iii) 10,000,000 Class A ordinary
shares, for an aggregate consideration of US$5,000,000 to Streeterville. The convertible note bears interest at a rate of 6.0% per year, computed on the basis of a 360-day
year. Streeterville has the right at any time after six months have elapsed since the purchase date until the outstanding balance has been paid in full, at its election, to
convert all or any portion of the outstanding balance into ADSs of our company at an initial conversion price of US$14 per ADS, each ADS representing thirty Class A
ordinary shares, subject to adjustment. Beginning on the date that is six months from the note purchase date, Streeterville has the right, exercisable at any time in its sole
and absolute discretion, to redeem any portion of the convertible note up to US$840,000 per calendar month. Payment of the redemption amount could be in cash or our
ADSs, provided that any redemptions made in cash which exceed half of the original principal amount will be subject to a ten percent (10%) premium. We have the right
to prepay all or any portion of the outstanding balance, at any time, subject to fifteen percent (15%) premium on the prepaid amount. In the event the principal amount
and interest accrued for the convertible note issued to Streeterville are fully repaid, we have the right to repurchase the remaining Class A ordinary shares held by
Streeterville that are unsold at US$0.0001 per share. We subsequently entered into the Exchange Agreement and convertible note, pursuant to which conversion price
was amended to: ninety percent (90%) multiplied by the lower of (a) the average of the Closing Trade Prices during the five (5) Trading Days immediately preceding the
date of the Lender Conversion Notice, and (b) the Closing Trade Price on the Trading Day immediately preceding the date of the Lender Conversion Notice. The
convertible notes are repaid in full in 2021.
In February 2021, NBTC Limited, our wholly-owned subsidiary, signed a strategic cooperation framework purchase agreement, or the Cooperation Agreement, with
Shenzhen MicroBT Electronics Technology Co., Ltd., the manufacturer of WhatsMiner bitcoin mining machines. Pursuant to the Cooperation Agreement, upon the
payment of a deposit, NBTC Limited has the right of first offer to purchase 5,000 WhatsMiner bitcoin mining machines from MicroBT within one year, including but not
limited to models M32 and M31S. We completed first batch purchase of 440 WhatsMiner M32 machines in February 2021. In March 2021, NiuLian Technology
(ShaoXing) Co., Ltd., our indirect wholly-owned subsidiary, has signed the second purchase order with MicroBT under the Cooperation Agreement. This second batch of
purchase consists of 482 WhatsMiner M31S+ machines. The hash rate of each of these WhatsMiner M31S+ machines is approximately 80-86TH/s, with the power
consumption of approximately 38-42W/T. These WhatsMiner M31S+ machines had been delivered and The9’s Bitcoin hash rate will be increased by approximately 40
PH/s. NiuLian Technology was sold and deconsolidated by the end of 2021, while ownership of the machines was transferred to NBTC Limited. We do not currently plan
to continue purchasing WhatsMiner machines under the Cooperation Agreement.
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In February 2021, we entered into a standby equity distribution agreement, or the SEDA, with YA II PN, Ltd., a Cayman Islands exempt limited partnership managed by
Yorkville Advisor Global, LP, or the Purchaser, pursuant to which we are able to sell up to US$100.0 million of our ADSs solely at our request at any time during the 36
months following the date of the SEDA. Pursuant to the SEDA, the preliminary purchase price per ADS, or the Preliminary Purchase Price, shall initially be 90% of the
average of the 3 lowest daily volume weighted average price of our ADSs during the five consecutive trading days immediately prior to the delivery of an advance notice
by us, or the Preliminary Pricing Period (the date of payment of Preliminary Purchase Price being the Preliminary Closing Date), which shall be adjusted to the greater of
(A) 90% of the average of the 3 lowest daily volume weighted average price of our ADSs during the Preliminary Pricing Period and during the five consecutive trading
days commencing on the trading day immediately following the Preliminary Closing Date, or commencing on the Preliminary Closing Date if the ADSs are received by
the Purchaser prior to the close of trading on the Preliminary Closing Date, or the Secondary Pricing Period, or (B) 85% of the average of the five daily volume weighted
average price of our ADSs during the Secondary Pricing Period, or the Final Purchase Price. If the Final Purchase Price is less than the Preliminary Purchase Price, we
shall deliver additional shares to the Purchaser. If the Final Purchase Price is greater than the Preliminary Purchase Price, the Purchaser shall make payment of the
additional amount to us. The purchase would be subject to certain ownership limitations as provided under the SEDA. The Purchaser has agreed that, during the term of
the SEDA, neither the Purchaser nor its affiliates will engage in any short sales or hedging transactions with respect to the Company’s Class A ordinary shares or ADSs.
We intend to use the proceeds from the potential offering of the ADSs pursuant to the SEDA to fund our business growth. On August 27, 2021, the Company and the
Purchaser agreed to terminate the SEDA and entered into a new standby equity distribution agreement (the “August SEDA”). The Company did not issue any securities
pursuant to the SEDA. Pursuant to the August SEDA, the Company will be able to sell up to US$100.0 million of its ADSs solely at the Company’s request at any time
during the 36 months following the date of the August SEDA. The ADSs would be purchased at a price per ADS that is the greater of (i) 85% of the average of the five
daily VWAPs (as defined below) during the pricing period, or (ii) 90% of the average of the 3 lowest daily VWAPs during the pricing period, rounded to the nearest
100th. “VWAP” means, for any trading day, the daily volume weighted average price of the Company’s ADSs for such date on the principal market as reported by
Bloomberg L.P. during regular trading hours.
In February 2021, we entered into purchase agreements with five Bitcoin mining machine owners to purchase Bitcoin mining machines by issuance of our Class A
ordinary shares. Pursuant to the purchase agreements, we issued an aggregate of 26,838,360 Class A ordinary shares in exchange for 26,007 Bitcoin mining machines,
with a total hash rate of approximately 549PH/S, accounting for about 0.36% of the global hash rate of Bitcoin. Majority of these mining machines were initially
deployed in Xinjiang, Sichuan and Gansu in China. The number of Class A ordinary shares issued to each owner was determined based on the fair market value of
Bitcoin mining machines, as apprised by an independent valuation firm prior to the execution of the purchase agreements, at a pre-agreed per share price of
approximately US$0.37 per Class A ordinary share (equivalent to US$11.18 per ADS).
In February 2021, our board of directors and board committees authorized and approved the issuance of an aggregate number of 33,090,000 Class A ordinary shares of
our company to certain directors, executive officers, employees and consultants of our company as share incentive awards for their services to us pursuant to the Option
Plan. Among those Class A ordinary shares grants, 32,190,000 shares were restricted Class A ordinary shares, subject to restrictions on transferability to be removed
upon the satisfaction of the conditions that half of the restricted shares should vest if our market capitalization reaches US$400 million and the other half should vest if
our market capitalization reaches US$500 million. We also granted 900,000 restricted Class A ordinary share units to our directors which are immediately vested and
issued the same number of shares.
In February 2021, we entered into a share purchase agreement with each of the four investors in the cryptocurrencies mining industry, respectively. Pursuant to the share
purchase agreements, we should issue 9,231,240 Class A ordinary shares in aggregate to investors for an aggregate consideration of US$11.5 million. Such transactions
were subsequently completed. Pursuant to the share purchase agreements, we filed a resale registration statement on Form F-3 covering resale of the investors’ Class A
ordinary shares on May 3, 2021.
In February 2021, we entered into a legally binding memorandum of understanding on the acquisition of 70% equity interest in Hangzhou SuanLi Technology Co., Ltd.,
a cryptocurrency cloud mining blockchain Software-as-a-Service company. The acquisition consideration would be approximately US$7 million, subject to due diligence
and valuation to be conducted by an independent valuation firm. We will pay the acquisition consideration by issuance of Class A ordinary shares at a price of US$82.89
per ADS, representing the closing market price of our ADSs prior to the signing of the memorandum of understanding. The deal has not been closed and we currently do
not expect it to be closed due to the due diligence results.
In February 2021, we signed a framework agreement with a Filecoin mining machine vendor to purchase Filecoin mining machines for cash consideration of US$10
million.
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In March 2021, we entered into purchase agreements with five Bitcoin mining machine owners to purchase Bitcoin mining machines by issuance of our Class A ordinary
shares. Pursuant to the purchase agreements, we issued an aggregate of 3,832,830 Class A ordinary shares in exchange for various Bitcoin mining machines including
different brands, such as WhatsMiner, AntMiner and AvalonMiner, with a total number of 8,489 units and a total hash rate of approximately 156PH/S. These Bitcoin
mining machines were initially deployed in Qinghai, Xinjiang and Inner Mongolia in China. The number of Class A ordinary shares issued to each owner was
determined based on the fair market value of Bitcoin mining machines, as apprised by an independent valuation firm prior to the execution of the purchase agreements, at
a pre-agreed per share price of approximately US$0.78 per Class A ordinary share (equivalent to US$23.35 per ADS).
In March 2021, we signed three legally-binding memoranda of understanding with three unrelated Bitcoin mining machine owners to purchase Bitcoin mining machines
by the issuance of Class A ordinary shares. This batch of Bitcoin mining machines includes different brands such as AvalonMiner, AntMiner and WhatsMiner, with an
additional total number of 10,252 units and an additional total hash rate of approximately 192PH/S. According to the memoranda of understanding, we will issue
approximately 5,883,750 Class A ordinary shares (equivalent to 196,125 ADSs) to the sellers based on a per share price of approximately US$1.3 per Class A ordinary
share (equivalent to US$38.51 per ADS) The number of Class A ordinary shares to be issued is subject to certain price adjustment mechanisms to be assessed six months
after the signing of the definitive agreements. We designated an independent valuation firm to conduct examination and assessment of the Bitcoin mining machine fair
market value. We entered into definitive agreement for the total of 5,246 units. After the closing, we issued additional Class A ordinary shares to two shareholders on
November 18, 2021, while the third is still pending the ADS delivery.
In March 2021, our wholly-owned subsidiary NBTC Limited signed a Bitcoin mining machine purchase agreement with Bitmain Technologies Limited. Pursuant to the
purchase agreement, we will purchase 24,000 Antminer S19j Bitcoin mining machines, which are scheduled to deliver starting from November 2021, for a total
consideration of US$82.8 million payable in installments according to the agreed time schedule. As of the date of this annual report, approximately US$74 million has
been paid.
In March 2021, we issued and sold a one-year convertible note in a principal amount of US$20,000,000 to Streeterville for an aggregate consideration of US$20,000,000.
In addition, we are obligated to issue certain number of ADSs to Streeterville as transaction cost. The convertible note bears interest at a rate of 6.0% per year, computed
on the basis of a 360-day year. Streeterville has the right, at any time after six months have elapsed since the purchase date until the outstanding balance has been paid in
full, at its election, to convert all or any portion of the outstanding balance into ADSs of our company at an initial conversion price per ADS calculated as ninety percent
(90%) of the lower of (a) the average of the closing trade prices during the five (5) trading days immediately preceding the date of the conversion, and (b) the closing
trade price on the trading day immediately preceding the date of the conversion. Beginning on the date that is six months from the note purchase date, Streeterville has
the right, exercisable at any time in its sole and absolute discretion, to redeem any portion of the convertible note up to US$3,360,000 per calendar month. Payment of the
redemption amount could be in cash or our ADSs, provided that any redemptions made in cash which exceed half of the original principal amount will be subject to a ten
percent (10%) premium. We have the right to prepay all or any portion of the outstanding balance, at any time, subject to fifteen percent (15%) premium on the prepaid
amount. The convertible note has been partially repaid and the remaining outstanding amount is approximately US$16 million, as of March 30, 2022.
In March 2021, we signed a Filecoin mining machine purchase and hosting agreement amounting to approximately US$2 million with a Filecoin mining service provider.
In February 2021, we signed a US$10 million framework agreement with a Filecoin mining machine vendor to purchase Filecoin mining machines. This new purchase
agreement is with another Filecoin mining machine vendor. Filecoin is an open source, distributed storage and digital payment system. Users can use the preset economic
incentive mechanism to store data to ensure that files are stored and accessed reliably for a long time. Users use the Filecoin in the system to rent hard drive space; and
storage miners are responsible for providing storage space to store files and proving these files have been stored correctly. Due to unfavorable crypto regulations which
were introduced by the Chinese government later in 2021, we have significantly scaled down after the disposal of Niulian Technology in 2021.
On March 31, 2021, we entered into an Underwriting Agreement with Maxim Group LLC, as the representative of several underwriters. In April 2021, we completed an
offering of 3,765,100 ADSs, each representing thirty Class A ordinary shares, and warrants to purchase 2,823,825 ADSs, at a public offering price of US$33.20 per ADS
and accompanying 0.75 of an warrant. The warrants offered in this offering has a term of three years and are exercisable by the holder at US$36.00 per ADS at any time
after the date of issuance. The underwriter exercised its over-allotment option that we granted to it and we further issued and sold 564,760 ADSs, each representing thirty
Class A ordinary shares, and warrants to purchase 423,574 ADSs to cover over-allotments. The aggregate net proceeds from this offering was approximately US$135.1
million, after deducting underwriting discounts and commissions and offering expenses.
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In April 2021, we entered into share purchase agreements with three sellers of Bitcoin mining equipment separately by issuance of our Class A ordinary shares. Pursuant
to the share purchase agreements, we issued an aggregate of 5,883,750 Class A ordinary shares, par value US$0.01 per share. In June 2021, we entered into an
amendment with one of the seller as certain 5,000 units of the Bitcoin mining equipment have defects and are not suitable for the intended use. Pursuant to the
amendment, we are deemed to have issued an aggregate of 5,346,020 Class A ordinary shares to the sellers. Upon the six month’s anniversary, we issued to all the sellers
a total of additional 12,501,150 Class A ordinary shares, in the form of 416,705 ADSs. An accompanying prospectus supplement dated November 17, 2021 was filed.
In April 2021, we signed a legally binding term sheet on a CAD4 million investment in Skychain Technologies Inc., a company listed in TSX Venture Exchange in
Canada. The purpose of the investment is for the construction and operation of a 12 MW cryptocurrency mining facility located in Birtle, Manitoba, Canada. In June
2021, we announced the closing of the investment in Skychain and entered into subscription agreements to purchase share units and debentures issued by Skychain
Technologies Inc. However, as of date of this annual report, the construction has not been completed and mining facility has not been delivered to us for deployment of
our mining machines on the agreed date. We may not be able to deploy our mining machines in this mining facility if Skychain Technologies Inc. will not be able to
complete the construction due to the local regulatory and permitting issues as well as significant construction delays.
In May 2021, we signed three Chia (XCH) cryptocurrency mining machine purchase and cloud service leasing agreements with three unrelated vendors, with the total
contract sum of more than US$5.7 million. Upon the executions of these agreements, we obtained approximately 130 Pebibytes Netspace, and joined the ecological
construction of Chia cryptocurrency, also known as the “Green Bitcoin Alternative.” Due to unfavorable crypto regulations which were introduced by Chinese
government later in 2021, we ceased this business together with the disposal of Niulian Technology in 2021.
In June 2021, we acquired Montcrypto Ltd. (“Montcrypto”), a Canadian company, to build a 20MW supply of electricity in Calgary, Canada. The carbon-neutral
infrastructure of Montcrypto provides a greener and more environmentally friendly power supply to the cryptocurrency mining business of us. Montcrypto had signed
natural gas procurement contracts with local oil extraction companies and plans to build carbon-neutral cryptocurrency mining facilities by using natural gas as the source
of electricity power generation. We invested a total of CAD7.6 million in two phases to obtain the controlling stake in Montcrypto. Upon the completion of the
construction, the power capacity of the mining facilities is expected to reach 20MW, which can supply electricity to operate more than 6,000 S19j Antminers. However,
as of date of this annual report, the construction has not been completed and mining facilities have not been delivered to us for deployment of our mining machines on the
agreed date. We may not be able to deploy our mining machines in these mining facilities if Montcrypto will not be able to complete the construction due to the local
regulatory and permitting issues as well as significant construction delays.
In June 2021, we announced Coinbase Custody, a wholly owned subsidiary of Coinbase Global Inc. (Nasdaq: COIN) and one of the global leaders in qualified digital
asset custody, as the custodian for our digital assets, including Bitcoin.
In July 2021, we signed a cryptocurrency mining hosting agreement with Russian company BitRiver through our wholly-owned subsidiary NBTC Limited. BitRiver,
headquartered in Moscow, was established in 2017 to provide global hosting services and one-stop, turnkey solutions for large-scale cryptocurrency mining operations.
BitRiver currently utilizes surplus hydroelectric power to operate data centers through low cost and sustainable renewable energy that offers hosting services for
cryptocurrency mining in Russia and the CIS region. The initial term of the agreement is 2 years. We have decided to terminate our partnership with BitRiver, following
the OFAC restriction.
In August 2021, our wholly-owned subsidiary NBTC Limited and Kazakhstan enterprise KazDigital Ltd (“KazDigital”) have signed a non-binding term sheet regarding
the establishment of a joint venture company in Kazakhstan to build a cryptocurrency mining site with a capacity of 100MW, which is used to deploy The9’s mining
machines and potentially other third-parties’ mining machines. However, we have not entered into a formal Joint Venture Agreement yet and we do not currently expect
to, due to the interim due diligence results.
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In August 2021, our wholly-owned subsidiary NBTC Limited and a Kazakhstan company LGHSTR Ltd. (“LGHSTR”) have signed a non-binding investment
memorandum to establish a joint venture in Kazakhstan. According to the non-binding investment memorandum, NBTC and LGHSTR will own 51% and 49% of the
joint venture respectively. NBTC will control the board of directors of the joint venture. The joint venture planned to invest and build cryptocurrency mining sites with a
total capacity of 200MW within two years. NBTC will have the priority to deploy cryptocurrency mining machines owned by NBTC or its partners. The joint venture
was subsequently established, however, as of the date of this annual report, the construction of the mining sites has not been fully completed and they have not been
delivered to us for deployment of our mining machines in accordance with the expected timetable. We may not be able to deploy our mining machines if the joint venture
will not be able to complete the construction due to the local regulatory and permitting issues as well as significant construction delays.
In November 2021, our subsidiary, NBTC Limited and Compute North, one of the industry leaders in economical, large-scale computing and cryptocurrency mining
infrastructure, entered into a hosting agreement pursuant to which Compute North will provide 32MW of capacity for 10,000 Bitmain S19j miners that NBTC will
deploy in the United States, beginning in the second quarter of 2022. We may not be able to deploy our mining machines on the agreed time if Compute North will not be
able to complete the construction due to the local regulatory and permitting issues as well as significant construction delays.
In November 2021, we offered 416,705 ADSs, representing 12,501,150 Class A ordinary shares, par value $0.01 per share. On April 9, 2021, we entered into certain
share purchase agreements (the “SPAs”) with three sellers of Bitcoin mining equipment separately, pursuant to which, we agreed to issue an aggregate of 5,883,750 Class
A ordinary shares to the sellers as preliminary subject shares and to issue additional Class A ordinary shares in case if, the aggregate market value of the preliminary
subject shares as of the day prior to the six-month anniversary of entering into such SPAs is lower than the sum of the market value of the Bitcoin mined and the
increased market value of such Bitcoin mining equipment during such six months, less the electricity cost, operation and maintenance service fee charged by mining
facility and repair and spare parts’ cost for the bitcoin mining equipment. On April 10, 2021, we issued to the sellers an aggregate of 5,883,750 Class A ordinary shares
as the preliminary subject shares under the SPAs. On June 28, 2021, we entered into an amendment with one of the seller as certain 5,000 units of the bitcoin mining
equipment have defects and are not suitable for the intended use. Pursuant to the amendment, we shall be deemed to have issued an aggregate of 5,346,020 Class A
ordinary shares to the sellers as the preliminary subject shares. Upon the six month’s anniversary, we determined to issue to all the sellers a total of additional 12,501,150
Class A ordinary shares, in the form of 416,705 ADSs, pursuant to the SPAs.
In November 2021, we offered 968,718 ADSs, representing 29,061,540 Class A ordinary shares, par value $0.01 per share. We entered into a SEDA with YA II PN, Ltd.,
a Cayman Islands exempt limited partnership managed by Yorkville Advisor Global LP in February 2021. On August 27, 2021, the SEDA was terminated and we entered
into a new standby equity distribution agreement (the “August SEDA”) with YA II PN, Ltd. Pursuant to the August SEDA, the Company will be able to sell up to
US$100.0 million of its ADSs solely at the Company’s request at any time during the 36 months following the date of the August SEDA. The ADSs would be purchased
at a price per ADS that is the greater of (i) 85% of the average of the five daily VWAPs (as defined below) during the pricing period, or (ii) 90% of the average of the 3
lowest daily VWAPs during the pricing period, rounded to the nearest 100th. “VWAP” means, for any trading day, the daily volume weighted average price of the
Company’s ADSs for such date on the principal market as reported by Bloomberg L.P. during regular trading hours. On November 17, 2021, we sent the first advance
notice to the purchaser for an aggregate amount of $10 million. Subject to the beneficial ownership limit of the purchaser as set forth the SEDA, the aggregate purchase
price of the ADSs as set forth in the settlement document provided by the purchaser in response to such advance notice is $9,600,000. The purchase price per ADS is
$9.91.
In February 2022, our subsidiary, NBTC Limited and Exponential Digital, Inc. (the “Exponential Digital”), entered into series of hosting agreements pursuant to which
Exponential Digital will provide total hosting capacity for 6,000 Bitmain S19j miners which NBTC will deploy in the United States, beginning of 2022. As of the date of
this Annual Report, 2022, around 2,000 Bitmain S19j miners are deployed.
We began cryptocurrency mining activities in February 2021. We started to provide computing power, or hash rate, to a Bitcoin mining pool and we are entitled to receive
a fractional share of Bitcoin award from the Bitcoin mining pool in return. As of the date of this annual report, we had mined a total of approximately 466 Bitcoins. After
partial sale, we held approximately 426 Bitcoins. Our holdings of digital assets may increase in the future as we continue to expand our cryptocurrencies mining
activities. We currently plan to hold all digital assets that we receive until we need to sell such assets to meet cash demands for our costs and expenses expenditures.
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Our Bitcoins received from the Bitcoin mining pool are stored in our Bitcoin electronic wallet. The wallet is designated to have a dedicated multi-signature system. It
takes approval from a majority of signatories to transfer Bitcoins out from our wallet. Six of our management level employees were assigned as the signatories of such
electronic wallet. Each signatory holds an electronic private key password. In order to ensure the password will not be forgotten or lost by the signatory, each password is
kept in a safe box at a bank. The safe boxes are registered under the accounts of two of our wholly-owned subsidiaries. We will continue to refine and optimize our
holding, storage and custodial practices.
NFT Business
In Augsut 2021, we formally stepped into the NFT business. NFTSTAR Singapore Pte. Ltd., our Singapore wholly owned subsidiary, launched a NFT trading and
community platform NFTSTAR (www.nftstar.com).
NFTSTAR is a NFT trading and community platform that provides users with purchase, trade, and interactive activities. NFTSTAR features NFT collections created by
global stars licensed IPs. Users can purchase different tiers of blind boxes and own stars’ limited NFT collections. Each NFT collectible has a unique record on the
blockchain, and the users will obtain the ownership of the unique NFT collectible through purchase on the platform, or through trading on NFTSTAR’s marketplace.
NFTSTAR accepts general payment methods such as credit cards to make it easy for mainstream consumers to participate.
NFTSTAR Community features stars from various fields, including but not limited to sports, entertainment, art, and other industries celebrities. Global sports stars are the
main partners at the initial launch. We will announce NFTSTAR’s sports stars lineup one by one. NFTSTAR community aims to create a significant entrance to the future
metaverse through NFT collections, trading, and community platform.
We expect the NFT market to grow globally and our NFTSTAR platform to grow accordingly. Driven by our current dual core businesses of NFT and cryptocurrency
mining, we expect our globalization strategy to be more solid, and a broader market may bring stronger growth to us.
In November 2021, we have entered into license agreements with international sports stars pursuant to which they have, respectively, granted us license to use their
likeness for production of NFTs. As of December 31, 2021, the total sum paid under license agreements is US$15.4 million, the Company still has payment commitment
amounting to US$44.8 million as of December 31, 2021.
Online Games
We operate and develop proprietary or licensed online games, primarily mobile games, and TV games.
We previously also operated mobile games. Knight Forever and Q Jiang San Guo ceased operations in 2019 and Pop Fashion ceased operations in 2020. Legend of
Immortals ceased operations in 2021. We used to have license from Smilegate to develop CrossFire New Mobile Game. However, such license expired by October 31,
2020 before we are able to launch CrossFire New Mobile Game. We no long plan to negotiate with Smilegate to re-gain the license for such game development. See
“Item 3. Key Information—D. Risk Factors— Risks Related to Our Company and Our Industry— We and our joint ventures may no longer focus on obtaining licenses to
games to expand our gaming business, our future results of operations and profitability may be materially impacted,” and “Item 3. Key Information—D. Risk Factors—
Risks Related to Our Company and Our Industry—We may no longer consider to pursue re-gaining license for CrossFire New Mobile Game, launching or operating
CrossFire New Mobile Game or other licensed games in China, and our future results of operations may be materially and adversely affected.”
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We entered into a master cooperation and publishing agreement with Voodoo, a French game developer and publisher, to cooperate on the publishing and operations of
casual games in China. In December 2020, we entered into an amendment to the master cooperation and publishing agreement to adjust the total consideration
thereunder. Pursuant to the master cooperation and publishing agreement and its amendment, we obtained exclusive licenses of several games developed by Voodoo.
Voodoo granted us an exclusive, sub-licensable license to test, perform, market, promote, distribute, reproduce, modify, support and/or otherwise use or exploit such
games directly or through authorized contractors in China for a maximum period of three years, commencing upon the upload and distribution of the underlying games
on any platform. In consideration for the exclusive license granted to us and as a minimum guarantee payment with respect to the first game, as amended by the
amendment to the master cooperation and publishing agreement, we paid US$3.0 million in cash to Voodoo. Pursuant to the master cooperation and publishing
agreement, we may further pay Voodoo an aggregate amount of US$10.0 million in cash based on the agreed timetable, subject to satisfaction of certain conditions
related to delivery of games by Voodoo. Currently, the collaboration has not formally ended, but our focus in the foreseeable future will no longer be directed at the
gaming business. Due to uncertainty in the game development, the upfront payment has been fully impaired in the second half of 2020. We may not continue obtaining
licenses to games.
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 “limited
commercial release” and “open beta testing.” In both limited commercial release and open beta testing, we allow our registered users to play without removing their in-
game data to ensure the performance consistency and stability of our operating systems. While we limit the number of users allowed to play the game in limited
commercial release, we do not set such a limit in open beta testing. We can choose to start charging users in limited commercial release or open beta testing or at a later
stage at our discretion.
Game Development and Licensing
We ceased our focus on continuing to develop new proprietary online games, primarily mobile games. We do not plan to further enhance our game development
capability and diversify our game portfolio and pipeline.
Technology
We maintain in-house servers to maintain internal technology networks, we utilize third-party cloud solutions to sustain our existing games and web-site operations. Our
current technology infrastructure consists of hardware platform and server sites primarily consisting of IBM storage systems, HP, H3C and Cisco network equipment.
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Competition
Our competitors include many well-known domestic and international players. We expect that competition in cryptocurrency mining industry will continue to be intense
as we compete not only with existing players that have been focused on cryptocurrency mining, but also new entrants that include well-established players in internet
industry, and players who were not predisposed to this industry in the past. Some of these competitors may also have stronger brand names, greater access to capital,
longer histories, longer relationships with their suppliers or customers and more resources than we do. Competition among the top companies engaging in cryptocurrency
mining business, such as Marathon Patent Group, Riot Blockchain and Bit Digital, has increased in recent years. All cryptocurrency mining companies compete for
sourcing mining machines at reasonable prices. In addition, cloud mining is gaining popularity outside of Chinese market, which increases the demand for mining
machines. The statistical fact that there are more Bitcoins currently stored in electronic wallets than Bitcoins remain to be mined may further exacerbate overall
competition in the cryptocurrency industry. For a discussion of risks relating to competition, see “Risk Factors—Risks Related to Our Company and Our Industry—New
lines of business or new products and services may subject us to additional risks.” and “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 with numerous competitors.”
Intellectual Property
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, the variable
interest 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
Regulations on Cryptocurrency
On December, 2013, five ministries and commissions including the People’s Bank of China, the Ministry of Industry and Information Technology of China, the China
Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission issued the “Notice on Preventing
Bitcoin Risks”, which identified Bitcoin as a “specified virtual commodity” that does not have the same legal status as currency, and should not be circulated as currency
in the market. Financial institutions and payment institutions are prohibited from conducting bitcoin-related businesses.
On September, 2017, seven ministries including the People’s Bank of China, the Central Cyberspace Administration of China, the Ministry of Industry and Information
Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the Insurance Regulatory Commission and the State
Administration for Industry and Commerce issued the “Announcement on Preventing the Financing Risks of Coin Offering,” which recognized the Initial Coin Offering
(ICO) is essentially an act of illegal public financing without approval. It immediately stopped all kinds of domestic ICO, clearly stipulating that no organization or
individual may illegally engage in ICO activities. The currency financing transaction platform shall not engage in the exchange business between legal currency, and
“virtual currency,” and financial institutions and payment institutions shall not conduct business related to ICO.
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Since then, the People’s Bank of China and other financial regulatory agencies and industry associations have repeatedly reiterated that the issuance and financing of
virtual digital currency/tokens is suspected of illegal and criminal activities by issuing risk warning announcements, rectification and self-examination notices, and
prohibits financial institutions or payments institutions carry out virtual currency sales, transactions and other related businesses or provide services for this.
On September, 2021, eleven ministries and commissions including the National Development and Reform Commission, the Publicity Department of the CPC Central
Committee, the Office of the Central Cyberspace Affairs Commission, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry
of Finance, the People’s Bank of China, the State Taxation Administration, the State Administration for Market Regulation, the China Banking and Insurance Regulatory
Commission and the National Energy Administration issued the “Notice on the regulation of virtual currency mining activities”, which requires strengthening the
supervision of the whole industry chain of upstream and downstream virtual currency mining activities, strictly prohibiting new virtual currency mining projects, and
accelerating the orderly withdrawal of the stock of projects. The notice also provides for the inclusion of virtual currency mining activities as an elimination category of
industry. Add “virtual currency mining activities” to the “Catalogue for Guiding Industry Restructuring (2019 version)” as an “elimination category”. Before the addition,
the virtual currency mining project is treated as an eliminated industry, and investment is prohibited in accordance with the relevant provisions of the Decision of the
State Council on Promulgating the “Interim Provisions on Promoting Industrial Structure Adjustment” for Implementation (No. 40 [2005] of the State Council). On
December 30, 2021, the National Development and Reform Commission on the revision of the “Catalogue for Guiding Industry Restructuring (2019 version)” decision
came into effect, which added “(xviii) other” item 7, into the elimination category of “ I. Backward production processes and equipment”, which is “virtual currency
mining activities”.
On September, 2021, ten ministries and commissions including the People’s Bank of China, the Office of the Central Cyberspace Affairs Commission, the Supreme
People’s Court, the Supreme People’s Procuratorate, the Ministry of Industry and Information Technology, the Ministry of Public Security, the State Administration for
Market Regulation, the China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission and the State Administration of Foreign
Exchange issued “Notice on Further Preventing and Resolving the Risks of Virtual Currency Trading and Speculation”, which made it clear once again that virtual
currencies do not have the same legal status as legal currency, and virtual currency-related activities are illegal financial activities. Provision of services by overseas
virtual currency exchanges to residents in China via the internet is also considered to be an illegal financial activity. It is aiming to establish a multi-dimensional and
multi-level risk prevention and resolution system. Subject to the new regulations, it is forbidden to invest in incremental projects and to develop virtual currency mining
projects in any name.
As we do not engage in operations as a financial institution or payment institution, we do not believe we are currently subject to such regulations. However, there can be
no assurance that there will not be future regulations that may be applicable to us. See “Item 3. Key Information—D. Risk Factors— Risks Related to Our Company and
Our Industry—We are subject to risks associated with legal, political or other conditions or developments regarding holding, using or mining of cryptocurrencies, which
could negatively affect our business, results of operations and financial position.”
Regulations on Foreign Investment
Investment activities in the PRC by foreign investors are principally governed by The Special Administrative Measures on Access of Foreign Investment (Negative List),
as amended from time to time, and the Catalogue of Industries for Encouraging Foreign Investment (2020 Version), or the Encouraging Catalogue, which were
promulgated by the National Development and Reform Commission, or the NDRC, and the Ministry of Commerce on December 27, 2020 and became effective on
January 27, 2021.
On March 15, 2019, the National People’s Congress promulgated the FIL, which came into effect on January 1, 2020 and replaced the previous FIE Laws. The FIL
embodies an expected regulatory trend in PRC to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative
efforts to unify the corporate legal requirements for both foreign and domestic investments. The FIL, by means of legislation, establishes the basic framework for the
access, promotion, protection and administration of foreign investment in view of investment protection and fair competition.
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According to the FIL, foreign investment shall enjoy pre-entry national treatment, except for those foreign invested entities that operate in industries deemed to be either
“restricted” or “prohibited” in the “negative list.” The FIL provides that foreign invested entities operating in foreign “restricted” or “prohibited” industries will require
entry clearance and other approvals. In addition, the FIL does not comment on the concept of “de facto control” or contractual arrangements with variable interest entity,
however, it has a catch-all provision under definition of “foreign investment” to include investments made by foreign investors in China through means stipulated by
laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or
provisions to provide for contractual arrangements as a form of foreign investment. See “Item 3. Key Information—D. Risk Factors—Our current corporate structure and
business operations may be affected by the Foreign Investment Law.”
The FIL also provides several protective rules and principles for foreign investors and their investments in the PRC, including, among others, that local governments
shall abide by their commitments to the foreign investors; foreign-invested enterprises are allowed to issue stocks and corporate bonds; except for special circumstances,
in which case statutory procedures shall be followed and fair and reasonable compensation shall be made in a timely manner, expropriate or requisition the investment of
foreign investors is prohibited; mandatory technology transfer is prohibited, allows foreign investors’ funds to be freely transferred out and into the territory of PRC,
which run through the entire lifecycle from the entry to the exit of foreign investment, and provide an all-around and multi-angle system to guarantee fair competition of
foreign-invested enterprises in the market economy. In addition, foreign investors or the foreign investment enterprise should be imposed legal liabilities for failing to
report investment information in accordance with the requirements. Furthermore, the FIL provides that foreign invested enterprises established according to the existing
laws regulating foreign investment may maintain their structure and corporate governance within five years after the implementing of the FIL, which means that foreign
invested enterprises may be required to adjust the structure and corporate governance in accordance with the current PRC Company Law and other laws and regulations
governing the corporate governance.
Current PRC laws and regulations impose substantial restrictions on foreign ownership of the online gaming and ICP businesses in China. We previously conducted
our online gaming and ICP businesses in China through contractual arrangements with Shanghai IT, the variable interest entity. Shanghai IT is owned by Qi Wang
and Wei Ji, both of whom are PRC citizens.
In the opinion of our PRC counsel, Grandall Law Firm, subject to the interpretation and implementation of the GAPP Circular and the Network Publication Measures, the
ownership structure and the business operation models of our PRC subsidiaries and the variable interest entity 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, it is uncertain that the PRC government
authorities will ultimately take a view that is consistent with the opinion of our PRC counsel.
In the online game 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 MCT, GAPPRFT and the State Administration for Market Regulation. 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 and 2016;
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The Administrative Rules for Foreign Investments in Telecommunications Enterprises (2001), as amended in 2008 and 2016;
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The Administrative Measures for Telecommunications Business Operating License (2017);
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The Administrative Measures for Internet Information Services (2000), as amended in 2011;
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●
The Tentative Measures for Administration of Internet Culture (2003), as amended and reissued in 2011 and further amended in 2017;
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Administrative Measures on Network Publication (2016);
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The Catalogue of Industries for Encouraging Foreign Investment (Edition 2020);
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The Special Administrative Measures on Access of Foreign Investment (Negative List) (Edition 2022); and
●
Provisions on the Ecological Governance of Network Information Contents (2020).
In July 2006, MIIT issued the MII Notice. The 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 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 in adopting 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). 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.
In February 2016, the GAPPRFT and the MIIT jointly issued the Administrative Measures on Network Publication, which took effect in March 2016. The Administrative
Measures on Network Publication further strengthen and expand the supervision and management on the network publication service, including online games service.
Therefore, online games, including mobile games, regardless of whether imported or domestic, shall be subject to a content review and approval by the GAPPRFT prior
to commencement of operations in China.
GAPPRFT and MIIT jointly impose a license requirement for any company that intends to engage in network publishing, defined as any activity of providing network
publications to the public through information networks. Network publications refer to the digitalized works with publishing features such as editing, producing and
processing. 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.
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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 imposes 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 these 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. These 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.
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. In addition, on February 4, 2016, the GAPPRFT and the MIIT jointly issued the Administrative
Measures on Network Publication, or the Network Publication Measures, which took effect in March 2016. Pursuant to the Network Publication Measures, wholly
foreign-owned enterprises, Sino-foreign equity joint ventures and Sino-foreign cooperative enterprises shall not engage in the provision of web publishing services,
including online game services. Project cooperation involving internet publishing services between an internet publishing service provider and a wholly foreign-owned
enterprise, Sino-foreign equity joint venture, or Sino-foreign cooperative enterprise within China or an overseas organization or individual shall be subject to prior
examination and approval by the GAPPRFT. It is not clear whether GAPPRFT and MIIT have regulatory authority over the ownership structures of online game
companies based in China and online game operation in China. The relevant governmental authorities have broad discretion in adopting 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.”
On May 24, 2016, the GAPPRFT issued the Circular on the Administration over Mobile Game Publishing Services to further regulate the administration of mobile game
publishing services. Pursuant to this circular, game publishing service entities shall be responsible for examining the contents of their games, applying for publication and
applying for game publication numbers. Upgrades or new expansions of a mobile game that have been approved for publication shall be deemed as new works and the
relevant publishing service entities shall go through relevant approval formalities again depending on the classification of the new works. Entities engaged in the joint
operation of such new works must verify whether such games have gone through all the relevant approval formalities and whether the relevant information has been
clearly displayed, or otherwise refrain from the joint operation. Mobile games without the required approval formalities shall be treated as illegal publications and the
relevant entities shall be punished accordingly. 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, MCT 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.
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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.”
The Administrative Measures on Internet Information Services specify that internet information services regarding news, publications, education, medical and health
care, pharmacy and medical devices, among other things, are to be examined, approved and regulated by the relevant authorities. Internet information providers are
prohibited from providing services beyond those included in the scope of their ICP licenses or filings. Furthermore, these measures clearly specify a list of prohibited
content. Internet information providers are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that
infringes the lawful rights and interests of others. Internet information providers that violate the prohibition may face criminal charges or administrative sanctions by the
PRC authorities. Internet information providers must monitor and control the information posted on their websites. If any prohibited content is found, they must remove
the offending content immediately, keep a record of it and report to the relevant authorities. Furthermore, in 2019, the CAC issued the Provisions on the Management of
Network Information Content Ecology, or the CAC Order No.5, which became effective on March 1, 2020, to further strengthen the regulation and management of
network information content. Pursuant to the CAC Order No.5, each network information content service platform is required, among others, (i) not to disseminate any
information prohibited by laws and regulations, such as information jeopardizing national security; (ii) to strengthen the examination of advertisements published on such
network information content service platform; (iii) to promulgate management rules and platform convention and improve user agreement, such that such network
information content service platform could clarify users’ rights and obligations and perform management responsibilities required by laws, regulations, rules and
convention; (iv) to establish convenient means for complaints and reports; and (v) to prepare annual work report regarding its management of network information
content ecology. In addition, a network information content service platform must not, among others, (i) utilize new technologies such as deep learning and virtual reality
to engage in activities prohibited by laws and regulations; (ii) engage in online traffic fraud, malicious traffic rerouting and other activities related to fraudulent account,
illegal transaction account or maneuver of users’ account; or (iii) infringe a third party’s legitimate rights or seek illegal interests by way of interfering with information
display.
On September 15, 2021, the CAC promulgated the Opinions on Further Enforcing Responsibilities on Website Platforms as the Main Responsible Party for Information
Content Management. In accordance with the Opinions, website platforms are required to perform specific responsibilities as the main responsible party for information
content management, including, among others, enhancing the platform community rules, strengthening the regulation and management of accounts, improving the
content vetting mechanism, improving the quality of information content, managing the dissemination of information content, and strengthening the management of key
functions.
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.
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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.
On December 15, 2019, the Cyberspace Administration of China promulgated the Provisions on the Ecological Governance of Network Information Contents, or the
Order No. 5, which came into effect on March 1, 2020. Pursuant to the Order No. 5, producers of network information contents shall abide by laws and regulations,
follow public order and good morals, and shall not harm national interests, public interests and the legitimate rights and interests of others. A network information
content service platform shall establish a mechanism for ecological governance of network information contents, formulate detailed rules for ecological governance of
network information contents of its own platform, and improve systems for user registration, account management, information release review, thread comment review,
page ecological management, real-time inspection, emergency response, and disposal of network rumors and black industry chain information. Where any network
information content service platform violates the regulations of the Order No. 5, the cyberspace administration shall, ex officio, have a talk with it, issue a warning and
order it to take rectification measures within the required time limit; where the network information content service platform refuses to take rectification measures or the
circumstances are serious, it shall be ordered to suspend updating the information and shall be punished in accordance with applicable laws and administrative
regulations.
Regulation on Internet Information Security
Internet information in China is also regulated and restricted from a national security standpoint. The National People’s Congress, China’s national legislative body, has
enacted the Decisions on Maintaining Internet Security, which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a
computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v)
infringe intellectual property rights. In November 2016, the Standing Committee of National People’s Congress promulgated the PRC Cyber Security Law taken into
effect in June 2017, or the PRC Cyber Security Law, which established a regulatory system with respect to the construction, operation, maintenance and use of internet
and set forth provisions on the supervision and administration of cyber security within the territory of the PRC. Pursuant to the PRC Cyber Security Law, the national
internet information department shall take charge of the arrangement, coordination, supervision and administration in connection with cyber-security issues, and the
telecommunications administrative departments, public security departments as well as other relevant departments shall be responsible for the security protection,
supervision and administration within the scope of their respective duties. The Ministry of Public Security has promulgated measures that prohibit use of the internet in
ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an internet information service provider violates these
measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites.
In addition, the Guidelines jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require internet finance service providers, to
improve technology security standards, and safeguard customer and transaction information.
The National People’s Congress has enacted legislation that prohibits use of the internet that breaches the public security, disseminates socially destabilizing content or
leaks state secrets. Breach of public security includes breach of national security and infringement on legal rights and interests of the state, society or citizens. Socially
destabilizing content includes any content that incites defiance or violations of PRC laws or regulations or subversion of the PRC government or its political system,
spreads socially disruptive rumors or involves cult activities, superstition, obscenities, pornography, gambling or violence. State secrets are defined broadly to include
information concerning PRC national defense, state affairs and other matters as determined by the PRC authorities.
Pursuant to applicable regulations, ICP operators must complete mandatory security filing procedures and regularly update information security and monitoring systems
for their websites with local public security authorities, and must also report any public dissemination of prohibited content.
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In December 2015, the Standing Committee of the National People’s Congress promulgated the Anti-Terrorism Law of the PRC, or the Anti-Terrorism Law, which took
effect on January 1, 2016 and was amended on April 27, 2018. According to the Anti-Terrorism Law, telecommunication service operators or internet service providers
shall (i) carry out pertinent anti-terrorism publicity and education to society; (ii) provide technical interfaces, decryption and other technical support and assistance for the
competent departments to prevent and investigate terrorist activities; (iii) implement network security and information monitoring systems as well as safety and technical
prevention measures to avoid the dissemination of terrorism information, delete the terrorism information, immediately halt its dissemination, keep relevant records and
report to the competent departments once the terrorism information is discovered; and (iv) examine customer identities before providing services. Any violation of the
Anti-Terrorism Law may result in severe penalties, including substantial fines.
In November 2016, the Standing Committee of the National People’s Congress promulgated the Cyber Security Law of the PRC, or the Cyber Security Law, which took
effect on June 1, 2017. In accordance with the Cyber Security Law, network operators must comply with applicable laws and regulations and fulfill their obligations to
safeguard network security in conducting business and providing services. Network service providers must take technical and other necessary measures as required by
laws, regulations and mandatory requirements to safeguard the operation of networks, respond to network security effectively, prevent illegal and criminal activities, and
maintain the integrity, confidentiality and usability of network data. On May 2, 2017, the Cyberspace Administration of China issued a trial version of the Measures for
the Security Review of Network Products and Services (Trial), which took effect on June 1, 2017, to provide for more detailed rules regarding cybersecurity review
requirements. On April 29, 2021, the Standing Committee of the National Peoples’ Congress issued a Second Draft for review of the Personal Information Protection
Law, or the Draft Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection.
For the further purposes of regulating data processing activities, safeguarding data security, promoting data development and utilization, protecting the lawful rights and
interests of individuals and organizations, and maintaining national sovereignty, security, and development interests, on June 10, 2021, Standing Committee of the PRC
National People’s Congress published the Data Security Law of the People’s Republic of China, which took effect on September 1, 2021. The Data Security Law requires
data processing, which includes the collection, storage, use, processing, transmission, provision, publication of data, to be conducted in a legitimate and proper manner.
The Data Security Law provides for data security and privacy obligations on entities and individuals carrying out data activities. The Data Security Law also introduces a
data classification and hierarchical protection system based on the importance of data in economic and social development, and the degree of harm it may cause to
national security, public interests, or legitimate rights and interests of individuals or organizations if such data are tampered with, destroyed, leaked, illegally acquired or
illegally used. The appropriate level of protection measures is required to be taken for each respective category of data. For example, a processor of important data is
required to designate the personnel and the management body responsible for data security, carry out risk assessments of its data processing activities and file the risk
assessment reports with the competent authorities. State core data, i.e. data having a bearing on national security, the lifelines of national economy, people’s key
livelihood and major public interests, shall be subject to stricter management system. Moreover, the Data Security Law provides a national security review procedure for
those data activities which affect or may affect national security and imposes export restrictions on certain data and information. In addition, the Data Security Law also
provides that any organization or individual within the territory of the PRC shall not provide any foreign judicial body and law enforcement body with any data without
the approval of the competent PRC governmental authorities. Since the Data Security Law has already taken effect, we may be required to make further adjustments to
our business practices to comply with this law, as well as any adjustments that may be required by the ultimate Personal Information Protection Law.
On July 6, 2021, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities, which, among others, provides for
improving relevant laws and regulations on data security, cross-border data transmission, and confidential information management. It provided that efforts will be made
to revise the regulations on strengthening the confidentiality and file management relating to the offering and listing of securities overseas, to implement the
responsibility on information security of overseas listed companies, and to strengthen the standardized management of cross-border information provision mechanisms
and procedures.
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On July 10, 2021, the Cyberspace Administration of China issued the Measures for Cybersecurity Review (Revision Daft for Comments), or the Draft Measures, which
will replace the current Measures for Cybersecurity Review after it is adopted and becomes effective. The scope of review under the Draft Measures extends to critical
information infrastructure operators that intend to purchase internet products and services and data processing operators engaging in data processing activities, which
affect or may affect national security. According to Article 6 of the Draft Measures, operators who possess personal information of over a million users shall apply to the
Cybersecurity Review Office for cybersecurity reviews before listing in a foreign country. Besides, the Draft Measures also provides that if the relevant authorities
consider that certain network products and services, data processing activities and listings in foreign countries affect or may affect national security, the authorities may
initiate a cybersecurity review even if the operators do not have an obligation to report for a cybersecurity review under such circumstances. The Draft Measures also
elaborated the factors to be considered when assessing the national security risks of the relevant activities, including among others, risks of core data, important data or a
large amount of personal information being stolen, leaked, destroyed, and illegally used or exited the country and risks of critical information infrastructure, core data,
important data or a large amount of personal information data being affected, controlled and maliciously used by foreign governments after a foreign listing. The final
version of Measures for Cybersecurity Review（2022） is issued on December 28,2021 and has taken effect on February 15, 2022.
On November 14, 2021, the CAC released the Regulations on the Network Data Security (Draft for Comments), or the Draft Regulations, and will accept public
comments until December 13, 2021. The Draft Regulations provide that data processors refer to individuals or organizations that autonomously determine the purpose
and the manner of processing data. In accordance with the Draft Regulations, data processors shall apply for a cybersecurity review for the following activities: (i)
merger, reorganization or division of Internet platform operators that have acquired a large number of data resources related to national security, economic development
or public interests to the extent that affects or may affect national security; (ii) listing abroad of data processors which process over one million users’ personal
information; (iii) listing in Hong Kong which affects or may affect national security; or (iv) other data processing activities that affect or may affect national security.
Besides, data processors that are listed overseas shall carry out an annual data security assessment. The Measures for Cybersecurity Review (2022) and the Draft
Regulations remain unclear on whether the relevant requirements will be applicable to companies that have been listed in the United States and Hong Kong, such as us.
We cannot predict the impact of the Measures for Cybersecurity Review (2022) and the Draft Regulations, if any, at this stage, and we will closely monitor and assess
any development in the rule-making process. If the enacted versions of the Measures for Cybersecurity Review (2022) and the Draft Regulations mandate clearance of
cybersecurity review and other specific actions to be completed by China-based companies listed on a U.S. stock exchange and Hong Kong Exchanges, such as us, we
face uncertainties as to whether such clearance can be timely obtained, or at all. In addition, if a final version of the Draft Regulations is adopted, we may be subject to
review when conducting data processing activities and annual data security assessment and may face challenges in addressing its requirements and make necessary
changes to our internal policies and practices in data processing. Based on the foregoing, our PRC legal counsel does not expect that, as of the date of this annual report,
the current applicable PRC laws on cybersecurity would have a material adverse impact on our business.
On July 30, 2021, the State Council issued the Regulations on Protection of Critical Information Infrastructure, or the Regulations. Pursuant to the Regulations, critical
information infrastructure shall mean the important network facilities or information systems of key industries or fields such as public communication and information
service, energy, transportation, water conservation, finance, public services, e-government affairs and national defense science, and important network facilities or
information systems which may endanger national security, people’s livelihood and public interest once there occur damage, malfunctioning or data leakage to them. The
Regulations provide that no individual or organization may carry out any illegal activity of intruding into, interfering with, or sabotaging any critical information
infrastructures, or endanger the security of any critical information infrastructures. The Regulations also require that critical information infrastructure operators shall
establish a cybersecurity protection system and accountability system, and that the main responsible person of a critical information infrastructure operator shall take full
responsibility for the security protection of the critical information infrastructures operated by it. In addition, relevant administration departments of each important
industry and sector shall be responsible for formulating the rule of critical information infrastructure determination applicable to their respective industry or sector, and
determine the critical information infrastructure operators in their industry or sector.
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On July 12, 2021, the MIIT and two other authorities jointly issued the Provisions on the Administration of Security Vulnerabilities of Network Products, or the
Provisions. The Provisions state that, no organization or individual may abuse the security vulnerabilities of network products to engage in activities that endanger
network security, or to illegally collect, sell, or publish the information on such security vulnerabilities. Anyone who is aware of the aforesaid offences shall not provide
technical support, advertising, payment settlement and other assistance to the relevant offenders. According to the Provisions, network product providers, network
operators, and platforms collecting network product security vulnerabilities shall establish and improve channels for receiving network product security vulnerability
information and keep such channels available, and retain network product security vulnerability information reception logs for at least six months. The Provisions also
bans provision of undisclosed vulnerabilities to overseas organizations or individuals other than to the product providers.
On October 29, 2021, the CAC issued the Measures for Security Assessment of Cross-border Data Transfer (Draft for Comment). According to these measures, in
addition to the self-risk assessment requirement for provision of any data outside China, a data processor shall apply to the competent cyberspace department for data
security assessment and clearance of outbound data transfer in any of the following events: (i) outbound transfer of personal information and important data collected and
generated by an operator of critical information infrastructure; (ii) outbound transfer of important data; (iii) outbound transfer of personal data by a data processor which
has processed more than one million users’ personal data; (iv) outbound transfer of more than one hundred thousand users’ personal information or more than ten
thousand users’ sensitive personal information cumulatively; (v) such other circumstances where ex-ante security assessment and evaluation of cross-border data transfer
is required by the CAC.
On August 20, 2021, the Standing Committee of the National People’s Congress of China promulgated the Personal Information Protection Law, which integrates the
scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. The Personal Information Protection Law
requires, among others, that (i) the processing of personal information should have a clear and reasonable purpose which should be directly related to the processing
purpose and should be conducted in a method that has the minimum impact on personal rights and interests, and (ii) the collection of personal information should be
limited to the minimum scope as necessary to achieve the processing purpose and avoid the excessive collection of personal information. Personal information processors
shall adopt necessary measures to safeguard the security of the personal information they handle. The offending entities could be ordered to correct, or to suspend or
terminate the provision of services, and face confiscation of illegal income, fines or other penalties.
In addition, the State Secrecy Bureau has issued provisions authorizing the blocking of access to any website it deems to be leaking state secrets or failing to comply with
the relevant legislation regarding the protection of state secrets during online information distribution. Specifically, internet companies in the PRC with bulletin boards,
chat rooms or similar services must apply for specific approval prior to operating such services.
Furthermore, the Provisions on Technological Measures for Internet Security Protection, promulgated by the Ministry of Public Security and became effective in March
2006, require all ICP operators to keep records of certain information about its users (including user registration information, log-in and log-out time, IP address, content
and time of posts by users) for at least 60 days and submit the above information as required by laws and regulations. The Decision on Strengthening Network
Information Protection, or the Network Information Protection Decision, which was promulgated by the PRC National People’s Congress in December 2012, states that
ICP operators must request identity information from users when ICP operators provide information publication services to the users. If ICP operators come across
prohibited information, they must immediately cease the transmission of such information, delete the information, keep relevant records, and report to relevant
government authorities.
On October 21, 2019, the Supreme People’s Court and the Supreme People’s Procuratorate of the PRC jointly issued the Interpretations on Certain Issues Regarding the
Applicable of Law in the Handling of Criminal Case Involving Illegal Use of Information Networks and Assisting Committing Internet Crimes, which came into effect
on November 1, 2019, and further clarifies the meaning of Internet service provider and the severe situations of the relevant crimes.
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Regulations on Privacy Protection
PRC laws and regulations prohibit Internet content providers from collecting and analyzing personal information from their users without user’s prior consent. We
require our users to accept a user agreement whereby they agree to provide certain personal information to us. In addition, 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.
On November 7, 2016, the Standing Committee of the National People’s Congress, or the SCNPC, promulgated the Cybersecurity Law of the PRC, or the Cybersecurity
Law, which came into effect on June 1, 2017. Pursuant to the Cybersecurity Law, network operators shall perform their cybersecurity obligations according to the
requirements of the classified protection system for cybersecurity, including: (a) formulating internal security management systems and operating instructions,
determining the persons responsible for cybersecurity, and implementing the responsibility for cybersecurity protection; (b) taking technological measures to prevent
computer viruses, network attacks, network intrusions and other actions endangering cybersecurity; (c) taking technological measures to monitor and record the network
operation status and cybersecurity incidents; (d) taking measures such as data classification, and back-up and encryption of important data; and (e) other obligations
stipulated by laws and administrative regulations. In addition, network operators shall comply with the principles of legitimacy to collect and use personal information
and disclose their rules of data collection and use, clearly express the purposes, means and scope of collecting and using the information, and obtain the consent of the
persons whose data is gathered.
The PRC Constitution states that PRC law protects the freedom and privacy of communications of citizens and prohibits infringement of these rights. In recent years,
PRC government authorities have enacted legislation on internet use to protect personal information from any unauthorized disclosure. The Network Information
Protection Decision provides that electronic information that identifies a citizen or involves privacy of any citizen is protected by law and must not be unlawfully
collected or provided to others. ICP operators collecting or using personal electronic information of citizens must specify the purposes, manners and scopes of
information collection and uses, obtain consent of the relevant citizens, and keep the collected personal information confidential. ICP operators are prohibited from
disclosing, tampering with, damaging, selling or illegally providing others with, collected personal information. ICP operators are required to take technical and other
measures to prevent the collected personal information from any unauthorized disclosure, damage or loss. The Administrative Measures on Internet Information Services
prohibit an ICP operator from insulting or slandering a third party or infringing upon the lawful rights and interests of a third party. According to the Provisions on
Protection of Personal Information of Telecommunication and Internet Users, which was promulgated by MIIT and became effective in September 2013,
telecommunication business operators and ICP operators are responsible for the security of the personal information of users they collect or use in the course of their
provision of services. Without obtaining the consent from the users, telecommunication business operators and ICP operators may not collect or use the users’ personal
information. The personal information collected or used in the course of provision of services by the telecommunication business operators or ICP operators must be kept
in strict confidence, and may not be divulged, tampered with or damaged, and may not be sold or illegally provided to others. The ICP operators are required to take
certain measures to prevent any divulgence of, damage to, tampering with or loss of users’ personal information. In accordance with the Cyber Security Law, network
operators are required to collect and use personal information in compliance with the principles of legitimacy, properness and necessity, and strictly within the scope of
authorization by the subject of personal information unless otherwise prescribed by laws or regulations. In the event of any unauthorized disclosure, damage or loss of
collected personal information, network operators must take immediate remedial measures, notify the affected users and report the incidents to the relevant authorities in
a timely manner. If any user knows that a network operator illegally collects and uses his or her personal information in violation of laws, regulations or any agreement
with the user, or the collected and stored personal information is inaccurate or wrong, the user has the right to request the network operator to delete or correct the
relevant collected personal information.
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The relevant telecommunications authorities are further authorized to order ICP operators to rectify unauthorized disclosure. ICP operators are subject to legal liability,
including warnings, fines, confiscation of illegal gains, revocation of licenses or filings, closing of the relevant websites, administrative punishment, criminal liabilities,
or civil liabilities, if they violate relevant provisions on internet privacy. Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the
National People’s Congress in August 2015 and becoming effective in November 2015, the standards of crime of infringing citizens’ personal information were amended
accordingly and the criminal culpability of unlawful collection, transaction, and provision of personal information has been reinforced. In addition, any ICP provider that
fails to fulfill the obligations related to internet information security administration as required by applicable laws and refuses to rectify upon orders, will be subject to
criminal liability for (i) any dissemination of illegal information in large scale; (ii) any severe effect due to the leakage of the client’s information; (iii) any serious loss of
evidence of criminal activities; or (iv) other severe situations, and any individual or entity that (x) sells or provides personal information to others unlawfully, or (y) steals
or illegally obtains any personal information, will be subject to criminal liability in severe situations. In addition, the Interpretations of the Supreme People’s Court and
the Supreme People’s Procuratorate of the PRC on Several Issues Concerning the Application of Law in Handling Criminal Cases of Infringing Personal Information,
effective in June 2017, have clarified certain standards for the conviction and sentencing in relation to personal information infringement. The PRC government has the
power and authority to order ICP operators to turn over personal information if an internet user posts any prohibited content or engages in illegal activities on the internet.
The Civil Code further provides in a stand-alone chapter of right of personality and reiterate that the personal information of a natural person shall be protected by the
law. Any organization or individual shall legitimately obtain such personal information of others in due course on a need-to-know basis and ensure the safety and privacy
of such information, and refrain from excessively handling or using such information.
With respect to the security of information collected and used by mobile apps, pursuant to the Announcement of Conducting Special Supervision against the Illegal
Collection and Use of Personal Information by Apps, which was issued on January 23, 2019, app operators should collect and use personal information in compliance
with the Cyber Security Law and should be responsible for the security of personal information obtained from users and take effective measures to strengthen the
personal information protection. Furthermore, app operators should not force their users to make authorization by means of bundling, suspending installation or in other
default forms and should not collect personal information in violation of laws, regulations or breach of user agreements. Such regulatory requirements were emphasized
by the Notice on the Special Rectification of Apps Infringing upon User’s Personal Rights and Interests, which was issued by MIIT on October 31, 2019. On November
28, 2019, the CAC, the MIIT, the Ministry of Public Security and the SAMR jointly issued the Methods of Identifying Illegal Acts of Apps to Collect and Use Personal
Information. This regulation further illustrates certain commonly-seen illegal practices of apps operators in terms of personal information protection, including “failure to
publicize rules for collecting and using personal information”, “failure to expressly state the purpose, manner and scope of collecting and using personal information”,
“collection and use of personal information without consent of users of such App”, “collecting personal information irrelevant to the services provided by such app in
violation of the principle of necessity”, “provision of personal information to others without users’ consent”, “failure to provide the function of deleting or correcting
personal information as required by laws” and “failure to publish information such as methods for complaints and reporting”. Among others, any of the following acts of
an app operator will constitute “collection and use of personal information without consent of users”: (i) collecting an user’s personal information or activating the
permission for collecting any user’s personal information without obtaining such user’s consent; (ii) collecting personal information or activating the permission for
collecting the personal information of any user who explicitly refuses such collection, or repeatedly seeking for user’s consent such that the user’s normal use of such app
is disturbed; (iii) any user’s personal information which has been actually collected by the app operator or the permission for collecting any user’s personal information
activated by the app operator is beyond the scope of personal information which such user authorizes such app operator to collect; (iv) seeking for any user’s consent in a
non-explicit manner; (v) modifying any user’s settings for activating the permission for collecting any personal information without such user’s consent; (vi) using users’
personal information and any algorithms to directionally push any information, without providing the option of non-directed pushing such information; (vii) misleading
users to permit collecting their personal information or activating the permission for collecting such users’ personal information by improper methods such as fraud and
deception; (viii) failing to provide users with the means and methods to withdraw their permission of collecting personal information; and (ix) collecting and using
personal information in violation of the rules for collecting and using personal information promulgated by such app operator.
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On August 22, 2019, the CAC promulgated the Children Information Protection Provisions, which took effect on October 1, 2019, requiring that before collecting, using,
transferring or disclosing the personal information of a child, the Internet service operator should inform the child’s guardians in a noticeable and clear manner and obtain
their consents. Meanwhile, internet service operators should take measures like encryption when storing children’s personal information. On March 12, 2021, the CAC
and three other authorities jointly issued the Rules on the Scope of Necessary Personal Information for Common Types of Mobile Internet Applications. The Rules
specifies the scope of necessary personal information to be collected each for a variety of common mobile internet applications, such as maps and navigation apps, online
ride-hailing apps, instant messaging apps, online community apps. Operators of such apps shall not refuse to provide basic services to users on the ground of users’
refusal to provide their personal non-essential information. On April 26, 2021, the MIIT issued the Interim Administrative Provisions on Personal Information Protection
in Internet Mobile Applications (Draft for Comment). The draft of the Interim Administrative Provisions on Personal Information Protection in Internet Mobile
Applications sets forth two principles of collection and utilization of personal information, namely “explicit consent” and “minimum necessity.”
In October 2020, the Standing Committee of the National People’s Congress issued the Draft Personal Information Protection Law for public comments. In April 2021,
the Standing Committee of the National Peoples’ Congress issued a Second Draft for review of the Personal Information Protection Law, or the Draft Personal
Information Protection Law, for public comments. The Draft Personal Information Protection Law integrates provisions from several rules with respect to personal
information rights and privacy protection. According to the Draft Personal Information Protection Law, personal information refers to information related to identified or
identifiable natural persons which is recorded by electronic or other means (excluding the anonymized information). The Draft Personal Information Protection Law
provides the circumstances under which a personal information processor could process personal information, such as where the consent of the individual concerned is
obtained and where it is necessary for the conclusion or performance of a contract to which such individual is a party to such contract. It also stipulates certain specific
provisions with respect to the obligations of a personal information processor. In addition, it imposes further obligations on a personal information processor that
provides for basic internet platform services, has large amount of users, has complicated business activities, including formulating of an independent institution mainly
comprising of outside members to supervise personal information processing activities, termination of provision of services for product or service providers on the
platform whose personal information processing activities are in material violation of laws and regulations, and issuing personal information protection social
responsibilities reports regularly. In addition, on August 20, 2021, the Standing Committee of the National People’s Congress adopted the Personal Information
Protection Law which has taken effect on November 1, 2021. The Personal Information Protection Law requires, among others, that (i) the processing of personal
information should have a clear and reasonable purpose which should be directly related to the processing purpose, in a method that has the least impact on personal
rights and interests, and (ii) the collection of personal information should be limited to the minimum scope necessary to achieve the processing purpose to avoid the
excessive collection of personal information. Different types of personal information and personal information processing will be subject to various rules on consent,
transfer, and security. Entities handling personal information shall bear responsibilities for their personal information handling activities, and adopt necessary measures to
safeguard the security of the personal information they handle. The entities failing to comply could be ordered to correct, or suspend or terminate the provision of
services, and face confiscation of illegal income, fines or other penalties.
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, MCT 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,
MCT may impose penalties on us. 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.
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Regulations on Intellectual Property Rights
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 most 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 or authorized banks is obtained. Furthermore, foreign investment enterprises in China in general may purchase foreign exchange without the approval
of SAFE or authorized banks 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 and was amended on May 4, 2015 and October 10, 2018 and was partly repealed on December 30,
2019. 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, as amended on October 10, 2018 and partly repealed on December 30, 2019, 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, which took effect on June 1, 2015, and was partly repealed on December 30, 2019. Pursuant to SAFE Circular 13, 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.
On April 26, 2016, SAFE issued the Circular of the State Administration of Foreign Exchange on Further Promoting Trade and Investment Facility and Improving the
Examination and Verification of the Authenticity, pursuant to which when handling the remittance of profits exceeding the equivalent of US$50,000 abroad for a
domestic institution, a bank should examine the authenticity of the transaction by reviewing related corporate approvals, tax filing record and other materials.
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On June 9, 2016, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement
Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the
prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a
prohibition against using such capital to issue loans to non-affiliated enterprises.
Dividend Distribution. The principal regulations governing distribution of dividends of foreign holding companies include:
●
The Company Law of People’s Republic of China;
●
Foreign Investment Law (2019); and
●
Implementation Regulations for the Foreign Investment Law (2019).
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, which took effect on June 1, 2015 and was partly repealed on December 30, 2019.
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.
As a result of the uncertainties relating to the interpretation and implementation of SAFE Circular 37 and other regulations of SAFE, 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.
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Regulations Relating to Overseas Listing and M&A
On August 8, 2006, six PRC governmental and regulatory agencies, including the MOFCOM and the CSRC, jointly promulgated the Regulations on Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors (the “M&A Rules”), a new regulation with respect to the mergers and acquisitions of domestic enterprises by
foreign investors that became effective on September 8, 2006 and revised on June 22, 2009. Foreign investors shall comply with the M&A rules when they purchase
equity interests of a domestic company or subscribe for the increased capital of a domestic company, and thus changing the nature of the domestic company into a
foreign- invested enterprise; or when the foreign investors establish a foreign-invested enterprise in the PRC for the purpose of purchasing the assets of a domestic
company and operating the asset; or when the foreign investors purchase the asset of a domestic company, establish a foreign-invested enterprise by injecting such assets,
and operate the assets. The M&A rules, among other things, purports to require that an offshore special vehicle, or a special purpose vehicle, formed for listing purposes
and controlled directly or indirectly by PRC companies or individuals, shall obtain the approval of the CSRC prior to the listing and trading of such special purpose
vehicle’s securities on an overseas stock exchange.
On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These
opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and
proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based
overseas-listed companies.
On December 27, 2021, the NDRC and the MOC jointly issued the Special Administrative Measures (Negative List) for Foreign Investment Access (2021 Version), or
the 2021 Negative List, which will become effective on January 1, 2022. Pursuant to such Special Administrative Measures, if a domestic company engaging in the
prohibited business stipulated in the 2021 Negative List seeks an overseas offering and listing, it shall obtain the approval from the competent governmental authorities.
Besides, the foreign investors of the company shall not be involved in the company’s operation and management, and their shareholding percentage shall be subject,
mutatis mutandis, to the relevant regulations on the domestic securities investments by foreign investors.
On December 24, 2021, the State Council issued a draft of the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by
Domestic Companies, or the Draft Provisions, and the CSRC issued a draft of Administration Measures for the Filing of Overseas Securities Offering and Listing by
Domestic Companies, or the Draft Administration Measures, for public comments. According to the Draft Provisions and the Draft Administration Measures, the
overseas offering and listing by a domestic company, whether directly or indirectly, shall be filed with the CSRC. Specifically, the determination of an indirect offering
and listing will be conducted on a “substance over form” basis, and an offering and listing shall be considered as an indirect overseas offering and listing by a domestic
company if the issuer meets the following conditions: (i) the operating income, gross profit, total assets, or net assets of the domestic enterprise in the most recent fiscal
year was more than 50% of the relevant line item in the issuer’s audited consolidated financial statement for that year; and (ii) senior management personnel responsible
for business operations and management are mostly PRC citizens or are ordinarily resident in the PRC, and the main place of business is in the PRC or carried out in the
PRC. According to the Draft Administration Measures, an overseas offering and listing is prohibited under any of the following circumstances: (i) if the intended
securities offering and listing is specifically prohibited by national laws and regulations and relevant provisions; (ii) if the intended securities offering and listing may
constitute a threat to or endangers national security as reviewed and determined by competent authorities under the State Council in accordance with law; (iii) if there are
material ownership disputes over the equity, major assets, and core technology, etc. of the issuer; (iv) if, in the past three years, the domestic enterprise or its controlling
shareholders or actual controllers have committed corruption, bribery, embezzlement, misappropriation of property, or other criminal offenses disruptive to the order of
the socialist market economy, or are currently under judicial investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations;
(v) if, in past three years, directors, supervisors, or senior executives have been subject to administrative punishments for severe violations, or are currently under judicial
investigation for suspicion of criminal offenses, or are under investigation for suspicion of major violations; (vi) other circumstances as prescribed by the State Council.
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According to the Draft Administration Measures, the issuer or its affiliated domestic company, as the case may be, shall file with the CSRC (i) with respect to its initial
public offering and listing within three business days, after its initial filing of the listing application to the regulator in the place of the intended listing, (ii) with respect to
its follow-on offering within three business days after completion of the follow-on offering, (iii) with respect to its follow-on offering for purpose of acquiring specific
assets, within three business days after the first public announcement of the transaction, and (iv) with respect to listing by means of reverse takeover, share swap,
acquisition and similar transactions, within three business days after its initial filing of the listing application or the first public announcement of the transaction, as case
may be. Non-compliance with the Draft Administration Measures or an overseas listing completed in breach of Draft Administration Measures may result in a warning
on the relevant domestic companies or a fine of RMB1 million to RMB10 million on them. If the circumstances are serious, they may be ordered to suspend their
business or suspend their business pending rectification, or their permits or businesses license may be revoked. Furthermore, the controlling shareholder, actual
controllers, directors, supervisors, and other legally appointed persons of the domestic enterprises may be warned, or fined between RMB500,000 to RMB5,000,000
either individually or collectively.
C.
Organizational Structure
The following diagram illustrates our organizational structure, the place of formation, ownership interest of each of our significant subsidiaries and material variable
interest entity as of the date of this annual report:
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Contractual Arrangements with The Variable Interest Entity.
Due to PRC legal restrictions on foreign ownership and investment in value-added telecommunications services, and internet content provision services in particular, we
currently conduct these activities through Shanghai IT, which we effectively control through a series of contractual arrangements. These contractual arrangements allow
us to:
●
exercise effective control over Shanghai IT;
●
receive substantially all of the economic benefits of Shanghai IT; and
●
have an exclusive option to purchase all or part of the equity interests in Shanghai IT when and to the extent permitted by PRC law.
As a result of these contractual arrangements, we have become the primary beneficiary of Shanghai IT, and we treat Shanghai IT as the variable interest entity under U.S.
GAAP. We have consolidated the financial results of Shanghai IT in our consolidated financial statements in accordance with U.S. GAAP.
Contractual Arrangements with Shanghai IT
Please refer to “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Arrangements with Variable Interest Entity.”
D.
Property, Plants and Equipment
Our headquarters are located on premises comprising over 1,500 square meters in an office building in Shanghai, China. We lease all of our premises from unrelated
third-parties. Our former headquarters were sold to Kapler, the consideration of which was used to repay the Convertible Notes. In addition, we have subsidiaries located
in the United States and Singapore and small branch offices in Beijing, 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. 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.
A.
Operating Results
We are an Internet company listed on Nasdaq in 2004. The9 Limited aims to become a global diversified high-tech Internet company. We had been operating an online
game business before our listing until this year, we have turned our business focus to blockchain business and are primarily engaged in the operation of cryptocurrency
mining and a Non-Fungible Token platform NFTSTAR.
The major factors affecting our results of operations and financial conditions include:
●
our revenues’ composition and sources of revenues;
●
our cost of revenues; and
●
our operating expenses.
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Revenue Composition and Sources of Revenue. In 2019 and 2020, we generated substantially all of our revenues from online game services, and the remaining portion
of our revenues from other services. We began cryptocurrency mining activities in February 2021. In 2021, we generated substantially all of our revenues from
cryptocurrency mining, and the remaining portion of our revenues from provision of game development services. The following table sets forth our revenues generated
from cryptocurrency mining and online game services and other revenues, both in absolute amounts and as percentages of total revenues for the periods indicated.
For the Year ended December 31,
2019
2020
2021
RMB
%
RMB
%
RMB
US$
%
(in thousands, except percentages)
Revenues:
Cryptocurrency mining revenue
—
—
—
—
134,123
21,047
98.7
Online game services and other revenues
343
100.0
625
100.0
1,752
275
1.3
Total Revenues
343
100.0
625
100.0
135,875
21,322
100.0
Cryptocurrency Mining. In 2021, revenues from our cryptocurrency mining business amounted to RMB134.1 million (US$21.0 million).
Majority of our cryptocurrency mining revenues was Bitcoin. Since February 2021, we have generated our Bitcoin mining revenues through provision of computing
power, or hash rate, in crypto asset transaction verification services to Bitcoin mining pools. In exchange for that, we are entitled to receive a fractional share of the
Bitcoin award from the Bitcoin mining pools. The transaction consideration we receive is noncash consideration, which we measure at fair value on the date received,
which is not materially different than the fair value at contract inception. The consideration is all variable. Because it is not probable that a significant reversal of
cumulative revenue will not occur, the consideration is constrained until the mining pools successfully place a block and we receive confirmation of the consideration, at
which time revenue is recognized.
We also started our mining of other cryptocurrencies including Chia and Filecoin. Chia and Filecoin mining is carried out through provision of computing storage space
to the main networks. In exchange for that, we are entitled to receive a fractional share of the Chia and Filecoin awards from the main networks. As of December 31,
2021, we have recognized insignificant amount of Chia mining revenue and nil Filecoin revenue based on our revenue recognition accounting policies.
Online game services and other revenues. In 2021, online game services and other revenues mainly included revenues from provision of game development services.
Revenues from our online game services and other revenues amounted to RMB1.8 million (US$0.3 million). In 2019 and 2020, online game services and other revenues
mainly include online game services and revenues from the provision of technical services to customers. Revenues from our online game services amounted to RMB0.3
million and RMB0.6 million. 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 online points. Fees from 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.
Cost of Revenues. In 2021, our cost of revenue primarily consists of costs associated with running the cryptocurrency mining business, including electricity costs,
depreciation on cryptocurrency mining equipment and transaction fees to the mining pools or mining partners. In 2019 and 2020, our cost of revenues consists of costs
directly attributable to rendering our services, including online game royalties, payroll, revenue 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 and other overhead expenses directly attributable
to the services we provide.
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Operating Expenses. In 2021, Our operating expenses consist primarily of impairment loss of equipment, gain on disposal of subsidiaries, product development
expenses, sales and marketing expenses, general and administrative expenses and impairment of cryptocurrencies. In 2019 and 2020, our operating expenses consist
primarily of product development expenses, sales and marketing expenses, general and administrative expenses, impairment of other long-lived assets, impairment on
advance and other assets and gain on disposal of subsidiaries.
Product Development Expenses. In 2021, our product development expenses consist primarily of outsourced research and development, payroll, depreciation charges
and other overhead for the development of NFTSTAR. In 2019 and 2020, our product development expenses consist primarily of outsourced research and development,
payroll, depreciation charges and other overhead for the development of our proprietary games. Other overhead product development costs include costs incurred by us to
develop, maintain, monitor and manage our websites. Our product development expenses amounted to RMB13.1 million, RMB2.4 million and RMB1.9 million (US$0.3
million) for the year ended December 31, 2019, 2020 and 2021, respectively.
Sales and Marketing Expenses. Our sales and marketing expenses consist primarily of advertising and promotional expenses, payroll and other overhead expenses
incurred by our sales and marketing personnel. Our sales and marketing expenses amounted to RMB2.1 million, RMB0.6 million and RMB22.0 million (US$3.5 million)
for the year ended December 31, 2019, 2020 and 2021, respectively.
General and Administrative Expenses. In 2021, our general and administrative expenses consist primarily of non-cash share based compensation, payroll and
professional fees incurred in connection with professional service providers for auditing, legal services and equity transactions. In 2019 and 2020, our general and
administrative expenses consist primarily of compensation and travel expenses for our administrative staff, depreciation of property and equipment, provision of
allowance for doubtful accounts, entertainment expenses, administrative office expenses, as well as fees paid to professional service providers for auditing, legal services
and equity transactions. General and administration expenses amounted to RMB113.9 million, RMB108.7 million and RMB293.2 million (US$46.0 million) for the year
ended December 31, 2019, 2020 and 2021, respectively.
Impairment of cryptocurrencies. The useful life of cryptocurrency is indefinite, thus it shall not be amortized but should be tested for impairment annually, or more
frequently, when events or changes in circumstances occur which indicate that it is more likely than not that the indefinite-lived asset is impaired. Impairment of
cryptocurrency exists when the carrying amount exceeds its fair value at any time subsequent to its acquisition and will require us to recognize an impairment charge. To
the extent an impairment loss is recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted. We recognized
impairment of cryptocurrencies of RMB50.9 millon (US$8.0 millon) for the year ended December 31, 2021.
Impairment of equipment, intangible assets and other long-lived assets. We recorded impairment on other long-lived assets of RMB34.9 million, RMB6.5 million and
RMB11.6 million (US$1.8 million) for the years ended December 31, 2019, 2020 and 2021.
Impairment on advance and other assets. We recorded impairment on advance and other assets of nil, RMB20.4 million and nil for the years ended December 31, 2019,
2020 and 2021.
Gain on disposal of subsidiaries. We had gain on disposal of subsidiaries of RMB1.2 million, RMB475.6 million and RMB15.0 million (US$2.4 million) for the year
ended December 31, 2019, 2020 and 2021.
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Holding Company Structure
We are a holding company incorporated in the Cayman Islands. We carry out our business through our subsidiaries in Hong Kong, Singapore, China, etc. We rely
primarily on dividends and other distributions from our subsidiaries and the variable interest entity in China for our cash requirements. Current PRC regulations restrict
the variable interest entity and subsidiaries from paying dividends in the following two principal aspects: (i) the variable interest entity 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.”
Income and Sales Taxes
Cayman Islands
Under the current tax laws of the Cayman Islands, we are not subject to tax on our income or capital gains. In addition, upon payment of dividends by The9 Limited to its
shareholders, no Cayman Islands withholding tax will be imposed.
Hong Kong
Our subsidiaries incorporated in Hong Kong did not have assessable profits that were derived in Hong Kong during the year ended December 31, 2021.
Singapore
Our subsidiaries incorporated in Singapore did not have assessable profits that were derived in Singapore during the year ended December 31, 2021.
PRC
Our subsidiaries and the VIE and its subsidiaries incorporated 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. Our
subsidiaries and the VIE and its subsidiaries in the PRC are generally subject to EIT at a statutory rate of 25%. We marginally conducted mining operations in China and
starting from June 2021, we moved all such operations outside of China. There is no explicit tax law in China regarding whether such mining revenue is taxable in China,
since such revenue is non-cash before the cryptocurrencies are sold for fiat. As of December 31, 2021, we have not sold any cryptocurrency mined for fiat. As such, we
believe that it is more-like-than-not such mining revenue is not taxable before sold for fiat upon audit by the relevant tax authority. Should there be any update in China
tax laws on mining revenue, we will accrue and pay any relevant taxes according to tax laws.
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 revised
on February 24, 2017 and December 29, 2018, and unified the tax rate generally applicable to both domestic and foreign-invested enterprises in the PRC. Our company’s
subsidiaries and variable interest entity in the PRC are generally subject to EIT at a statutory rate of 25%.
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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 and filing procedures of
relevant tax authority.
In February 2018, the SAT issued the Announcement of the State Administration of Taxation on Issues Relating to “Beneficial Owner” in Tax Treaties on issues relating
to “beneficial owner” in tax treaties, or Circular No. 9, which took effect on April 1, 2018. Circular No. 9 provides a more elastic guidance to determine whether the
applicant engages in substantive business activities to constitute a “beneficial owner.” When determining the applicant’s status of the “beneficial owner” regarding tax
treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation, whether the applicant is obligated to pay
more than 50% of his or her income in the past twelve months to residents in third country or region, whether the business operated by the applicant constitutes the actual
business activities, and whether the other country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes at all or levy tax at an
extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. This circular further provides that
applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according to the Administrative
Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties, pursuant to which non-resident taxpayers which satisfy the criteria to be entitled to tax
treaty benefits may, at the time of tax declaration or withholding declaration through a withholding agent, enjoy the tax treaty benefits, and be subject to follow-up
administration by the tax authorities. If the non-resident taxpayer does not apply to the withholding agent for the tax treaty benefits, or such taxpayer does not satisfy the
criteria to be entitled to tax treaty benefits, the withholding agent should withhold tax pursuant to the provisions of PRC tax laws. 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 which was partly repealed on December 29, 2017. 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, as amended on
April 17, 2015, June 28, 2016 and June 15, 2018, 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 decrease.”
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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%. On March 23,
2016, the Ministry of Finance and the SAT jointly issued the Circular on the Pilot Program for Overall Implementation of the Collection of Value Added Tax Instead of
Business Tax, or Circular 36, which took effect on May 1, 2016 and was amended on July 11, 2017 and March 20, 2019. Pursuant to Circular 36, all companies operating
in construction, real estate, finance, modern service or other sectors which were required to pay business tax are required to pay VAT in lieu of business tax As a result of
Circular 36, the services provided by Shanghai IT, Shanghai Hui Ling, Wuxi QuDong, Shencai, Leixian and Jiugang as general VAT payers will be subject to VAT at the
rate of 6%, and the services provided by our other PRC subsidiaries or variable interest entity as small-scale VAT payers will be subject to VAT at the rate of 3%.
United States
Our subsidiaries in the United States are registered in Delaware and are subject to U.S. federal corporate marginal income tax at a rate of 21% for the taxable year ended
December 31, 2021 and subsequent taxable years and state corporate income tax at a rate of 8.7%.
Inflation
Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year
percent changes in the consumer price index for December 2019, 2020 and 2021 increases of 4.5%, 0.2% and 1.5%, respectively. Although we have not been materially
affected by inflation, we may be affected if China experiences higher rates of inflation in the future.
Recent Accounting Pronouncements
A list of recent accounting pronouncements that are relevant to us is included in note <30> to our consolidated financial statements, which are included in this annual
report.
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Results of Operations
The following table sets forth a summary of our consolidated statements of operations for the periods indicated.
For the Year Ended December 31,
2019
2020
2021
RMB
%
RMB
%
RMB
US$
%
Revenues:
Cryptocurrency mining revenue
—
—
—
—
134,122,954
21,046,818
98.7
Online game services and other revenues
343,077
100.0
625,488
100.0
1,752,186
274,956
1.3
343,077
100.0
625,488
100.0
135,875,140
21,321,774
100.0
Sales taxes
(1,582)
(0.5)
—
—
—
—
—
Total net revenues
341,495
99.5
625,488
100.0
135,875,140
21,321,774
100.0
Cost of cryptocurrency mining
—
—
—
—
(83,449,749)
(13,095,087)
(61.4)
Cost of online game services and other revenues
(1,342,266)
(391.2)
(814,136)
(130.2)
(4,584,754)
(719,447)
(3.4)
Total cost
(1,342,266)
(391.2)
(814,136)
(130.2)
(88,034,503)
(13,814,534)
(64.8)
Gross (loss) profit
(1,000,771)
(291.7)
(188,648)
(30.2)
47,840,637
7,507,240
35.2
Operating (expenses) income:
Product development
(13,090,530)
(3,815.6)
(2,438,095)
(389.8)
(1,917,562)
(300,907)
(1.4)
Sales and marketing
(2,114,519)
(616.3)
(646,492)
(103.4)
(22,039,467)
(3,458,473)
(16.2)
General and administrative
(113,867,000)
(33,189.9)
(108,747,919)
(17,386.1)
(293,152,801)
(46,002,072)
(215.8)
Impairment on other long-lived assets
(34,881,000)
(10,167.1)
(6,515,200)
(1,041.6)
—
—
—
Impairment on cryptocurrency
—
—
—
—
(50,887,472)
(7,985,355)
(37.5)
Impairment on equipment
—
—
—
—
(11,639,246)
(1,826,452)
(8.6)
Impairment on advance and other assets
—
—
(20,371,500)
(3,256.9)
—
—
—
Gain on disposal of subsidiaries
1,206,925
351.8
475,588,803
76,034.8
15,015,770
2,356,302
11.1
Total operating (expenses) income
(162,746,124)
(47,437.2)
336,869,597
53,857.1
(364,620,778)
(57,216,957)
268.3
Other operating income, net
30,240
8.8
27,358
4.4
—
—
—
(Loss) income from operations
(163,716,655)
(47,720.1)
336,708,307
53,831.3
(316,780,141)
(49,709,717)
(233.1)
Impairment on equity investments
(4,666,128)
(1,360.1)
(1,172,755)
(187.5)
(7,599,505)
(1,192,528)
(5.6)
(Impairment)Gain on other investments
(3,791,039)
(1,105.0)
(18,000,000)
(2,877.8)
17,245,513
2,706,198
12.7
Impairment on other advances
(5,980,788)
(1,743.3)
—
—
—
—
—
Interest income
18,576
5.4
429,732
68.7
—
—
—
Interest expense
(34,501,556)
(10,056.5)
(4,070,179)
(650.7)
(119,174,037)
(18,701,007)
(87.7)
Fair value change on warrants liability
1,292,244
376.7
37,851
6.1
—
—
—
Gain from change in fair value of convertible feature derivative liability
—
—
—
—
62,246,860
9,767,891
45.8
Gain on disposal of equity investee and available-for-sale investments
694,628
202.5
174,295
27.9
—
—
—
Gain on disposal of other investments
13,430,588
3,914.7
2,818,643
450.6
—
—
—
Gain on extinguishment of convertible notes
—
—
56,755,902
9,073.9
—
—
—
Gain on waiver of interest-free loan
—
—
35,397,500
5,659.2
—
—
—
Foreign exchange loss
(5,474,002)
(1,595.6)
(8,319,669)
(1,330.1)
(6,449,136)
(1,012,010)
(4.7)
Other(Expenses) income, net
9,372,652
2,731.9
2,005,143
320.6
(44,589,670)
(6,997,093)
(32.8)
(Loss) income before income tax expense and share of loss in equity method investments
(193,321,480)
(56,349.3)
402,764,770
64,392.1
(415,100,116)
(65,138,266)
(305.5)
Income tax expense
—
—
(7,165,097)
(1,145.5)
—
—
—
Share of loss in equity method investments
(2,847,260)
(829.9)
(2,165,935)
(346.3)
(1,725,152)
(270,714)
(1.3)
Net (loss) income
(196,168,740)
(57,179.2)
393,433,738
62,900.3
(416,825,268)
(65,408,980)
(306.8)
Net loss attributable to noncontrolling interest
(13,517,983)
(3,940.2)
(3,259,528)
(521.1)
(5,590,513)
(877,273)
(4.1)
Net loss attributable to redeemable noncontrolling interest
(4,855,589)
(1,415.3)
(1,190,122)
(190.3)
—
—
—
Net (loss) income attributable to The9 Limited
(177,795,168)
(51,823.7)
397,883,388
63,611.7
(411,234,755)
(64,531,707)
(302.7)
Change in redemption value of redeemable noncontrolling interest
(12,827,598)
(3,739.0)
(1,190,122)
(190.3)
—
—
—
Net (loss) income attributable to holders of ordinary shares
(190,622,766)
(55,562.7)
396,693,266
63,421.4
(411,234,755)
(64,531,707)
(302.7)
Other comprehensive (loss) income, net of tax:
Currency translation adjustments
(793,531)
(231.3)
3,516,774
562.2
3,984,443
625,246
2.9
Total comprehensive (loss) income
(196,962,271)
(57,410.5)
396,950,512
63,462.5
(412,840,825)
(64,783,734)
(303.8)
Notes:
(1) Translation from Renminbi amounts into U.S. dollars was made at a rate of RMB6.3726 to US$1.00 for the convenience of the reader only. See “Item 3. Key
Information—Selected Financial Information—Exchange Rate Information.”
Year 2021 Compared to Year 2020
Revenues. Our revenues increased by 21,623.1%, from RMB625 thousand in 2020 to RMB135.9 million (US$21.3 million) in 2021, primarily because we started our
cryptocurrency mining business in February 2021.
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Cost of Revenue. Cost of revenue increased by 10,713.2% from RMB814 thousand in 2020 to RMB88.0 million (US$13.8 million) in 2021, primarily due to the increase
in costs associated with running the cryptocurrency mining business, including electricity costs, depreciation on cryptocurrency mining equipment and transaction fees to
the mining pools or mining partners.
Product Development Expenses. Product development expenses decreased by 21.3% from RMB2.4 million in 2020 to RMB1.9 million (US$301 thousand) in 2021. The
decrease was primarily due to the decrease in payroll expenses for the development team.
Sales and Marketing Expenses. Sales and marketing expenses increased by 3,309.1% from RMB646 thousand in 2020 to RMB22.0 million (US$3.5 million) in 2021.
The increase in sales and marketing expenses was primarily due to the increase in offline marketing expenses and the increase in payroll expenses for the marketing team.
General and Administrative Expenses. General and administrative expenses increased by 169.6% from RMB108.7 million in 2020 to RMB293.2 million (US$46.0
million) in 2021. The increase was primarily due to the increase in share-based compensation to senior management and professional fees incurred from professional
service providers for auditing, legal services, and equity transactions.
Impairment on Cryptocurrencies. We recorded an impairment of cryptocurrencies amounting to RMB50.9 million (US$8.0 million) in 2021, based on the impairment
assessment performed after considering our Bitcoin carrying amount exceeded its fair value at any time subsequent to their acquisition. We did not have any impairment
on cryptocurrencies in 2020 as we commenced our cryptocurrency mining in February 2021.
Gain on Disposal of Subsidiaries. We had a gain on disposal of subsidiaries of RMB15.0 million (US$2.4 million) in 2021, which included RMB9.4 millon (US$1.5
million) pertaining to the loss of control of Red 5 Studios, Inc. Red 5 Studios, Inc. was an online game development studio invested by us and based in the U.S., which
had been inactive for the past few years. We had a gain on disposal of subsidiaries of RMB475.6 million in 2020, including a gain on disposal of subsidiaries that had
been classified as held-for-sale.
Impairment (Gain) on Other Investments. We recorded gain on other investments amounting to RMB17.2 million (US$2.7 million) in 2021, primarily due to the net
effect on the gain we recognized on the rebooking the investment in FF Intelligent, less its subsequent impairment, and our investment in SMI; less the impairment losses
we recognized in other investment. We recorded an impairment of other investment amounting to RMB18.0 million in 2020, primarily due to the impairment assessment
performed after considering the recoverable amount of the Shanghai Institute of Visual Art of Fudan University.
Interest (Expenses), Net. We recorded interest expenses amounting to RMB119.2 million (US$18.7 million) in 2021, mainly resulting from a non-cash amortization of
debt discount and interest expense relating to the convertible notes we issued in February and March 2021. We recorded interest expenses of RMB4.1 million in 2020,
primarily related to the convertible notes which were settled in May 2020.
Change in Fair Value of Warrants Liability. We had a loss from change in fair value of convertible notes and warrants liability of RMB37.9 thousand in 2020. We did
not have such expenses after we settled the convertible notes in May 2020.
Change in Fair Value of Conversion Feature Derivative Liability. We had a gain from change in fair value of conversion feature derivative liability of RMB62.2 million
(US$9.8 million) in 2021, mainly related to the convertible notes we issued in February and March 2021.
Gain on Disposal of Other Investments. We had no gain on disposal of other investments in 2021. We had a gain on disposal of other investments of RMB2.8 million in
2020 related to the disposal and refund of certain subscribed tokens.
Other (Expenses) Income, Net. We recorded other expenses amounting to RMB44.6 million (US$7.0 million) in 2021, mainly relating to the refund to investors who
invested in our previous CrossFire New Mobile Game project. Since the refund was made at a discount, we recorded other income together with the extinguishment of
the respective liabilities. We recorded other income of RMB9.4 million in 2019 and RMB2.0 million in 2020, primarily due to foreign exchange loss.
Net (Loss) Income Attributable to Holders of Ordinary Shares. Primarily as a result of the cumulative effect of the above factors, we recorded a net loss attributable to
our holders of ordinary shares of RMB411.2 million (US$64.5 million) in 2021, as compared with net income attributable to holders of ordinary shares of RMB396.7
million in 2020.
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Year 2020 Compared to Year 2019
Please refer to our annual report on Form 20-F for the fiscal year ended December 31, 2020, filed on March 29, 2021, as amended on March 30, 2021.
B.
Liquidity and Capital Resources
We are a holding company and conduct our operations primarily through our subsidiaries in Hong Kong, Singapore and PRC. Currently, the majority of our revenues are
derived from our Hong Kong subsidiaries. As a result, our cash requirements and our ability to pay dividends principally depend upon dividends and other distributions
from our subsidiaries in Hong Kong. We do not foresee any foreign currency or dividend distribution control in Hong Kong.
We conduct our business primarily through our subsidiaries, and we have gradually and significantly reduced our business operation through the variable interest entity 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 the variable interest entity. Specifically, Shanghai Hui Ling, 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 Shanghai Hui Ling is entitled to determine the amount of
payment.
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 or designated banks. Approval from or registration with appropriate government
authorities and authorized banks 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 the variable interest entity and subsidiaries from paying dividends in the following two principal aspects: (i) the variable interest entity
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, 2021, such restricted portion was RMB65.9 million (US$10.4 million). We have not directed our PRC
subsidiaries or variable interest entity to distribute any dividends to-date.
Cash Flows and Working Capital
We fund 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,
2019, 2020 and 2021, we had RMB10.1 million, RMB31.7 million and RMB428.4 million (US$67.2 million), respectively, in cash and cash equivalents. The increase in
cash and cash equivalents from 2020 to 2021 was primarily due to the net cash provided by financing activities including proceeds from our follow-on offering and
issuance of convertible notes in 2021, partially offset by cash used in operating activities mainly related to our cryptocurrency mining business in 2021. The increase in
cash and cash equivalents from 2019 to 2020 was primarily due to the cash flows from the disposal of three subsidiaries.
We have an accumulated deficit of approximately RMB3,403.5 million (US$534.1 million) and total assets exceeded total current liabilities by approximately RMB766.0
million (US$120.2 million) as of December 31, 2021, and total current assets exceeded total current liabilities by approximately RMB506.2 million (US$79.4 million) as
of December 31, 2021. We also had a net loss of
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approximately RMB416.8 million (US$65.4 million) for the year ended December 31, 2021 and have not generated significant revenues or positive cash flows from
operations since 2009.
We are not aware of any obligations that we cannot meet in the next 12 months plus a day.
We are transforming our business focus from online games development and operation to cryptocurrency mining. As we plan to further increase our global hash rate of
Bitcoin, based on our current estimates and the market price of the Bitcoin mining machine, the total amount of funds that we may need for our business operation in
order to achieve our business goal is approximately US$250 million. We have issued and may continue to issue restricted shares of our company, rather than cash, to
acquire second-hand Bitcoin mining machines from their owners, which may lower the total amount of cash required to operate our cryptocurrency business and to
achieve our business target. We plan to satisfy these funding needs by means of fund raising and sale of some of our Bitcoins. We may also consider initiating mining
activities of other cryptocurrencies.
To meet our working capital needs, we are also considering multiple alternatives, including but not limited to additional equity and debt financing, as described below.
We may continue to incur losses, negative cash flows from operating activities and net current liabilities in the future. If we are not able to return to profitability or raise
sufficient capital to cover our capital needs, we may not continue as a going concern. See “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. If we are not able to return to profitability or raise sufficient
capital to cover our capital needs, we may not continue as a going concern.”
Additional Equity and Debt Financing
In February 2020, we issued and sold a one-year convertible note for consideration of US$500,000 to Iliad. In October 2020, we completed an offering of 2,350,000
ADSs and 27,025,000 Warrants to purchase 2,702,500 ADSs, each ADS representing thirty Class A ordinary shares, and raised net proceeds of US$8.1 million. The
warrants were exercised in 2021, with the net proceeds being US$9 million.
In January 2021, we entered into a share subscription and warrant purchase agreement with the holding entities of several investors (“Investors”) in the cryptocurrencies
mining industry based on the pre-agreed legally-binding term sheet. Pursuant to the purchase agreement, we issued 8,108,100 Class A ordinary shares in aggregate at
US$0.1233 per share and 207,891,840 warrants in aggregate, to the Investors in February 2021. The warrants will only be exercisable upon the satisfaction of its
respective condition in connection with the market capitalization of the Company reaching US$100 million, US$300 million, US$500 million and US$1 billion within
the time frames of 6 months, 12 months, 24 months and 36 months from its issuance date, respectively. The transaction was closed in February 2021.
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In February 2021, we issued and sold (i) a one-year convertible note in a principal amount of US$5,000,000, (ii) 50,000 ADSs, and (iii) 10,000,000 Class A ordinary
shares, for an aggregate consideration of US$5,000,000 to Streeterville Capital LLC, or Streeterville. The convertible note bears interest at a rate of 6.0% per year,
computed on the basis of a 360-day year. Streeterville has the right, at any time after six months have elapsed since the purchase date until the outstanding balance has
been paid in full, at its election, to convert all or any portion of the outstanding balance into ADSs of our company at an initial conversion price of US$14 per ADS, each
ADS representing thirty Class A ordinary shares, subject to adjustment. Beginning on the date that is six months from the note purchase date, Streeterville has the right,
exercisable at any time in its sole and absolute discretion, to redeem any portion of the convertible note up to US$840,000 per calendar month. Payment of the
redemption amount could be in cash or our ADSs, provided that any redemptions made in cash which exceed half of the original principal amount will be subject to a ten
percent (10%) premium. We have the right to prepay all or any portion of the outstanding balance, at any time, subject to fifteen percent (15%) premium on the prepaid
amount. In the event the principal amount and interest accrued for the convertible note issued to Streeterville are fully repaid, we have the right to repurchase the
remaining Class A ordinary shares held by Streeterville that are unsold at US$0.0001 per share. We subsequently entered into the Exchange Agreement and convertible
note, pursuant to which conversion price was amended to: ninety percent (90%) multiplied by the lower of (a) the average of the Closing Trade Prices during the five (5)
Trading Days immediately preceding the date of the Lender Conversion Notice, and (b) the Closing Trade Price on the Trading Day immediately preceding the date of
the Lender Conversion Notice. The convertible note was repaid in full in 2021.
In February 2021, we entered into a standby equity distribution agreement, or the SEDA, with YA II PN, Ltd., a Cayman Islands exempt limited partnership managed by
Yorkville Advisor Global, LP, or the Purchaser, pursuant to which we are able to sell up to US$100.0 million of our ADSs solely at our request at any time during the 36
months following the date of the SEDA. Pursuant to the SEDA, the preliminary purchase price per ADS, or the Preliminary Purchase Price, shall initially be 90% of the
average of the 3 lowest daily volume weighted average price of our ADSs during the five consecutive trading days immediately prior to the delivery of an advance notice
by us, or the Preliminary Pricing Period (the date of payment of Preliminary Purchase Price being the Preliminary Closing Date), which shall be adjusted to the greater of
(A) 90% of the average of the 3 lowest daily volume weighted average price of our ADSs during the Preliminary Pricing Period and during the five consecutive trading
days commencing on the trading day immediately following the Preliminary Closing Date, or commencing on the Preliminary Closing Date if the ADSs are received by
the Purchaser prior to the close of trading on the Preliminary Closing Date, or the Secondary Pricing Period, or (B) 85% of the average of the five daily volume weighted
average price of our ADSs during the Secondary Pricing Period, or the Final Purchase Price. If the Final Purchase Price is less than the Preliminary Purchase Price, we
shall deliver additional shares to the Purchaser. If the Final Purchase Price is greater than the Preliminary Purchase Price, the Purchaser shall make payment of the
additional amount to us. The purchase would be subject to certain ownership limitations as provided under the SEDA. The Purchaser has agreed that, during the term of
the SEDA, neither the Purchaser nor its affiliates will engage in any short sales or hedging transactions with respect to the Company’s Class A ordinary shares or ADSs.
We intend to use the proceeds from the potential offering of the ADSs pursuant to the SEDA to fund our business growth. On August 27, 2021, the Company and the
Purchaser agreed to terminate the SEDA and entered into a new standby equity distribution agreement (the “August SEDA”). The Company did not issue any securities
pursuant to the SEDA. Pursuant to the August SEDA, the Company will be able to sell up to US$100.0 million of its ADSs solely at the Company’s request at any time
during the 36 months following the date of the August SEDA. The ADSs would be purchased at a price per ADS that is the greater of (i) 85% of the average of the five
daily VWAPs (as defined below) during the pricing period, or (ii) 90% of the average of the 3 lowest daily VWAPs during the pricing period, rounded to the nearest
100th. “VWAP” means, for any trading day, the daily volume weighted average price of the Company’s ADSs for such date on the principal market as reported by
Bloomberg L.P. during regular trading hours. In November 2021, we offered 968,718 ADSs, representing 29,061,540 Class A ordinary shares, par value $0.01 per share.
On November 17, 2021, we sent the first advance notice to the purchaser for an aggregate amount of $10 million. Subject to the beneficial ownership limit of the
purchaser as set forth the SEDA, the aggregate purchase price of the ADSs as set forth in the settlement document provided by the purchaser in response to such advance
notice is $9,600,000. The purchase price per ADS is $9.91.
In February 2021, we entered into a share purchase agreement with each of the four investors in the cryptocurrencies mining industry, respectively. Pursuant to the share
purchase agreements, we issued 9,231,240 Class A ordinary shares in aggregate to investors for an aggregate consideration of US$11.5 million. Such transactions were
subsequently completed.
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In March 2021, we issued and sold a one-year convertible note in a principal amount of US$20,000,000 to Streeterville for an aggregate consideration of US$20,000,000.
In addition, we are obligated to issue certain number of ADSs to Streeterville as transaction cost. The convertible note bears interest at a rate of 6.0% per year, computed
on the basis of a 360-day year. Streeterville has the right, at any time after six months have elapsed since the purchase date until the outstanding balance has been paid in
full, at its election, to convert all or any portion of the outstanding balance into ADSs of our company at an initial conversion price per ADS calculated as ninety percent
(90%) of the lower of (a) the average of the closing trade prices during the five (5) trading days immediately preceding the date of the conversion, and (b) the closing
trade price on the trading day immediately preceding the date of the conversion. Beginning on the date that is six months from the note purchase date, Streeterville has
the right, exercisable at any time in its sole and absolute discretion, to redeem any portion of the convertible note up to US$3,360,000 per calendar month. Payment of the
redemption amount could be in cash or our ADSs, provided that any redemptions made in cash which exceed half of the original principal amount will be subject to a ten
percent (10%) premium. We have the right to prepay all or any portion of the outstanding balance, at any time, subject to fifteen percent (15%) premium on the prepaid
amount. The convertible note has been partially repaid and the remaining outstanding amount is around US$15 million, as of March 30, 2022.
On March 31, 2021, we entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC, as the representative of several underwriters.
In April 2021, we completed an offering of 3,765,100 ADSs, each representing thirty Class A ordinary shares, and warrants to purchase 2,823,825 ADSs, at a public
offering price of US$33.20 per ADS and accompanying 0.75 of an warrant. The warrants offered in this offering has a term of three years and are exercisable by the
holder at US$36.00 per ADS at any time after the date of issuance. The underwriter exercised its over-allotment option that we granted to it and we further issued and
sold 564,760 ADSs, each representing thirty Class A ordinary shares, and warrants to purchase 423,574 ADSs to cover over-allotments. The aggregate net proceeds from
this offering was approximately US$135.1 million, after deducting underwriting discounts and commissions and offering expenses.
We may continue to do similar equity financing in the future.
If we are unable to obtain the necessary capital, we will need to sell our assets, seek to be acquired by another entity and/or cease operations. See “Risk Factors—Risks
Related to Our Company and Our Industry—We may not be able to obtain additional financing to support our business and operations, and our equity or debt financings
may have an adverse effect on our business operations and share price.”
We believe that, upon the successful implementation of the foregoing potential sources of cash flow, we may have sufficient financial resources to meet our anticipated
operating cash flow requirements, to meet our obligations and to pay off liabilities as and when they fall due for the 12 months following the date of this annual report.
The following table sets forth the summary of our cash flows for the periods indicated:
For the Year Ended December 31,
2019
2020
2021
2021
RMB
RMB
RMB
US$
(in thousands)
Net cash used in operating activities
(54,175)
(106,253)
(687,689)
(107,913)
Net cash provided by (used in) investing activities
60,879
438,263
(141,083)
(22,139)
Net cash (used in) provided by financing activities
40,923
(310,686)
1,226,636
192,486
Effect of foreign exchange rate changes on cash and cash equivalents
1,257
259
(1,140)
(179)
Net change in cash and cash equivalents
5,857
21,583
396,725
62,255
Cash and cash equivalents at the beginning of year
4,256
10,113
31,696
4,974
Cash and cash equivalents at the end of year
10,113
31,696
428,421
67,229
Operating Activities
Net cash used in operating activities was RMB687.7 million (US$107.9 million) in 2021, compared to RMB106.3 million in 2020 and RMB54.2 million in 2019. The
increase of net cash used in operating activities in 2021 was mainly due to cash used in operating activities related to our cryptocurrency mining business in 2021.
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The net cash used in operating activities in 2021 reflected a net loss of RMB416.8 million (US$65.4 million), primarily due to (i) increase in intangible assets of
cryptocurrencies of RMB114.9 million (US$18.0 million), (ii) increase in prepayments and other current assets of RMB537.1 million (US$84.3 million), and (iii) gain
from change in fair value of conversion feature derivative liability of RMB62.2 million (US$9.8 million), partially offset by (iv) impairment of cryptocurrencies of
RMB50.9 million (US$8.0 million), (v) share-based compensation expense of RMB150.2 million (US$23.6 million), (vi) depreciation and amortization of property,
equipment and software of RMB47.4 million (US$7.4 million), (vii) amortization of discount and interest on convertible notes of RMB120.6 million (US$18.9 million),
and (viii) increase of accrued expense and other current liabilities of RMB60.3 million (US$9.5 million).
The net cash used in operating activities in 2020 primarily reflected a net gain of RMB393.4 million, partially offset by gain on disposal of subsidiaries of RMB475.6
million, gain on extinguishment of Convertible Notes of RMB56.8 million and gain on waiver of interest-free loan of RMB35.4 million.
The net cash used in operating activities in 2019 primarily reflected a net loss of RMB196.2 million, partially offset by consulting fee paid by issuance of shares of
RMB35.1 million, impairment on other long-lived assets of RMB34.9 million, interest expense on Convertible Notes of RMB33.2 million, share-based compensation
expense of RMB21.8 million, and changes in accrued expenses and other current liabilities of RMB11.9 million.
Investing Activities
Net cash used in investing activities was RMB141.1 million (US$22.1 million) in 2021, which primarily included (i) purchase of property, equipment and software of
RMB75.6 million (US$11.9 million), and (ii) purchase of other investments of RMB46.6 million (US$7.3 million), partially offset by proceeds from disposal of property,
equipment and software of RMB11.7 million (US$1.8 million).
Net cash provided by investing activities was RMB438.3 million in 2020, which primarily included (i) proceeds from disposal of subsidiaries of RMB443.9 million, (ii)
partially offset by purchase for other investments of RMB8.0 million.
Net cash provided by investing activities was RMB60.9 million in 2019, which primarily included (i) proceeds from disposal of assets and liabilities classified as held for
sale of RMB49.3 million, (ii) proceeds from disposal of other investments of RMB37.0 million, (iii) proceeds from transferred tokens of RMB6.9 million, and (iv) initial
deposit payment of RMB34.9 million to joint venture.
Financing Activities
Net cash provided by financing activities in 2021 was RMB1,226.6 million (US$192.5 million), primarily attributable to (i) the proceeds from issuance of ordinary shares
and warrants of RMB1,011.5 million (US$158.7 million), and (ii) the proceeds from issuance of convertible note of RMB161.6 million (US$25.4 million), partially
offset by (i) ADS issuance fee of RMB3.7 million (US$0.6 million), and (ii) payment for financial products of RMB800.0 thousand (US$125.5 thousand).
Net cash used in financing activities in 2020 was RMB310.7 million, primarily attributable to the repayments of convertible notes and interest-free loan of RMB318.9
million, repayment of a loan from a related party of RMB42.5 million, partially offset against the proceeds from the issuance of ordinary shares and warrants of
RMB47.4 million.
Net cash provided by financing activities in 2019 was RMB40.9 million, primarily attributable to proceeds of other loans of RMB34.9 million and loan from a related
party of RMB16.1 million, partially offset by repayment of a loan from a related party of RMB10.0 million.
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As a result of non-renewal of WoW license on June 7, 2009, we announced a refund plan in connection with inactivated WoW game point cards. According to the plan,
inactivated WoW game point card holders are eligible to receive a cash refund from us. We recorded a liability in connection with both inactivated 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 de-recognition 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 inactivated 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 inactivated 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$26.7 million) as of December 31, 2021.
Material Cash Requirements
Our material cash requirements as of December 31, 2021 and any subsequent interim period primarily include our purchase of mining machines, convertible notes
payable and operating lease obligations.
We incurred capital expenditures of RMB0.8 million, RMB0.4 million and RMB75.6 million (US$11.8 million) in 2019, 2020 and 2021, respectively. In 2021, the capital
expenditures principally consisted of purchases of cryptocurrency mining machines. We may continue to purchase cryptocurrency mining machines depending on the
market situation. In 2019 and 2020, the capital expenditures principally consisted of purchases of computers and other items related to our network infrastructure.
Our purchase of mining machines includes the outstanding payment for the purchase of 24,000 Antminer S19j Bitcoin mining machines. As of December 31, 2021, we
have US$29.0 million of purchase of mining machines.
Our convertible notes payable includes the one-year convertible notes in a principal amount of US$5 million and US$20 million respectively issued to Streeterville
Capital, LLC. If Streeterville Capital, LLC convert the notes or if we choose to repay the notes by issuance of shares, the upcoming cash repayment will be reduced. As
of December 31, 2021, we have RMB18.8 million (US$3.0 million) of convertible notes payable.
Our operating lease obligations includes the lease of office space, parking lots and warehouse. As of December 31, 2021, we have RMB7.2 million (US$1.1 million) of
operating lease obligations.
C.
Research and Development, Patents and Licenses, etc.
Our research and development efforts are primarily focused on the development of our NFTSTAR platform, our proprietary online games and the maintenance of our
websites. Our product development expenses were RMB13.1 million, RMB2.4 million and RMB1.9 million (US$0.3 million) in 2019, 2020 and 2021, respectively.
D.
Trend Information
Except 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, 2021
to December 31, 2021 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.
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E.
Critical Accounting Estimates
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.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported
amount of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported revenues and
expenses during the reported periods. Significant accounting estimates reflected in our consolidated financial statements include the valuation of non-marketable equity
investments and determination of other-than-temporary impairment, allowance for doubtful accounts, revenue recognition, assessment of impairment of other long-lived
assets, assessment of impairment of advances to suppliers and other advances, incremental borrowing rates for lease assessment, fair value of redeemable noncontrolling
interest, fair value of the warrants, share-based compensation expenses, consolidation of affiliated PRC entity, valuation allowances for deferred tax assets, and
contingencies. Such accounting policies are affected significantly by judgments, assumptions and estimates used in the preparation of our consolidated financial
statements, and actual results could differ materially from these estimates.
Revenue Recognition
We recognize revenues when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration expected to be entitled
to in exchange for those goods or services. Depending on the terms of the contract and the laws that apply to the contract, control of the goods or services may be
transferred over time or at a point in time. We do not believe that significant management judgments are involved in revenue recognition. We adopted ASC 606 using the
modified retrospective transition approach method, reflecting the cumulative effect of initially applying the standard to revenue recognition as of January 1, 2018. We
evaluated all revenue streams to assess the impact of implementing ASC 606 on revenue contracts. The adoption did not have an effect over the consolidated financial
statements on the adoption date and no adjustment to prior year consolidated financial statements was required. Under ASC 606, Revenue from contracts with customers,
the core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that
core principle:
●
Step 1: Identify the contract with the customer;
●
Step 2: Identify the performance obligations in the contract;
●
Step 3: Determine the transaction price;
●
Step 4: Allocate the transaction price to the performance obligations in the contract; and
●
Step 5: Recognize revenue when the Company satisfies a performance obligation.
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each
promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of
the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the
customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
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If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The
consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must
consider the effects of all of the following:
●
Variable consideration
●
Constraining estimates of variable consideration
●
The existence of a significant financing component in the contract
●
Noncash consideration
●
Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation
on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at
a point in time or over time as appropriate.
Majority of our cryptocurrency mining revenues was Bitcoin. We generate our Bitcoin mining revenues through provision of computing power, or hash rate, in crypto
asset transaction verification services to Bitcoin mining pools. In exchange for that, we are entitled to receive a fractional share of the Bitcoin award from the Bitcoin
mining pools. The transaction consideration we receive is noncash consideration, which we measure at fair value on the date received, which is not materially different
than the fair value at contract inception. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the
consideration is constrained until the mining pools successfully place a block and we can confirm the receipt of the consideration, at which time revenue is recognized.
Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific
definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has
exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards
Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from
operations.
Other than Bitcoins, we are also engaged in the mining of Chia and Filecoins. We generate Chia and Filecoins mining revenues through provision of computing storage
space to the main networks. In exchange for that, we are entitled to receive a fractional share of the Chia and Filecoins awards from the main networks.
For Chia mining, the revenue recognition is the same as Bitcoins under ASC 606. The9 recognizes Chia mining revenue at fair value on the date we receive Chia awards.
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For Filecoin mining, unlike other cryptocurrency mining, Filecoin mining main network requires miners not only to contribute mining machines with computing storage
space, but miners also need to pledge certain amount of Filecoins to the main network to start the Filecoin mining. Then Filecoin main network will continuously reward
the miners by Filecoin awards. Upon the end of the mining process, which is typically a 540 days process, the Filecoin main network will release the pledged Filecoins to
the miners. We cooperate with a third party company where we contribute mining machines and the third party contributes Filecoins for pledging to the Filcoin main
network. Under this mining cooperation, the Filecoins mined are distributed to the third party ahead of us according to the agreed distribution schedule. Therefore in the
early stage of the 540 days mining process, we do not own any Filecoin. Since it is not probable that a significant reversal of cumulative revenue will not occur, we do
not recognized any Filecoin mining revenue before we start to own the Filecoins being mined. Only when we starts to own the Filecoins being mined (after the
distribution made to the third party under the agreed distribution schedule), we will start to recognize Filecoin mining revenue at fair value on the date we receive and
own the Filecoin awards.
Online game services
We earn revenue from provision of online game operation services to players on the game servers and third-party platforms and overseas licensing of the online game to
other operators. We grant operation right on authorized games, together with associated services which are rendered to the customers over time. We adopt virtual item /
service consumption model for the online game services. Players can access certain games free of charge, but many of them purchase game points to acquire in-game
premium features. We may act as principal or agent through the various transaction arrangements we entered into.
The determination on whether to record the revenue gross or net is based on an assessment of various factors, including but not limited to whether we (i) are the primary
obligor in the arrangement; (ii) have general inventory risk; (iii) change the product or perform part of the services; (iv) have latitude in establishing the selling price; and
(v) have involvement in the determination of product or service specifications. The assessment is performed for all of the licensed online games.
When acting as principal
Revenues from online game operation operated through telecom carriers and certain online games operators are recognized upon consumption of the in-game premium
features based on the gross of revenue sharing-payments to third-party operators, but net of VAT. We obtain revenue from the sale of in-game virtual items. Revenues are
recognized when the virtual items are consumed or over the estimated lives of the virtual items, which are estimated by considering the average period that active players
and players’ behavior patterns derived from operating data. Accordingly, commission fees paid to third-party operators are recorded as cost of revenues.
When acting as agent
With respect to games license arrangements we entered into with third-party operators, if the terms provide that (i) third-party operators are responsible for providing
game desired by the game players; (ii) the hosting and maintenance of game servers for running the games are the responsibility of third-party operators; (iii) third-party
operators have the right to review and approve the pricing of in-game virtual items and the specification, modification or update of the game made by us; and (iv)
publishing, providing payment solution and market promotion services are the responsibilities of third-party operators and we are responsible to provide the license of
intellectual property and subsequent technical services, then we consider ourselves as an agent of the third-party operators in such arrangement with game players.
Accordingly, we record the game revenues from these licensed games, net of amounts paid to the third-party operators.
Licensing revenue
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 evenly throughout the license period after commencement of the game, given that our intellectual property rights subject to the license are
considered to be symbolic and the licensee has the right to access such intellectual property rights as they exist over time when the license is granted. Monthly revenue-
based royalty payments are recognized when the relevant services are delivered, provided that collectability is reasonably assured. We view the third-party licensee
operators as our customers and recognize revenues on a net basis, as we do not have the primary responsibility for fulfillment and acceptability of the game services.
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Technical services
Technical services are blockchain-related consulting services where we provide designing, programming, drafting of white papers, and related services to customers.
These revenues are recognized when delivery of the service has occurred or when services have been rendered and the collection of the related fees is reasonably assured.
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represent amounts invoiced and revenue recognized prior to
invoicing, when we satisfy its performance obligations and have the unconditional right to payment.
Deferred revenue relates to unsatisfied performance obligations at the end of the period and primarily consists of fees received from game players in the online game
services and technical services. For deferred revenue, due to the generally short-term duration of the contracts, the majority of the performance obligations are satisfied in
the following reporting period. The amount of revenue recognized that was included in deferred revenue balance at the beginning of the period was nil for the year ended
December 31, 2021.
Impairment of Cryptocurrencies
The useful life of cryptocurrency is indefinite, thus it shall not be amortized but should be tested for impairment annually, or more frequently, when events or changes in
circumstances occur which indicate that it is more likely than not that the indefinite-lived asset is impaired. Impairment of cryptocurrency exists when the carrying
amount exceeds its fair value at any time subsequent to its acquisition and will require us to recognize an impairment charge. To the extent an impairment loss is
recognized, the loss establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
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, 2019, 2020 and 2021, 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 year ended
December 31, 2019, 2020 and 2021, we did not have any material interest and penalties associated with tax positions.
In recent years, the rise of cryptocurrency prices and transaction volume has attracted the attention of tax authorities. As the laws governing cryptocurrencies are still
evolving, the tax treatment of cryptocurrencies in various jurisdictions are subject to change. While some countries intend to or have imposed taxation on cryptocurrency
assets and transactions, other tax authorities are silent. As there is considerable uncertainty over the taxation of cryptocurrencies, we cannot guarantee that the
cryptocurrency assets and transactions denominated in cryptocurrencies will not be subject to further taxation in the future, including but not limited to additional taxes
and increased tax rate. These events could reduce the economic return of cryptocurrency and increase the holding costs of cryptocurrency assets, which could materially
and adversely affect the businesses and financial performances of our cryptocurrency mining business, and in turn could have a material adverse effect on our business
and results of operations.
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We may be subject to various tax obligations associated with mining in countries where we have hosting agreements for our machines in the future, including the so-
called tax on mining in Kazakhstan, effectively a surcharge on the electricity price per kW/h. Currently, crypto assets which are obtained through crypto mining
operations are not taxed in Russia. However, to address this gap, local government is developing draft tax regulations. We do not expect that new laws will be applied
retroactively, therefore, for the period until such regulations will be adopted by the parliament, cryptocurrency derived from the Russian mining operations are not
taxable in Russia.
Share-Based Compensation
We have granted share-based compensation awards to certain employees, directors and consultants under several equity plans. We measure the cost of employee services
received in exchange for an equity award, based on the fair value of the award at the date of grant. Share-based compensation expense is recognized net of estimated
forfeitures, determined based on historical experience. We recognizes share-based compensation expense over the requisite service period. For performance and market-
based awards which also require a service period, we use graded vesting over the longer of the derived service period or when the performance condition is considered
probable. We determine the grant date fair value of stock options using a Black-Scholes Model with assumptions made regarding expected term, volatility, risk-free
interest rate, and dividend yield. The fair value of the stock options containing a market condition is estimated using a Monte Carlo simulation model. For options
awarded our private subsidiaries, the fair value of shares is estimated based on the equity value of the subsidiary. We evaluate 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. On January 1,
2019, we adopted ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvement to Nonemployee Share-based Payment Accounting (“ASU 2018-07”) to
amend the accounting for share-based payment awards issued to nonemployees. Under ASU 2018-07, the accounting for awards to non-employees is similar to the model
for employee awards.
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
our ADSs. Risk-free interest rate is based on United States government bonds issued with maturity terms similar to the expected term of the stock-based awards.
We recognize 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
two-to-three year vesting period or in the case of market-based awards, over the greater of the vesting period or derived service 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. 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.
For stock option modifications, we compare the fair value of the original award immediately before and after the modification. For modifications, or probable-to-
probable vesting conditions, the incremental fair value of fully vested awards is recognized as expense on the date of the modification, with the incremental fair value of
unvested awards recognized ratably over the new service period.
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, our chairman and chief executive officer, 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. Of such shares, 500,000 ordinary shares were vested and
issued to Incsight Limited, a company wholly-owned by Jun Zhu, on November 17, 2015. 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.
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In May 2011, we 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.
In January 2018, we granted 8,250,000 options to directors, officers and consultants, of which 5,750,000 shares would vest based on their services period with our
company and 2,500,000 shares granted would vest subject to their performance condition. We measured the fair value of the options using the Black-Scholes option-
pricing model. In September 2018, we canceled a total of 6,200,000 shares granted in January 2018.
In September 2018 our board granted an aggregate amount of 30,000,000 restricted shares to our directors, officers and consultant. In exchange for such restricted shares
grant, we forfeited and cancelled the stock options in the total amount of 6,200,000 shares previously granted to our directors in January 2018. In January 2019, our board
of directors approved to forfeit and cancel 15,000,000 out of 30,000,000 restricted shares previously granted.
On June 17, 2020, our board of directors and board committees authorized and approved the issuance of an aggregate number of 29,100,000 restricted Class A ordinary
shares of our company to certain directors, officers, employees and consultants of our company as share incentive awards for their services to us pursuant to our Eighth
Amended and Restated 2004 Stock Option Plan. Among those restricted Class A ordinary shares grants, 15,600,000 restricted Class A ordinary shares are subject to
restrictions on transferability that would be removed once certain pre-agreed performance targets are met, and 13,500,000 restricted Class A ordinary shares are subject
to restrictions on transferability for a six-month period that would be removed in installments once certain service period conditions are met. All the restrictions attached
to those shares have been removed upon the satisfaction of the underlying targets and conditions.
In February 2021, our board of directors and board committees authorized and approved the issuance of an aggregate number of 33,090,000 Class A ordinary shares of
our company to certain directors, executive officers, employees and consultants of our company as share incentive awards for their services to us pursuant to the Option
Plan. Among those Class A ordinary shares grants, 32,190,000 shares were restricted Class A ordinary shares, subject to restrictions on transferability to be removed
upon the satisfaction of the conditions that half of the restricted shares should vest if our market capitalization reaches US$400 million and the other half should vest if
our market capitalization reaches US$500 million. We also granted 900,000 restricted Class A ordinary share units to our directors which are immediately vested and
issued the same number of shares.
In September 2021, our board of directors and board committees authorized and approved the issuance of an aggregate number of 44,290,560 Class A ordinary shares of
our company to certain directors, executive officers, employees and consultants of our company as share incentive awards for their services to us pursuant to the Option
Plan. Among those Class A ordinary shares grants, 44,290,560 shares were restricted Class A ordinary shares, subject to the following vesting condition: restricted shares
shall vest within two years, i.e., 1/24th of all restricted share grants shall vest on the last day of each month after the date of the grant. We also granted 4,950,000
restricted Class A ordinary share units to our directors which are immediately vested and issued the same number of shares.
Share-based compensation expenses of RMB21.3 million, RMB55.1 million and RMB150.2 million (US$23.6 million) were recognized for the year ended December 31,
2019, 2020 and 2021, respectively, for options and restricted shares granted to our company’s and its subsidiaries’ employees and directors, including compensation cost
due to the acceleration vesting and exercise of options in June 2017.
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Allowance for doubtful accounts
Starting from January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2016-13. Financial Instruments—Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized
cost and is codified in Accounting Standards Codifications (“ASC”) Topic 326, Credit Losses (“ASC 326”). ASU 2016-13 replaces the existing incurred loss impairment
model and introduces an expected loss approach with macroeconomic forecasts referred to as a current expected credit losses (“CECL”) methodology which will result in
more timely recognition of credit losses. There was no significant impact on its consolidated financial statements and related disclosures as a result. Under the incurred
loss methodology, credit losses are only recognized when the losses are probable of having been incurred. The CECL methodology requires that the full amount of
expected credit losses for the lifetime of the financial instrument be recorded at the time it is originated or acquired, considering relevant historical experience, current
conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime credit
losses subsequently, which may require earlier recognition of credit losses.
Accounts receivable mainly consist of receivables from third-party game platforms, and other receivables, which are included in prepayments and other current assets,
both of which are recorded net of allowance for doubtful accounts. We determine 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. We provided an allowance for doubtful
accounts of RMB0.2 million, RMB2.3 million and RMB0.6 million (US$0.1 million) for the years ended December 2019, 2020 and 2021, respectively. We have written-
off an amount of RMB3.2 million, RMB2.1 million and RMB1.3 million (US$0.2 million) for the years ended December 31, 2019, 2020 and 2021, respectively.
Impairment of Long-lived Assets Other Than Cryptocurrencies
We review long-lived assets and intangible assets other than cryptocurrencies 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 intangible assets and other assets amounting to RMB34.9 million, RMB6.5 million and nil were recognized in 2019, 2020 and 2021, respectively.
Impairment Loss of Investments
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 investment is higher than
related fair value and that this decline is other-than-temporary, the carrying value of the investment is adjusted downward to reflect these declines in value. Impairment
loss on investments of RMB8.5 million, RMB19.2 million and RMB9.6 million (US$1.5 million) was recognized in 2019, 2020 and 2021, respectively.
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Consolidation of Variable Interest Entity, or VIE
Historically majority of our revenues was derived from online game operation in PRC. PRC laws and regulations, including the GAPP Circular and the Network
Publication Measures prohibit or restrict foreign ownership of online game related businesses. We believe, consistent with the view of our PRC legal counsel that our
structure complies with these foreign ownership restrictions, subject to the interpretation and implementation of the GAPP Circular and the Network Publication
Measures. Specifically, we operated our online game business through Shanghai IT and have entered into a series of contractual arrangements with Shanghai IT and its
equity owners. 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 VIE to us as
collateral for all of their payments due to the wholly-owned foreign enterprise, or WFOE, and to secure performance of all obligations of the VIE 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 VIE granted
WFOE or any third parties designated by the WFOE an irrevocable power of attorney to act on all matters pertaining to the VIE. 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 VIE 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 VIE economic performance and the obligation to absorb losses of or right to receive benefits from the VIE 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. Since the beginning of 2021, we have changed
our business focus from online games to the blockchain industry, including the operation of cryptocurrency mining and NFTSTAR. We expect going forward that a
majority of our revenues will be sourced outside PRC, and the revenues to be recorded in the variable interest entity will be minimal.
Refund of WoW Game Points
As a result of the non-renewal of the WoW license on June 7, 2009, we announced a refund plan in connection with inactivated 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 de-recognition 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$26.7 million) as of December 31, 2021.
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Convertible Notes and Beneficial Conversion Feature (“BCF”)
We have issued convertible notes and warrants in December 2015. We have evaluated whether the conversion feature of the notes is considered an embedded derivative
instrument subject to bifurcation in accordance with ASC 815, Accounting for Derivative Instruments and Hedging Activities. Based on our evaluation, the conversion
feature is not considered an embedded derivative instrument subject to bifurcation as conversion option does not provide the holder of the notes with means to net settle
the contracts. Convertible notes, for which the embedded conversion feature does not qualify for derivative treatment, are evaluated to determine if the effective rate of
conversion pursuant to the terms of the convertible note agreement is below market value. In these instances, the value of the BCF is determined as the intrinsic value of
the conversion feature, which is recorded as deduction to the carrying amount of the notes and credited to additional paid-in-capital. For convertible notes issued with
detachable warrants, a portion of the note’s proceeds is allocated to the warrant based on the fair value of the warrants as of the date of issuance. The allocated fair values
for the warrants and BCF are both recorded in the financial statements as debt discounts from the face amount of the notes, which are then accreted to interest expense
over the life of the related debt using the effective interest method.
We present the occurred debt issuance costs as a direct deduction from the convertible notes. Amortization of the costs is reported as interest expense.
Upon the extinguishment of the convertible notes, the reacquisition price is allocated to the repurchased beneficial conversion feature measured at the intrinsic value as of
the extinguishment date, the residual amount allocated to convertible debt. The difference between the reacquisition price of convertible debt and the net carrying amount
of the extinguished convertible debt is recognized as gain or loss in the statement of operations and comprehensive (loss) gain of the period of extinguishment.
Warrants
We account for the warrants issued in connection with equity-linked instrument under authoritative guidance on accounting from ASC 480, Distinguishing Liabilities
from Equity and ASC 815, Derivatives and Hedging. We classify warrants in its consolidated balance sheet as a liability or equity based on the nature and characteristics
of each warrant issued. For those warrants classified as equity, there is no remeasurement to the warrants after initial recognition. For those warrants classified as liability,
the proceeds are allocated first to the liability classified warrants at the full fair value then the remaining proceeds allocated to the equity instruments offered. The
warrants are initially recognized on its fair value as of issuance date then remeasured at each reporting period and adjusted to fair value. The changes in the fair value of
the warrant liability are recorded in the income of the period.
Redeemable Noncontrolling 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 noncontrolling interests adjusted for cumulative earnings (loss)
allocations.
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
Age
Position/Title
Jun Zhu
55
Director, Chairman of the Board and Chief Executive Officer
Davin A. Mackenzie
(1)(2)
61
Independent Director
Kwok Keung Chau
(1)(2)
45
Independent Director
Ka Keung Yeung
(1)(2)
63
Independent Director
George Lai (Lai Kwok Ho)
45
Director and Chief Finance Officer
Chris Shen
53
Vice President
Notes:
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
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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 our
company, 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.
Davin A. Mackenzie has served as our independent director since July 2005. Mr. Mackenzie is currently the General Manager of Greater China for Scape, a developer
and operator of purpose-build student accommodation, and the Managing Director – Asia Pacific for the Madison Sports Group, the promoter of the Six Day series of
track cycling events. Mr. Mackenzie was a consultant of Spencer Stuart Beijing Office, a renowned global executive search company, from 2012 to 2016. Currently, he
serves as 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.
Kwok Keung Chau has served as our independent director since October 2015. Currently, he serves the chief financial officer and executive director of BetterLife
Holding Limited (SEHK: 06909), responsible for overall financial planning and management, company secretarial affairs, coordination of investors relations and
administrative work, an independent non-executive director and the chairman of the audit committee of China Xinhua Education Group Limited (SEHK: 02779) since
October 2017, an independent non-executive director of China Tobacco International (HK) Company Limited (SEHK: 06055) since December 2018, an independent
non-executive director of Bank of Zhangjiakou Co., Ltd. since April 2020, and an independent non-executive director and the chairman of the audit committee of Suzhou
Basecare Medical Corporation Limited (SEHK 02170) since October 2021. From November 2007 to January 2020, Mr. Chau was an executive director and the chief
financial officer of Comtec Solar Systems Group Limited, responsible for corporate financial and general management. From May 2014 to May 2019, he was an
independent non-executive director and the chairman of the audit committee of Qingdao Port International Co., Ltd. (SEHK: 06198; SSE: 601298). From December 2019
to August 2021, he was an independent non-executive director and the chairman of the audit committee of Forward Fashion (International) Holdings Company Ltd.
(SEHK: 02528). He acted as a member of supervisory board of RIB Software AG, a software company in Germany, which was listed in Frankfurt Stock Exchange, from
May 2010 to June 2013. Prior to joining Comtec Solar in November 2007, Mr. Chau served in various positions at China.com Inc., (SEHK: 08006) from October 2005 to
October 2007, including vice president of the finance department, chief financial officer, company secretary and authorized representative. Prior to joining China.com
Inc., Mr. Chau served as the deputy group financial controller of China South City Holdings Limited (SEHK: 01668) from August 2003 to April 2005. Before that, he
served as the financial controller of Shanghai Hawei New Material and Technology co., Ltd. from June 2002 to August 2003. Mr. Chau has been a member of the
Association of Chartered Certified Accountants since June 2002, a Chartered Financial Analyst of the CFA Institute since September 2003, a member of the Hong Kong
Institute of Certified Public Accountants since July 2005, and a fellow member of the Institute of Public Accountants of Australia and Institute of Financial Accountants
since June 2020. Mr. Chau received his bachelor’s degree in business administration from the Chinese University of Hong Kong in May 1998.
Ka Keung Yeung has served as our independent director since July 2005. Mr. Yeung also serves as a director of Phoenix New Media Limited (NYSE: FENG), a
subsidiary of Phoenix Media Investment (Holdings) Ltd. (Phoenix TV), of which he serves as the chief financial officer, company secretary and qualified accountant.
Mr. Yeung joined Phoenix TV in March 1996 and is in charge of all its internal and external financial management and arrangements and also supervises administration
and personnel matters. Mr. Yeung graduated from the University of Birmingham in the United Kingdom 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.
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George Lai has served as our chief financial officer since July 2008 and our director since January 2016. Currently, he also serves as an independent non-executive
director and the chairman of the compensation committee of Qingdao Port International Co., Ltd. (SEHK: 06198). 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 president since September 2020 and served as our vice president from January 2006 to September 2020. Mr. Shen joined us 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.
Board Diversity Matrix
Board Diversity Matrix (As of February 28, 2022)
Country of Principal Executive Offices
PRC
Foreign Private Issuer
Yes
Disclosure Prohibited Under Home Country Law
No
Total Number of Directors
5
Female
Male
Non-Binary
Did Not
Disclose
Gender
Part I: Gender Identity
Directors
0
5
0
0
Part II: Demographic Background
Underrepresented Individual in Home Country Jurisdiction
0
LGBTQ+
0
Did Not Disclose Demographic Background
0
B.
Compensation
Compensation of Directors and Executive Officers
For the year ended December 31, 2021, the aggregate cash compensation paid or payable to our executive officers and non-executive directors for their services in 2021
was approximately RMB3.5 million (US$0.6 million) and RMB1.6 million (US$0.2 million), respectively. No director or executive officer is entitled to any severance
benefits upon termination of his or her employment with or appointment by our company. With respect to compensation in the form of share incentive awards, see “—
Share Incentive Plan.”
Share Incentive Plan
Ninth Amended and Restated 2004 Stock Option Plan
Our board of directors and our shareholders have adopted and approved the 2004 Stock Option Plan, as amended and restated, or the 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. The Option Plan was amended and restated in December 2006, November 2008, August 2010, November 2010, November 2015, August 2016,
June 2017, December 2018 and August 2021.
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By the amendment to the Option Plan in December 2018, we increased the total number of ordinary shares reserved under the Option Plan from 34,449,614 to
100,000,000. By the amendment to the Option Plan in August 2021, we increased the total number of ordinary shares reserved under the Option Plan from 100,000,000
to 250,000,000. As of February 28, 2022, options to purchase 50,000 Class A ordinary shares under the Option Plan were outstanding and 141,876,600 restricted shares
were issued upon the grant of restricted shares and the vesting of restricted share units. In September 2018 our board granted an aggregate amount of 30,000,000
restricted shares to our directors, officers and consultant. In exchange for such restricted shares grant, we forfeited and cancelled the stock options in the total amount of
6,200,000 shares previously granted to our directors in January 2018. In January 2019, our board of directors approved to forfeit and cancel 15,000,000 out of 30,000,000
restricted shares previously granted. In June 2020, our board of directors and board committees authorized and approved the issuance of an aggregate number of
29,100,000 restricted Class A ordinary shares of our company to certain directors, officers, employees and consultants of our company as share incentive awards for their
services to us pursuant to the Option Plan. Among those restricted Class A ordinary shares grants, 15,600,000 restricted Class A ordinary shares are subject to restrictions
on transferability that would be removed once certain pre-agreed performance targets are met, and 13,500,000 restricted Class A ordinary shares are subject to
restrictions on transferability for a six-month period that would be removed in installments once certain service period conditions are met. As of the date of this annual
report, all the restrictions attached to those shares have been removed upon the satisfaction of the underlying targets and conditions. In February 2021, our board of
directors and board committees authorized and approved the issuance of an aggregate number of 33,090,000 Class A ordinary shares of our company to certain directors,
executive officers, employees and consultants of our company as share incentive awards for their services to us pursuant to the Option Plan. Among those Class A
ordinary shares grants, 32,190,000 shares were restricted Class A ordinary shares, subject to restrictions on transferability to be removed upon the satisfaction of the
conditions that half of the restricted shares should vest if our market capitalization reaches US$400 million and the other half should vest if our market capitalization
reaches US$500 million. We also granted 900,000 restricted Class A ordinary share units to our directors which are immediately vested and issued the same number of
shares.
In September 2021, our board of directors and board committees authorized and approved the issuance of an aggregate number of 44,290,560 Class A ordinary shares of
our company to certain directors, executive officers, employees and consultants of our company as share incentive awards for their services to us pursuant to the Option
Plan. Among those Class A ordinary shares grants, 44,290,560 shares were restricted Class A ordinary shares, subject to the following vesting condition: restricted shares
shall vest within two years, i.e., 1/24th of all restricted share grants shall vest on the last day of each month after the date of the grant. We also granted 4,950,000
restricted Class A ordinary share units to our directors which are immediately vested and issued the same number of shares.
The following table provides a summary of the options and restricted shares granted to our directors, executive officers and other individuals as a group under the Option
Plan as of February 28, 2022 and that remained outstanding.
Total Number
of Ordinary
Shares
Restricted
Underlying
Exercise Price
Shares Issued
Options
(in US$)
Expiration Date
Jun Zhu
58,800,000 (1)
—
—
—
Davin Alexander Mackenzie
*
—
—
—
Kwok Keung Chau
*
—
—
—
Ka Keung Yeung
*
—
—
—
George Lai
9,019,971
—
—
—
Chris Shen
*
—
—
—
All Directors and Senior Executive Officers as a Group
80,038,591
—
—
—
* Less than 1% of our total issued and outstanding shares.
(1) Consists of 7,500,000 Class B ordinary shares and 51,300,000 Class A ordinary shares.
As of February 28, 2022, 141,876,600 restricted Class A ordinary shares and options to purchase 50,000 Class A ordinary shares outstanding under the Option Plan were
issued or granted to the other individuals as a group.
The following paragraphs describe the principal terms of the Ninth Amended and Restated 2004 Stock Option Plan.
Types of Awards. The Option Plan permits the awards of options, stock purchase rights, restricted shares and restricted share units.
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Administration. Our 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 award 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.
Award Agreement. Awards granted under our Option Plan are evidenced by an award agreement that contains, among other things, terms, conditions and limitations for
each award, which may include the term of the award, the provisions concerning exercisability and forfeiture upon termination of employment or consulting
arrangements, as determined by our board.
Eligibility. We may grant awards to our employees, directors and consultants of our company.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the award agreement. The vested portion of option will expire
if not exercised prior to the time as the plan administrator determines at the time of its grant.
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
awards will be assumed or equivalent options or share awards 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.
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 awards
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 Option Plan will expire in 2038. Our board of directors has the authority to amend, alter, suspend or terminate our
Option Plan. However, no such action may (i) impair the rights of any grantee unless agreed by the grantee 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 Option Plan.
C.
Board Practices
Board of Directors
Our board of directors consists of the following five directors: Jun Zhu, Kwok Keung Chau, Davin A. Mackenzie, Ka Keung Yeung and George Lai. A director is not
required to hold any shares in our company by way of qualification. Any director who is in any way, whether directly or indirectly, interested in a contract or proposed
contract with our company must declare the nature of his interest at a meeting of our directors. A director may vote with respect to any contract, proposed contract or
arrangement notwithstanding that he may be interested, and if he does so, his vote shall be counted and he may be counted in the quorum at any meeting of our directors
at which any such contract or proposed contract or arrangement is considered and voted upon. Our directors may exercise all the powers of our company to borrow
money, and to mortgage or charge its undertaking, property and uncalled capital or any part thereof, and issue debentures, debenture stock or other securities whenever
money is borrowed, or as security for any debt, liability or obligation of our company or of any third party.
Committees of the Board of Directors
Audit Committee. Our audit committee consists of Messrs. Kwok Keung Chau, 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.
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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. Kwok Keung Chau, Davin A. Mackenzie and Ka Keung Yeung, all of whom meet the
“independence” standards for compensation committee members 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.
Duties of Directors
Under Cayman Islands law, our directors owe to our company fiduciary duties, including a duty of loyalty, a duty to act honestly and a duty to act in what they consider
in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also owe to our company a duty to act with
care and diligence that a reasonably prudent person would exercise in comparable circumstances and a duty to exercise the skill they actually possess. 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.
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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 Kwok Keung Chau, Davin A.
Mackenzie and Ka Keung Yeung, were re-elected (elected in the case of Kwok Keung Chau) at our 2018 annual general meeting and each of them is serving a three-year
term until the 2021 annual general meeting or until his successor is duly elected and qualified, whichever is earlier. Jun Zhu, our chairman and chief executive officer,
was re-elected as a director at our 2019 annual general meeting and is serving a three-year term until the 2022 annual general meeting or until his successor is duly
elected and qualified, whichever is earlier. George Lai, our chief financial officer and director, was re-elected as a director at our 2018 annual general meeting and is
serving a three-year term until the 2021 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.
D.
Employees
As of December 31, 2021, we had 74 employees, all of them were based in China, including 35 in management and administration, one in our customer service center, 7
in game operations, sales and marketing, and 32 in product development, including supplier management personnel and technical support personnel. We had 61 and 47
employees as of December 31, 2019 and 2020, respectively. We consider our relations with our employees to be good.
E.
Share Ownership
As of February 28, 2022, there were 707,105,330 ordinary shares outstanding, being the sum of 693,497,996 Class A ordinary shares (excluding 160,545,180 ordinary
shares we reserved for issuance upon the exercise of options under our share incentive plan, shares that we may be obligated to issue pursuant to the terms and conditions
of the warrants and for our treasury ADSs) and 13,607,334 Class B ordinary shares.
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of February 28, 2022 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.
Ordinary Shares Beneficially Owned(1)
Total ordinary
shares on an
as converted
% of aggregate
Class A
Class B
basis
%(2)
voting power(3)
Directors and Executive Officers:
Jun Zhu(4)
57,517,323
13,607,334
71,124,657
10.1
69.0
Davin A. Mackenzie
*
—
*
0.4
0.1
Kwok Keung Chau
*
—
*
0.4
0.1
Ka Keung Yeung
*
—
*
0.3
0.1
George Lai (Lai Kwok Ho)(5)
9,019,971
—
9,019,971
1.3
0.4
Chris Shen
*
—
*
0.6
0.2
All Directors and Senior Executive Officers as a Group
78,755,914
13,607,334
92,363,248
13.1
70.1
Principal Shareholders:
Jun Zhu(4)
57,517,323
13,607,334
71,124,657
10.1
69.0
JPKONG LTD(6)
49,801,786
—
49,801,786
6.6
2.4
Qifeng Sun Ltd.(7)
24,900,894
—
24,900,894
3.4
1.2
Root Grace Ltd.(8)
24,900,894
—
24,900,894
3.4
1.2
Plutux Labs Limited(9)
21,000,000
—
21,000,000
3.0
1.0
Notes:
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* 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, 2022, 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 707,105,330 ordinary shares outstanding as of February 28, 2022, as well as the shares underlying share options and
warrants exercisable by such person or group within 60 days from February 28, 2022.
(3) For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or
group by the voting power of all of our Class A and Class B ordinary shares as a single class. Each holder of Class A ordinary shares is entitled to one vote per share
and each holder of our Class B ordinary shares is entitled to one-hundred votes per share on all matters submitted to them for a vote. Our Class A ordinary shares and
Class B ordinary shares vote together as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. Our Class
B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a one-for-one basis.
(4) Includes (i) 6,107,334 Class B ordinary shares and 912,090 Class A ordinary shares represented by ADSs held by Incsight Limited, a British Virgin Islands company
wholly owned and controlled by Jun Zhu, and (ii) 7,500,000 Class B ordinary shares in the form of restricted shares, 51,300,000 Class A ordinary shares in the form
of restricted shares and 5,305,230 Class A ordinary shares represented by ADSs held by Jun Zhu.
(5) Includes 5,775,021 Class A ordinary shares in the form of restricted shares and 3,244,950 Class A ordinary shares represented by American depositary shares
directly held by George Lai.
(6) Includes 46,198,186 Class A ordinary shares issuable upon the exercise of warrants exercisable pursuant to the terms and conditions specified in the Purchase
Agreement held by JPKONG LTD. JPKONG LTD. is a British company wholly owned and controlled by Mr. Jianping Kong. The registered address for JPKONG
LTD. is Sertus Chambers, P.O. Box 905, Quastisky Building, Road Town, Tortola, British Virgin Islands.
(7) Includes 23,099,094 Class A ordinary shares issuable upon the exercise of warrants exercisable pursuant to the terms and conditions specified in the Purchase
Agreement held by Qifeng Sun Ltd. Qifeng Sun Ltd. is a Virgin company wholly owned and controlled by Mr. Qifeng Sun. The registered address for Qifeng Sun
Ltd. is Sertus Chambers, P.O. Box 905, Quastisky Building, Road Town, Tortola, British Virgin Islands.
(8) Includes 23,099,094 Class A ordinary shares issuable upon the exercise of warrants exercisable pursuant to the terms and conditions specified in the Purchase
Agreement held by Root Grace Ltd. Root Grace Ltd. is a Islands company wholly owned and controlled by Mr. Enguang Li. The registered address for Root Grace
Ltd. is Sertus Chambers, P.O. Box 905, Quastisky Building, Road Town, Tortola, British Virgin Islands.
(9) Includes 21,000,000 Class A ordinary shares held by Plutux Labs Limited, as reported by Plutux Labs Limited on the Schedule 13G filed with the SEC on
September 13, 2018. The address for Plutux Labs Limited is 4th Floor, Harbour Place, 103 South Church Street, Grand Cayman KY1-1002, Cayman Islands.
To our knowledge, as of February 28, 2022, 687,632,362 Class A ordinary shares (including 160,545,180 ordinary shares we reserved for issuance upon the exercise of
options under our share incentive plan and for our treasury ADSs), were held by two record shareholders in the United States, one of which is The Bank of New York
Mellon, our ADS depositary. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our
ordinary shares in the United States.
We are currently not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
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B.
Related Party Transactions
Arrangements with Variable Interest Entity
Current PRC laws and regulations impose substantial restrictions on foreign ownership of entities involved in ICP in China. Therefore, we conduct part of our activities
through a series of agreements with Shanghai IT, the variable interest entity. Shanghai IT holds the requisite licenses and approvals for conducting ICP-related businesses
in China. Shanghai IT is owned by our employees Wei Ji, who acquired his equity interests in Shanghai IT from Jun Zhu in November 2011, and our employee Qi Wang,
who acquired his equity interests in Shanghai IT from Zhimin Lin in December 2021.
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 its shareholders, we are able to direct and control the operation and management of Shanghai IT. We believe that the individual shareholders of Shanghai IT 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, Grandall Law Firm,
subject to the interpretation and implementation of the GAPP Circular and the Network Publication Measures, 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.
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 equivalent to 90% of its
operating profit to. 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 shall remain in force indefinitely unless the parties agrees in writing to terminate in advance.
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 designated 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.
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.
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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.
Zhimin Lin transferred the equity interests in Shanghai IT to Qi Wang in 2022. In May 2019, we terminated such loan agreement and entered into a new loan agreement
among the shareholders of Shanghai IT and Shanghai Hui Ling and a subsidiary of us. Pursuant to the terms of this new 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 Shanghai Hui Ling 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. In December 2021, Zhimin Lin, Qi Wang, Wei Ji, Shanghai Hui Ling, and Shanghai IT entered into a Transfer Agreement of Contract
Interest, where all contract interest of Zhimin Lin under the loan agreement has been transferred to Qi Wang. Currently, Qi Wang 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.
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, Shanghai Hui Ling, 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 market regulation
pursuant to the 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.
In the opinion of Grandall Law Firm, our PRC counsel:
●
the ownership structures of Shanghai Hui Ling and Shanghai IT currently are in compliance with PRC laws or regulations currently in effect; and
●
the contractual arrangements among Shanghai Hui Ling, Shanghai IT and the shareholders of Shanghai IT governed by PRC law currently are valid, binding
and enforceable under PRC law, and do not and will not result in any violation of applicable PRC laws or regulations currently in effect.
However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. The PRC regulatory
authorities may in the future take a view that is contrary to the above opinion of our PRC counsel. If the PRC government finds that the agreements that establish the
structure for operating our business do not comply with PRC government restrictions on foreign investment in value-added telecommunications services business, such
as the internet content provision services, we could be subject to severe penalties, including being prohibited from continuing operations. See “Item 3. Key Information—
D. Risk Factors—Risks Related to Our Corporate Structure—Our current corporate structure and business operations may be affected by the Foreign Investment Law.”
Investments or Agreements entered into with Variable Interest Entity or Associates
In 2013, we entered into an agreement with ZTE9, an equity investee of us, to jointly operate IPTV games in the PRC. According to the agreement, we paid ZTE9 a
royalty fee for providing game contents on IPTV. In July 2020, ZTE9 initiated the liquidation process given its inability to repay its liabilities due. In September 2020, we
entered into a debt settlement agreement with ZTE9 by paying ZTE9 an amount of RMB1.0 million (US$0.2 million) and all outstanding balances have been offset. No
IPTV business transaction in 2019 and 2020 and total amount due to ZTE9 for IPTV business was RMB0.2 million and nil as of December 31, 2019 and 2020,
respectively. No borrowing lent to ZTE9 in 2019 and 2020 and total amount due from ZTE9 for outstanding loans was RMB1.0 million and nil as of December 31, 2019
and 2020, respectively.
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We charged a service fee to Big Data, a previous equity investee and now a subsidiary of ours, amounted to RMB0.02 million, nil and nil in 2019, 2020 and 2021,
respectively. As of December 31, 2019, 2020 and 2021, the total amount due from Big Data was RMB0.1 million, RMB0.1 million and RMB1.5 million, respectively.
In March 2019, we entered into a joint venture agreement with F&F, and subsequently attempted to enter into electric vehicle business. In April 2019, we paid an initial
deposit of US$5.0 million to F&F through an interest-free loan from Ark Pacific Associates Limited, an affiliate of Splendid Days Limited. In November 2020, we
converted initial deposit of US$5.0 million with F&F into 2,994,011 Class B ordinary shares of FF Intelligent Mobility Global Holdings Ltd. (formerly known as Smart
King Limited), the holding company of F&F that operates its electric vehicles business, at a pre-agreed conversion price set forth in the joint venture agreement. As a
result of this conversion, the capital commitment in the joint venture agreement was deemed to be released. In July 2021, F&F Intelligent Mobility Global Holdings Ltd.
completed a merger with a SPAC company and became a public company F&F Intelligent Electric Inc. (Nasdaq: FFIE). The Group owns 423,053 shares of FFIE after
the merger.
In June 2019, we and our wholly-owned subsidiary entered into a share purchase agreement with Comtec Windpark Renewable (Holdings) Co Ltd, a wholly-owned
subsidiary of Comtec Solar Systems Group Limited (SEHK: 00712), which was affiliated with Kwok Keung Chau, our independent director. Pursuant to the share
purchase agreement, we issued 3,444,882 Class A ordinary shares to purchase 9.9% equity interest in Zhenjiang Kexin Power System Design and Research Company, a
lithium battery management system and power storage system supplier.
In February 2020, we entrusted a nominee to hold trust shares of 50% in Nanyang Herbs. In March 2020, Nanyang Herbs entered into a research collaboration agreement
with Nanyang Technological University (“NTU”) to jointly provide technology and financial support to fund the research project to embark on evidence-based study to
illustrate the medicinal values and efficacies of certain herbs. We have invested an amount of RMB3.3 million (US$0.5 million) to Nanyang Herbs in 2020.
In June 2020, we entered into an investment agreement to establish Shandong Shanyeyunye, where we invested a total of RMB5.0 million (US$0.8 million) in
Shanyeyunye for an equity interest of 10%. Shanyeyunye is to establish a joint venture with Shandong Dazhong Digital Culture Technology Co., Ltd. to develop and
operates chess and card leisure games in the Province of Shandong. In 2021, we signed an agreement with a third party to sell our equity, and the transaction is not
completed as of December 31, 2021.
In August 2020, we entered into an investment agreement with Beijing Naonao, which aims to develop and operate games designed for therapy purposes. We invested
RMB3.0 million (US$0.5 million) in Beijing Naonao for an equity interest of 9.09%.
In May 2021, Shanghai IT entered into a joint venture agreement with Tian He (Hainan) Technology Co. Ltd. to establish a joint venture company, Shanghai Jiuciyuan
Computer Co., Ltd. (the “Jiu Ciyuan”). Shanghai IT invested RMB 7.16 million for an equity interest of 60%. Jiu Ciyuan will develop technology to create digital avatar
images, which could be used in various Apps and Metaverse projects.
In April 2021, we signed a legally binding term sheet on a CAD4 million investment in Skychain Technologies Inc., a company listed in TSX Venture Exchange in
Canada. The purpose of the investment is for the construction and operation of a 12 MW cryptocurrency mining facility located in Birtle, Manitoba, Canada. In June
2021, we announced the closing of the investment in Skychain and entered into subscription agreements to purchase share units and debentures issued by Skychain
Technologies Inc. Upon the completion of construction, we plan to deploy our cryptocurrency mining machines there.
Loan from Related Parties
Mr. Jun Zhu, the chairman and chief executive officer, extended aggregate of RMB16.1 million, nil and nil in loan to us in 2019, 2020 and 2021, respectively. The loans
are interest-free. We have repaid a total of RMB42.5 million and RMB6.4 million (US$1.0 million) for the years ended December 31, 2020 and 2021, respectively. As of
December 31, 2019, 2020 and 2021, RMB63.2 million, RMB20.6 million and RMB14.1 million (US$2.2 million) of such loan remained outstanding, respectively.
Stock Option Grants
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plan—Eighth Amended and Restated 2004 Stock Option Plan.”
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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
Due to our failure to repay the Convertible Notes in a timely manner as stipulated in the previous deed of settlement and its amendments, in May 2020, Splendid Days
obtained an injunction order from the Court of First Instance of the Hong Kong Special Administrative Region prohibiting our company and some of our subsidiaries and
the variable interest entity from disposing our assets worldwide up to the value of US$55.5 million and such injunction order was also registered in the High Court of the
Republic of Singapore. In May 2020, Splendid Days also commenced an arbitration proceeding in Hong Kong under the rules of the Hong Kong International Arbitration
Centre against our company, our subsidiaries and the variable interest entity. We entered into a Settlement Deed with Splendid Days and other parties named therein to
settle the Convertible Notes. The injunction order against us has been discharged. In April 2022 we have negotiated and intend to sign another settlement deed pursuant
to which we agreed to pay Splendid Days and a third-party total of approximately US$8.6 million in order to settle outstanding claims under the Convertible Notes. Upon
the satisfaction of certain conditions set forth in the foregoing settlement deed, the arbitration proceeding will be terminated.
Other than the foregoing, we are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or
administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is
likely to result in substantial cost and diversion of our resources, including our management’s time and attention.
Dividend Policy
We currently intend to retain most, if not all, of our available funds and any future earnings for use in the operation of our business. Our board of directors has discretion
as to whether we will distribute dividends in the future, subject to applicable laws. In addition, our shareholders may by ordinary resolution declare a dividend, but no
dividend may exceed the amount recommended by our board of directors. 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.
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ITEM 9. THE OFFER AND LISTING
A.
Offer and Listing Details
Our ADSs, each currently representing thirty Class A ordinary shares, are listed on the Nasdaq Capital Market. Our ADSs are traded under the symbol “NCTY.” Our
ADSs had been listed on the Nasdaq Global Market from December 15, 2004 to October 2018. Effective May 9, 2018, we effected a change of the ratio of the ADSs to
ordinary shares from one ADS representing one ordinary share to three ordinary shares. In October 2018, we transferred our listing venue to the Nasdaq Capital Market.
Effective October 19, 2020, we effected a change of the ratio of the ADS to our Class A ordinary shares from one ADS representing three Class A ordinary shares to one
ADS representing thirty Class A ordinary shares. The change in the ratio of the ADS to our Class A ordinary shares had no impact on our underlying Class A ordinary
shares, and no Class A ordinary shares were issued or cancelled in connection with the change in the ratio of the ADS to our Class A ordinary shares.
B.
Plan of Distribution
Not applicable.
C.
Markets
Our ADSs have been listed on the Nasdaq Capital Market since October 2018 and previously Nasdaq Global Market since December 15, 2004 under the symbol
“NCTY.”
D.
Selling Shareholders
Not applicable.
E.
Dilution
Not applicable.
F.
Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A.
Share Capital
Not applicable.
B.
Memorandum and Articles of Association
The following are summaries of material provisions of our currently effective Third Amended and Restated Memorandum and Articles of Association, as well as the
Companies Act insofar as they relate to the material terms of our ordinary shares.
Ordinary Shares
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary shares and Class B ordinary shares have the
same rights except for voting and conversion rights. All of our issued and outstanding ordinary shares are fully paid and non-assessable. Our ordinary shares are issued in
registered form and are issued when entered in our register of members (shareholders). Every person whose name is entered in our register of members as a registered
shareholder is entitled to receive a share certificate within two months of the allotment of such shares. We are not permitted to issue bearer shares.
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Conversion
Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B
ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of Class B ordinary shares by a holder thereof to any person who is not an
affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the same number of Class A ordinary shares.
Dividends
The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. In addition, our shareholders may declare dividends by
ordinary resolution, but no dividend shall exceed the amount recommended by our directors. Under the laws of the Cayman Islands, our company may pay a dividend out
of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as
they fall due in the ordinary course of business.
Voting Rights
Holders of our Class A ordinary shares and our Class B ordinary shares shall, at all times, vote together as one class on all matters submitted to a vote by our shareholders
at any general meeting of our company. Each Class A ordinary share shall be entitled to one vote, and each Class B ordinary share shall be entitled to one hundred votes,
on all matters subject to a vote at general meetings of our company. Voting at any meeting of shareholders is by show of hands unless a poll is demanded. A poll may be
demanded by one or more shareholders together holding not less than ten percent of the paid up voting share capital, 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 issued and outstanding shares entitled to vote. Our company may
hold an annual general meeting but shall not (unless required by the Companies Act) be obliged to hold an annual general meeting. Annual general meetings and
extraordinary general meetings may be convened by our board of directors on its own initiative. In addition, our board of directors is required to convene extraordinary
general meetings upon any requisition by shareholders holding in aggregate not less than 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 extraordinary general meetings.
An ordinary resolution to be passed by our shareholders requires the affirmative vote of a simple majority of the votes attaching to our 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 our ordinary shares cast in a general meeting. A
special resolution is required for important matters such as a change of name, a reduction of our share capital, effecting a statutory merger, or amending our memorandum
and articles of association. Holders of our ordinary shares may effect certain changes by ordinary resolution, including an increase of our authorized 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 authorized but
unissued shares.
Transfer of Shares
Subject to the restrictions of our memorandum and 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 the winding up of our company, if the assets available for distribution amongst our shareholders shall be more than sufficient to repay the whole of the share capital at
the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to the par value of the shares held by them at the
commencement of the winding up. 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 in proportion to the par value of the shares held by them.
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Calls on Shares and Forfeiture of Shares
Our board of directors may from time to time make calls upon shareholders for any moneys unpaid on their shares in a notice served to such shareholders at least 14 days
prior to the specified time of payment. The shares that have been called upon and remain unpaid on the specified time are subject to forfeiture.
Redemption, Repurchase and Surrender of Shares
We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders of such shares, on such terms and in such manner as
may be determined, before the issuance of such shares, by our board of directors. Our company may also repurchase any of our shares (including any redeemable shares)
provided that the manner of such purchase has been approved by ordinary resolution of our shareholders or the manner of such purchase is in accordance with our
memorandum and articles of association. Under the Companies Act, the redemption or repurchase of any share may be paid out of our company’s profits or out of the
proceeds of a fresh issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption
reserve) if the company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Act
no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares outstanding, or
(c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.
Variation of Rights of Shares
If at any time our share capital is divided into different classes of shares, the rights attaching to any class of shares may, subject to our memorandum articles of
association, be varied or abrogated either with the written consent of the holders of a majority of the issued shares of that class or with the sanction of a resolution passed
by at least a majority of the holders of the shares of that class present in person or by proxy at a separate general meeting of the holders of the shares of that class.
Issuance of Additional Shares
Our Third Amended and Restated Memorandum and Articles of Association authorize our board of directors to issue additional shares from time to time as our board of
directors shall determine, to the extent of available authorized but unissued shares.
Our Third Amended and Restated Memorandum and Articles of Association also authorize our board of directors to establish from time to time one or more series of
preferred shares and to determine, with respect to any series of preferred shares, the terms and rights of that series, including but not limited to:
●
the designation of the series;
●
the number of shares of the series and the subscription price thereof if different from the par value thereof;
●
the dividend rights, dividend rates, conversion rights, voting rights; and
●
the rights and terms of redemption and liquidation preferences
Our board of directors may issue preferred shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares may dilute the voting
power of holders of ordinary shares.
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 (other
than a right to receive copies of our memorandum and articles of association and any special resolutions, and a right to inspect our register of mortgages and charges).
However, we will provide our shareholders with annual audited financial statements.
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Anti-Takeover Provisions
Some provisions of our Third Amended and Restated Memorandum and Articles of Association may discourage, delay or prevent a change of control of our company or
management that shareholders may consider favorable, including provisions that:
●
authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such
preferred 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; and
●
limit the ability of shareholders to requisition and convene general meetings of shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our Third Amended and Restated 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.
Changes in Capital
We may from time to time by ordinary resolution of our shareholders increase our share capital by such sum, to be divided into shares of such classes and amount, as the
resolution shall prescribe.
We may by ordinary resolution of our shareholders:
●
consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;
●
sub-divide our existing shares, or any of them into shares of a smaller amount provided that in the subdivision the proportion between the amount paid and the
amount, if any unpaid on each reduced share shall be the same as it was in case of our share from which the reduced share is derived; and
●
cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of its
share capital by the amount of the shares so cancelled.
We may by special resolution of our shareholders reduce our share capital and any capital redemption reserve in any manner authorized by law.
Differences in Corporate Law
The Companies Act of the Cayman Islands is derived, to a large extent, from the older Companies Acts of England, but does not follow recent English law statutory
enactments, and accordingly there are significant differences between the Companies Act of the Cayman Islands and the current Companies Act of England. In addition,
the Companies Act of the Cayman Islands differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of certain
significant differences between the provisions of the Companies Act applicable to us and the comparable provisions of the laws applicable to companies incorporated in
the State of Delaware and their shareholders.
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Mergers and Similar Arrangements
The Companies Act 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 (b) a ”consolidation” means the combination of two or more constituent companies into a combined company and the
vesting of the undertaking, property and liabilities of such companies to the consolidated company. 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) a special resolution of the shareholders of each
constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. The written 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 declaration as to
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 and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Save in certain limited
circumstances, a shareholder of a Cayman Islands constituent company who dissents from the merger or consolidation is entitled to payment of the fair value of his
shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) upon dissenting to the merger or consolidation, provided the dissenting
shareholder complies strictly with the procedures set out in the Companies Act. The exercise of dissenter rights will preclude the exercise by the dissenting shareholder of
any other rights to which he or she might otherwise be entitled by virtue of holding shares, save for the right to seek relief on the grounds that the merger or consolidation
is void or unlawful. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
In addition to the statutory provisions relating to mergers and considerations, the Companies Act also contains statutory provisions that facilitate the reconstruction and
amalgamation of companies by way of schemes of arrangement, 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 Grand Court of the Cayman Islands can be expected to approve the arrangement if it determines that:
●
the statutory provisions as to the required 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 Act.
The Companies Act also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of dissentient minority shareholder upon a tender
offer. When a tender offer is made and accepted by holders of 90% 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 an arrangement and reconstruction by way of scheme of arrangement is thus approved and sanctioned, or if a tender offer is made and accepted, in accordance with the
foregoing statutory provisions, a 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.
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Shareholders’ Suits
In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company, and as a general rule, a derivative action may ordinarily not be brought
by a minority shareholder. However, based on English authority, which would in all likelihood be of persuasive authority in the Cayman Islands, the Cayman Islands
courts can be expected (and have had occasion) to follow and apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) which
permit a minority shareholder to commence a class action against, or derivative actions in the name of, our company to challenge:
●
an act which is ultra vires or illegal and is therefore incapable of ratification by the shareholders,
●
an act which constitutes a fraud against the minority where the wrongdoers are themselves in control of the company, and
●
an act which requires a resolution with a qualified (or special) majority (i.e. more than a simple majority) which has not been obtained.
Indemnification of Directors and Officers and Limitation of Liability
Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors,
except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or
the consequences of committing a crime. Our Third Amended and Restated Memorandum and Articles of Association provides that we shall indemnify each of our
directors and officers against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such director or officer in
connection with the execution or discharge of his duties, powers, authorities or discretions as a director or officer, including without prejudice to the generality of the
foregoing, any costs, expenses, losses or liabilities incurred by him in defending any civil proceedings concerning our company or its affairs in any court whether in the
Cayman Islands or elsewhere. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.
In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons with additional indemnification beyond
that provided in our Third Amended and Restated Memorandum and Articles of Association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing
provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore
unenforceable.
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 acts 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, the
director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
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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 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 based on 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, 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.
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. The Companies Act and our Third Amended and Restated Memorandum and Articles of Association provide that shareholders may approve corporate
matters by way of a unanimous 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.
The Companies Act provides shareholders with only limited rights to requisition a general meeting and does not provide shareholders with any right to put any proposal
before a general meeting. However, these rights may be provided in a company’s articles of association. Our Third Amended and Restated Memorandum and Articles of
Association allow our shareholders holding not less than 33% of the share capital of our company carrying the right of voting at general meetings of our company to
requisition a shareholder’s meeting, in which case our directors are obligated to convene an extraordinary general meeting and to put the resolutions so requisitioned to a
vote at such meeting. Other than this right to requisition a shareholders’ meeting, our Third Amended and Restated Articles of Association do not provide our
shareholders other right to put proposal before annual general meetings or extraordinary general meetings not called by such shareholders. As a Cayman Islands
exempted company, we are not obliged by law to call shareholders’ annual general meetings.
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. While there is nothing under the laws of the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for the election of
directors of our company, it is not a concept that is accepted as a common practice in the Cayman Islands, and our company has made no provisions in our memorandum
and articles of association to allow cumulative voting for such elections. As a result, our shareholders are not afforded any less protections or rights on this issue than
shareholders of a Delaware corporation.
Removal of Directors
Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the
outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our Third Amended and Restated Memorandum and Articles of
Association, subject to certain restrictions as contained therein, directors may be removed with or without cause, by an ordinary resolution of our shareholders. A director
shall hold office until the expiration of his or her term or his or her successor shall have been elected and qualified, or until his or her office is otherwise vacated. In
addition, a director’s office shall be vacated if the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) is found to be or
becomes of unsound mind or dies; (iii) resigns his office by notice in writing to the company; (iv) without special leave of absence from our board of directors, is absent
from meetings of our board for six consecutive months and the board resolves that his office be vacated; or (v) is removed from office pursuant to any other provisions
of our Third Amended and Restated Memorandum and Articles of Association.
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Transactions with Interested Shareholders
The Delaware General Corporation Law contains a business combination statute applicable to Delaware 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 a group
who or which owns or owned 15% or more of the target’s outstanding voting share within the past three years. This has the effect of limiting the ability of a potential
acquirer 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 acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with
the target’s board of directors.
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, the directors of the Company are required to
comply with the fiduciary duties which they owe to the Company under Cayman Islands law, including the duty to ensure that, in their opinion, any such transactions
entered into are bona fide in the best interests of the Company, and are entered into for a proper corporate 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 Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the
company is unable to pay its debts as they fall due, by an ordinary resolution of its members. 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 Third Amended and Restated Articles of Association, if at any time our share capital is
divided into different classes of shares, the rights attaching to any class (unless otherwise provided by the terms of issue of the shares of that class) may, subject to our
Memorandum and Articles of Association, be varied or abrogated with the consent in writing of the holders of a majority of the issued shares of that class or with the
sanction of a resolution passed by at least a majority of the holders of the shares of that 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. Under Cayman Islands law and our Third Amended and Restated Memorandum and Articles of
Associations, our Third Amended and Restated Memorandum and Articles of Association may only be amended with a special resolution of our shareholders.
Rights of Non-resident or Foreign Shareholders
There are no limitations imposed by our Third Amended and Restated 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 Third Amended and Restated Memorandum and Articles of Association which
require our company to disclose shareholder ownership above any particular ownership threshold.
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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
See “Item 4. Information on the Company—B. Business Overview—Government Regulations—Regulations on Foreign Currency Exchange and Dividend Distribution.”
E.
Taxation
Cayman Islands Taxation
In the opinion of our Cayman Islands counsel, Maples and Calder (Hong Kong) LLP, 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, or after execution, brought into, 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.
Payments of dividends and capital in respect of our shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a
dividend or capital to any holder of our shares, nor will gains derived from the disposal of our shares be subject to Cayman Islands income or corporation tax.
People’s Republic of China Taxation
If we are considered a PRC resident enterprise under the EIT Law, our shareholders and ADS holders who are deemed non-resident enterprises may be subject to the
10% EIT on the dividends payable by us or any gains realized from the transfer of our shares or ADSs, if such income is deemed derived from China, provided that
(i) such foreign enterprise investor has no establishment or premises in China, or (ii) it has establishment or premises in China but its income derived from China has no
real connection with such establishment or premises. Furthermore, if we are considered a PRC resident enterprise and relevant PRC tax authorities consider the dividends
we pay with respect to our shares or ADSs and the gains realized from the transfer of our shares or ADSs to be income derived from sources within the PRC, it is also
possible that such dividends and gains earned by non-resident individuals may be subject to the 20% PRC individual income tax. It is uncertain whether, if we are
considered a PRC resident enterprise, holders of our shares or ADSs would be able to claim the benefit of tax treaties or arrangements entered into between China and
other jurisdictions.
If we are required under the PRC tax law to withhold PRC income tax on our dividends payable to our non-PRC resident shareholders and ADS holders, or if any gains
realized from the transfer of our shares or ADSs by our non-PRC resident shareholders and ADS holders are subject to the EIT or the individual income tax, your
investment in our shares or ADSs could be materially and adversely affected.
U. S. Federal Income Taxation
The following discussion is a summary of U.S. federal income tax considerations to U.S. Holders (as defined below) relating to the ownership and disposition of the
ADSs or ordinary shares. This discussion applies only to U.S. Holders of the ADSs or ordinary shares as “capital assets” (generally, property held for investment). 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 is for general information only and does not address all of the tax considerations that may be relevant to any particular investor or to persons in
special tax situations such as:
●
banks and other financial institutions;
●
insurance companies;
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●
pension plans;
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cooperatives;
●
regulated investment companies;
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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 (including private foundations);
●
persons liable for alternative minimum tax;
●
persons whose functional currency is not the U.S. dollar;
●
persons holding ADSs or ordinary shares as part of a straddle, hedging, conversion or integrated transaction for U.S. federal income tax purposes;
●
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 directly, indirectly or constructively own 10% or more of our stock (by vote or value);
●
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.
In addition, the discussion below does not address any U.S. state, local or non-U.S. tax considerations, the Medicare tax, alternative minimum tax, or any non-income tax
(such as U.S. federal estate or gift tax) considerations.
U.S. HOLDERS 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
OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.
For the purpose of this discussion, a “U.S. Holder” is a beneficial owner of ADSs or ordinary shares that is, 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
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●
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. If you are a partner or a partnership holding our ADSs or
ordinary shares, you are urged to consult your tax advisor as to the particular U.S. federal income tax considerations of an investment in the ADSs or ordinary shares that
is applicable to you.
It is generally expected that a U.S. Holder of ADSs should be treated, for U.S. federal income tax purposes, as the beneficial owner of the underlying Class A ordinary
shares represented by the ADSs. The remainder of this discussion assumes that a U.S. Holder of ADSs will be treated in this manner. Predicated upon such treatment,
deposits or withdrawals of our ordinary shares for our ADSs will not be subject to U.S. federal income tax.
Passive Foreign Investment Company Considerations
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 consists of certain types of passive income (the “income test”); or
●
at least 50% of the value of its assets (generally determined on the basis of a quarterly average) is attributable to assets that produce or are held for the
production of passive income (the “asset test”).
For this purpose, cash and assets readily convertible into cash are generally classified as passive assets and goodwill and other unbooked intangibles associated with
active business activities may generally be classified as non-passive assets. Passive income generally includes, among other things, 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), and gains from the disposition of passive
assets.
We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly
or indirectly, at least 25% (by value) of the stock.
Based on the market price of our ADSs and the nature and composition of our assets, we believe that we were a PFIC for United States federal income tax purposes for
our taxable year ended December 31, 2021, and we will very likely be a PFIC for our current taxable year unless the market price of our ADSs increases and/or we invest
a substantial amount of the cash and other passive assets we hold in assets that produce or are held for the production of active income.
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. However, if we cease to be a PFIC, provided that you have not made a mark-to-market election, as
described below, you may avoid some of the adverse effects of the PFIC regime by making 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 our 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 below under “Passive Foreign Investment Company Rules.” 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. The rules dealing with deemed sale elections are very complex. 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.
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Passive Foreign Investment Company Rules
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 the PFIC 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 became a PFIC (a “pre-
PFIC year”), will be taxable as ordinary income;
●
the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to the highest tax rate in effect for individuals or corporations, as
applicable to the U.S. Holder for each such year; and
●
the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each prior taxable year other than a pre-
PFIC year.
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 a PFIC for any taxable year and any of non-U.S. subsidiaries is also a PFIC, a U.S. Holder would be treated as owning a proportionate amount (by value) of the
shares of the lower-tier PFIC for purposes of the application of these rules, and could incur liability for the deferred tax and interest charge described below if either
(1) we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFICs or (2) you dispose of all or part of your ADSs or ordinary shares. It is
possible that one or more of our subsidiaries were also PFICs for the taxable year ending December 31, 2021. You should consult your tax advisors regarding the
application of the PFIC rules to any of our subsidiaries.
The tax liability for amounts allocated to years prior to the year of disposition of “excessive distribution” cannot be offset by any net operating losses for such years, and
gains (but not losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.
Alternatively, 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.
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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. Although our ADSs are currently listed
on, and historically regularly traded on, Nasdaq, which is a qualified exchange or other market for these purposes, no assurance can be given that the ADSs will be
regularly traded on an established securities market in the United States for any taxable year. Moreover, if our ADSs are delisted (as described in “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Shares and ADSs— Our ADSs may be delisted from the Nasdaq Capital Market as a result of our not meeting the
Nasdaq Capital Market continued listing requirements.”), then the mark-to-market election generally would be unavailable to U.S. Holders. If any of our subsidiaries are
or become PFICs, the mark-to-market election will technically not be available with respect to the shares of such subsidiaries that are treated as owned by you.
Consequently, you could be subject to the PFIC rules with respect to income of the lower-tier PFICs the value of which already had been taken into account indirectly via
mark-to-market adjustments. 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.
We do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections which, if available, would result in tax treatment different
from (and generally less adverse than) the general tax treatment for PFICs described above.
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. In addition, if you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required to file IRS Form 8621 regarding distributions
received on the ADSs or ordinary shares and any gain realized on the disposition of the ADSs or ordinary shares. 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 PRIOR YEARS 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.
Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares
Subject to the discussion above under “Passive Foreign Investment Company Rules,” 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.
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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 IRS 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). There can be no assurance that our ADSs
will be considered readily tradable on an established securities market in the United States in later years. Moreover, if our ADSs are delisted and not readily tradable on
an established securities market in the United States (as described in “Item 3. Key Information—D. Risk Factors—Risks Related to Our Shares and ADSs— Our ADSs
may be delisted from the Nasdaq Capital Market as a result of our not meeting the Nasdaq Capital Market continued listing requirements.”), clause (1) above would not
be satisfied, and dividends would not qualify for the preferential rate applicable to qualified dividend income. Since we do not expect that our ordinary shares will be
listed on an established securities market in the United States, it is unclear if the dividends that we pay on our ordinary shares which are not backed by ADSs currently
meet the conditions required for the reduced tax rate. Furthermore, as previously disclosed, we believe that we were a PFIC for U.S. federal income tax purposes for our
taxable year ended December 31, 2021. 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 (the “Treaty”). 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 decrease”), 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.
As discussed above, we believe that we were a PFIC for our taxable year ended December 31, 2021, and we will very likely be a PFIC for our current taxable year. You
are urged to consult your tax advisors regarding the availability of the reduced tax rate on dividends with respect to our ADSs or ordinary shares in your particular
circumstances.
Taxation of Disposition of the ADSs or Ordinary Shares
Subject to the discussion above under “Passive Foreign Investment Company Rules,” 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.
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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).
As described in “Item 10. Additional Information—E. Taxation—People’s Republic of China Taxation,” if we are deemed to be a PRC resident enterprise under the EIT
Law, gains from the disposition of the ADSs or ordinary shares may be subject to PRC income tax and will generally be U.S. source, which may limit the ability to
receive a foreign tax credit. If a U.S. Holder is eligible for the benefits of the Treaty, such holder may be able to elect to treat such gain as PRC source income under the
Treaty. Pursuant to recently issued U.S. Treasury regulations, however, if a U.S. Holder is not eligible for the benefits of the Treaty or does not elect to apply the Treaty,
then such holder may not be able to claim a foreign tax credit arising from any PRC tax imposed on the disposition of the ADSs or ordinary shares. The rules regarding
foreign tax credits and deduction of foreign taxes are complex. U.S. Holders should consult their tax advisors regarding the availability of a foreign tax credit or
deduction in light of their particular circumstances, including their eligibility for benefits under the Treaty, and the potential impact of the recently issued U.S. Treasury
regulations.
As discussed above, we believe that we were a PFIC for our taxable year ended December 31, 2021, and we will very likely be a PFIC for our current taxable year. You
are urged to consult your tax advisors regarding the tax considerations of the sale or other disposition of our ADSs or ordinary shares under your particular
circumstances.
F.
Dividends and Paying Agents
Not applicable.
G.
Statement by Experts
Not applicable.
H.
Documents on Display
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
Not applicable.
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.
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Foreign Exchange Risk
We are exposed to foreign exchange risk arising from various currency exposures. Our payments to overseas developers, a portion of our financial assets and the
Convertible Notes 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. Any significant revaluation of RMB against the
U.S. dollar may materially affect our earnings and financial position, and the value of, and any dividends payable on, our ADS in U.S. dollars. 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.”
As of December 31, 2021, we had U.S. dollar-denominated cash and cash equivalents of US$49.3 million. A hypothetical 10% increase or decrease in the exchange rate
of the U.S. dollar against the RMB would have resulted in an increase or decrease of RMB31.4 million in the U.S. dollar-denominated cash and cash equivalents as of
December 31, 2021.
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.
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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 or ADSs holders 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$0.05 (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$0.05 (or less) per ADS per calendar year
●
Depositary services
Registration or transfer fees
●
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
Expenses of the depositary
●
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
Starting from 2021, the depository is not be obliged to reimburse us due to the ADS ratio change (now the ADSs each represents thirty Class A ordinary shares), which
led to a decrease in the number of ADSs, hence reduced the dollar amount of the collected ADS fees. According to the amended Letter Agreement, the revenue sharing
arrangement was amended and the payment would be due to us for three contract years-for the periods from December 14, 2017 to December 13, 2018, from December
14, 2018 to December 13, 2019, and from December 14, 2019 to December 13, 2020-for the net issuance fees, net cash dividend fees, and net depositary service fees
collected during such contract years. Thus, for the remaining two years of the contract, no revenue sharing would be due to us but rather that if the aforementioned net
fees collected were less than $120,000 at the end of each contract year, the difference would be billed to us. For the contract year from December 14, 2020 to December
13, 2021, the total fees collected met the $120,000 requirement, and we would not be billed for any difference.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
On December 22, 2021, we held an annual general meeting at which our shareholders approved, among other things, to modify voting rights of Class B ordinary shares
from fifty (50) votes per share to one hundred (100) votes per share on all matters subject to vote at general meetings of our company.
See “Item 10. Additional Information” for a description of the rights of securities holders.
E.
Use of proceeds
In February 2021, we entered into a share purchase agreement with each of the four investors in the cryptocurrencies mining industry, respectively. Pursuant to the share
purchase agreements, we should issue 9,231,240 Class A ordinary shares in aggregate to investors for an aggregate consideration of US$11.5 million.
On March 31, 2021, we entered into an Underwriting Agreement with Maxim Group LLC, as the representative of several underwriters. In April 2021, we completed an
offering of 3,765,100 ADSs, each representing thirty Class A ordinary shares, and warrants to purchase 2,823,825 ADSs, at a public offering price of US$33.20 per ADS
and accompanying 0.75 of an warrant. The warrants offered in this offering has a term of three years and are exercisable by the holder at US$36.00 per ADS at any time
after the date of issuance. The underwriter exercised its over-allotment option that we granted to it and we further issued and sold 564,760 ADSs, each representing thirty
Class A ordinary shares, and warrants to purchase 423,574 ADSs to cover over-allotments. The aggregate net proceeds from this offering was approximately US$135.1
million, after deducting underwriting discounts and commissions and offering expenses. In the event that the common warrants and over-allotment warrants offered are
exercised in full, the Company would receive approximately an additional $116 million in proceeds.
In November 2021, we offered 968,718 ADSs, representing 29,061,540 Class A ordinary shares. We expect to use the net proceeds of approximately $8,924,000, after
deducting the finder’s fees and offering expenses, for working capital and other general corporate purposes.
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-15I 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 chief executive officer and chief financial officer have concluded that, as of December 31, 2021, we did not maintain
effective disclosure controls and procedures as of December 31, 2021 due to the material weakness identified in our internal control over financial reporting as described
below under “Internal Control over Financial Reporting.” We have taken action to and will continue to undertake remedial steps to address such material weakness as set
forth below under “Internal Control over Financial Reporting.”
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 defined in Rules 13a-15 (f) under the Exchange
Act. Our management, with the participation of our chief financial officer and internal audit manager, evaluated the effectiveness of our internal control over financial
reporting based on criteria established in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our management has concluded that we did not maintain effective internal control over financial reporting as of
December 31, 2020 and 2021 due to a material weakness identified in our internal control over financial reporting as described below under “Internal Control over
Financial Reporting.”
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Internal Control over Financial Reporting
In the course of preparing and auditing our consolidated financial statements for the year ended December 31, 2020 and 2021, we and our independent registered public
accounting firms respectively identified material weakness in our internal control over financial reporting. In accordance with reporting requirements set forth by the
SEC, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of our company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
For the year ended December 31, 2020, the material weakness identified related to our lack of sufficient resources regarding financial reporting and accounting personnel
with understanding of U.S. GAAP, in particular, to address complex U.S. GAAP technical accounting issues, related disclosures in accordance with U.S. GAAP and
financial reporting requirements set forth by the SEC. Had our independent registered public accounting firm performed an audit of the effectiveness of our internal
control over financial reporting, additional material weaknesses may have been identified.
For the year ended December 31, 2021, the following material weaknesses have been identified and are included in management’s assessment: a) we failed to maintain
and implement controls over our period-end closing and financial reporting process in a timely manner, and b) we lack accounting personnel with knowledge of U.S.
GAAP and SEC financial reporting requirements, which resulted in a number of adjustments detected and or proposed by our auditor.
To remedy our identified material weakness, we are hiring additional qualified financial and accounting staff with working experience of U.S. GAAP and SEC reporting
requirements. We will establish clear roles and responsibilities for accounting and financial reporting staff to address accounting and financial reporting issues.
Furthermore, we will continue to further expedite and streamline our reporting process and develop our compliance process, including establishing a comprehensive
policy and procedure manual, to allow early detection, prevention and resolution of potential compliance issues, and establishing an ongoing program to provide
sufficient and appropriate training for financial reporting and accounting personnel, especially training related to U.S. GAAP and SEC reporting requirements. We intend
to conduct regular and continuous U.S. GAAP accounting and financial reporting programs and send our financial staff to attend external U.S. GAAP training courses.
We also intend to hire additional resources to strengthen the financial reporting function and set up a financial and system control framework. Further, we plan to enhance
an internal audit function as well as engaging an external consulting firm to help us assess our compliance readiness under Rule 13a-15 of the Exchange Act and improve
overall internal control.
However, we cannot assure you that we will remediate our material weakness in a timely manner. See “Risk Factors—Risks Relating to Our Business and Our Industry—
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.”
Attestation Report of the Registered Public Accounting Firm
Our auditor has audited the effectiveness of our internal control over financial reporting as of December 31, 2021 as stated in its report, which appears on page F-2 of this
annual report on Form 20-F.
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. Other
than as described above, there were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report on Form 20-
F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
See “Item 6. Directors, Senior Management and Employees—C. Board Practices.”
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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.
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 Grant Thornton and RBSM
LLP (“RBSM”), our principal external auditors for the periods indicated below.
2020(5)
2021
RMB
RMB
US$
Audit fees(1)
2,372,000
5,575,686
874,947
Audit-related fees(2)
391,500
28,827
4,524
Tax fees(3)
—
—
—
All other fees(4)
—
—
—
(1) “Audit fees” represent the aggregate fees billed for professional services rendered by our principal auditor for the audit of our annual financial statements and the
review of our comparative interim financial statements.
(2) “Audit-related fees” represent the aggregate fees billed for assurance and related services rendered by our auditor.
(3) “Tax fees” represents the aggregate fees billed in each of the fiscal years listed for the professional tax services rendered by our auditor.
(4) “All other fees” represents the aggregate fees billed in each of the fiscal years listed for services rendered by our auditor other than services reported under “Audit
fees”, “Audit-related fees” and “Tax fees.”
(5) On August 20, 2021, Grant Thornton has resigned as our independent registered public accounting firm. On August 27, 2021, we engaged RBSM as our independent
registered public accounting firm. The fees for 2020 had been already paid to Grant Thornton. See also “Item 16F. Change in Registrant’s Certifying Accountant.”
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 minimis services which are approved by our audit committee
prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
We were notified by Grant Thornton, the China member firm of Grant Thornton International, that, effective from August 20, 2021, Grant Thornton has resigned as our
independent registered public accounting firm. Grant Thornton has served as our independent registered public accounting firm since 2016.
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The reports of Grant Thornton on our consolidated financial statements for the fiscal years ended December 31, 2019 and 2020 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle, except that they contained explanatory paragraphs which
noted that there was substantial doubt as to the Company’s ability to continue as a going concern.
During the fiscal years ended December 31, 2019 and 2020 and the subsequent interim period through August 20, 2021, there have been no (i) disagreements between us
and Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or audit scope or procedure, which disagreements if not resolved
to the satisfaction of Grant Thornton would have caused them to make reference thereto in their reports on the consolidated financial statements for such years, or (ii) no
“reportable events” (as described in Item 304(a)(1)(v) of Regulation S-K) other than the material weakness related to the Company’s lack of sufficient resources
regarding financial reporting and accounting personnel with understanding of U.S. GAAP reported by management in Item 15 of the Company’s Form 20-F filed with the
U.S. Securities and Exchange Commission on March 29, 2021.
We have provided Grant Thornton with a copy of the disclosures hereunder and required under Item 16F of Form 20-F and requested from Grant Thornton a letter
addressed to the SEC indicating whether it agrees with such disclosures. A copy of Grant Thornton’s letter dated May 2, 2022 is attached as Exhibit 16.1.
On August 27, 2021, we engaged RBSM as its independent registered public accounting firm. The engagement of RBSM has been approved by our audit committee and
the board of directors on August 27, 2021.
During each of the fiscal years ended December 31, 2019 and 2020 and the subsequent interim period through August 20, 2021, neither we nor anyone on behalf of us
has consulted with RBSM regarding (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our consolidated financial statements, and neither a written report nor oral advice was provided to us that RBSM concluded was an important factor
considered by us in reaching a decision as to any accounting, audit, or financial reporting issue, (ii) any matter that was the subject of a disagreement pursuant to Item
16F(a)(1)(iv) of the instructions to Form 20-F, or (iii) any reportable event pursuant to Item 16F(a)(1)(v) of the instructions to Form 20-F.
ITEM 16G. CORPORATE GOVERNANCE
We are an exempted company 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 Capital 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. In each of November 2015 and August 2016, our board of directors approved an increase in the total number
of ordinary shares reserved for issuance under our Option Plan, for which we have followed “home country practice” in lieu of obtaining a shareholder approval pursuant
to Nasdaq Marketing Rule 5635(c). We also followed “home country practice” in lieu of obtaining a shareholder approval pursuant to Nasdaq Market Rule 5635(a) with
respect to issuance of securities in excess of 20% of our total issued and outstanding shares prior to such issuance. We also followed “home country practice” in lieu of
the requirement under Nasdaq rule 5635(d) to seek shareholder approval in connection with certain transactions involving the sale, issuance or potential issuance by the
company of common stock (or securities convertible into or exercisable for common stock) at a price less than certain references price equals 20% or more of common
stock or 20% or more of the voting power outstanding before the issuance 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.
ITEM 16I.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
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
Description of Document
1.1
Third Amended and Restated Memorandum and Articles of Association of the Registrant as currently in effect (incorporated by reference to Exhibit 3.1 to our
Report of Foreign Private Issuer on Form 6-K (File No. 001-34238) filed with the Securities and Exchange Commission on December 23, 2021)
2.1
Specimen American Depositary Receipt (incorporated by reference to Exhibit A (Form of American Depositary Receipt) of Exhibit 1 (Form of Deposit
Agreement) to our Post-Effective Amendment No. 3 to the Registration Statement on Form F-6 (file no. 333-156635) filed with the Securities and Exchange
Commission on June 21, 2019)
2.2
Specimen Certificate for Class A ordinary shares of The Registrant (incorporate by reference to Exhibit 2.2 to our Annual Report on Form 20-F (File No. 001-
34238) filed with the Securities and Exchange Commission on April 30, 2020)
2.3
Form of Amended and Restated Deposit Agreement 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 to our Post-Effective Amendment No. 3 to the
Registration Statement on Form F-6 (file no. 333-156635) filed with the Securities and Exchange Commission on June 21, 2019)
2.4
Description of Securities (incorporate by reference to Exhibit 2.4 to our Annual Report on Form 20-F (File No. 001-34238) filed with the Securities and Exchange
Commission on April 30, 2020)
4.1
Ninth Amended and Restated 2004 Stock Option Plan (incorporated herein by reference to Exhibit 8.1 to the registration statement on Form S-8 (File No. 001-
259135) filed with the Securities and Exchange Commission on August 27, 2021)
4.2
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)
4.3
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)
4.4
Translation of Exclusive Technical Service Agreement dated May 1, 2019 between Shanghai IT and Shanghai Hui Ling (incorporated by reference to Exhibit 4.8
to our Annual Report on Form 20-F (File No. 001-34238) filed with the Securities and Exchange Commission on April 30, 2020)
4.5
Translation of Shareholder Voting Proxy Agreement dated May 1, 2019 among Shanghai Hui Ling, Wei Ji and Zhimin Lin (incorporated by reference to
Exhibit 4.9 to our Annual Report on Form 20-F (File No. 001-34238) filed with the Securities and Exchange Commission on April 30, 2020)
4.6
Translation of Equity Pledge Agreements dated May 1, 2019 between Shanghai Hui Ling and each of the shareholders of Shanghai IT (incorporated by reference
to Exhibit 4.10 to our Annual Report on Form 20-F (File No. 001-34238) filed with the Securities and Exchange Commission on April 30, 2020)
4.7
Translation of Exclusive Call Option Agreement dated May 1, 2019 among Shanghai Hui Ling, Wei Ji and Zhimin Lin (incorporated by reference to Exhibit 4.11
to our Annual Report on Form 20-F (File No. 001-34238) filed with the Securities and Exchange Commission on April 30, 2020)
4.8
Translation of Loan Agreement dated May 1, 2019 among Shanghai Hui Ling, Wei Ji and Zhimin Lin (incorporated by reference to Exhibit 4.12 to our Annual
Report on Form 20-F (File No. 001-34238) filed with the Securities and Exchange Commission on April 30, 2020)
4.9
Confidential Settlement Deed dated May 29, 2020 among the Registrant, Splendid Days Limited and other parties named therein (incorporate by reference to
Exhibit 10.14 to our Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on August 4, 2020)
4.10†
Master Cooperation and Publishing Agreement dated September 18, 2020 between Voodoo and 9City Asia Limited (incorporate by reference to Exhibit 10.16 to
our Registration Statement on Form F-1 Amendment No.2 (File No. 333-240331) filed with the Securities and Exchange Commission on September 23, 2020)
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Exhibit
Number
Description of Document
4.11
Warrant Agency Agreement dated October 2, 2020 among The9 Limited, Computershare Inc. and Computershare Trust Company, N.A. (incorporated by reference
to Exhibit 4.4 to our Report of Foreign Private Issuer on Form 6-K (File No. 001-34238) furnished with the Securities and Exchange Commission on October 5,
2020)
4.12
Form of Warrant Offered in the Offering (included in Exhibit 4.11)
4.13
Representative’s Warrant (incorporated by reference to Exhibit 4.6 to our Report of Foreign Private Issuer on Form 6-K (File No. 001-34238) furnished with the
Securities and Exchange Commission on October 5, 2020)
4.14
Share Subscription and Warrant Purchase Agreement dated January 25, 2021 among the Registrant, Jianping Kong, JPKONG LTD., Qifeng Sun Ltd., Luckylily
Ltd. and Root Grace Ltd. (incorporated by reference to Exhibit 10.11 to our Post-effective Amendment No. 2 to Registration Statement on Form F-1 (File No. 333-
240331) filed with the Securities and Exchange Commission on February 9, 2021)
4.15
Securities Purchase Agreement dated February 2, 2021 between The9 Limited and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.12 to our
Post-effective Amendment No. 2 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on February 9,
2021)
4.16
Form of Share Purchase Agreement between The9 Limited and the owner of the cryptocurrencies mining machines and a schedule of all executed share purchase
agreements adopting the same form in connection with the purchase of cryptocurrencies mining machines by the Registrant (incorporated by reference to
Exhibit 10.13 to our Post-effective Amendment No. 3 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange
Commission on March 23, 2021)
4.17
Form of Share Purchase Agreement between the Registrant and investors named therein and a schedule of all executed share purchase agreements adopting the
same form in connection with investment in the cryptocurrency mining business of the The9 Limited (incorporated by reference to Exhibit 10.14 to our Post-
effective Amendment No. 3 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on March 23, 2021)
4.18†
Future Sales and Purchase Agreement dated March 16, 2021 between Bitmain Technologies Limited and NBTC Limited (incorporated by reference to
Exhibit 10.15 to our Post-effective Amendment No. 3 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange
Commission on March 23, 2021)
4.19
Securities Purchase Agreement dated March 17, 2021 between The9 Limited and Streeterville Capital, LLC (incorporated by reference to Exhibit 10.16 to our
Post-effective Amendment No. 3 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on March 23,
2021)
4.20
Underwriting Agreement dated March 31, 2021 between The9 Limited and Maxim Group LLC (incorporated by reference to Exhibit 99.1 to Form 6-K (File
Number: 001-34238) filed with the Securities and Exchange Commission on April 7, 2021)
4.21
Standby Equity Distribution Agreement dated August 27, 2021 between The9 Limited and YA II PN, LTD. (incorporated by reference to Exhibit 99.1 to Form 6-K
(File Number: 001-34238) filed with the Securities and Exchange Commission on August 27, 2021)
4.22*†
Translation of Shanghai Jiucheng Information Technology Co., Ltd. Equity Transfer Agreement dated December 10, 2021 between Zhimin Lin and Qi Wang
4.23*†
Translation of Equity Pledge Agreement dated December 10, 2021 between Huiling Computer Technology Consulting (Shanghai) Co., Ltd. and Qi Wang
4.24*†
Translation of Transfer Agreement of Contractual Interests dated December 10, 2021 among Zhimin Lin, Qi Wang, Wei Ji, Huiling Computer Technology
Consulting (Shanghai) Co., Ltd. and Shanghai Jiucheng Information Technology Co., Ltd.
8.1*
List of Significant and Other Principal Subsidiaries and Variable Interest Entity 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
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 (Hong Kong) LLP
15.2*
Consent of Grandall Law Firm
15.3*
Consent of RBSM LLP, independent registered public accounting firm
15.4*
Consent of Grant Thornton, independent registered public accounting firm
16.1*
Letter from Grant Thornton to the Securities and Exchange Committee, dated May 2, 2022
101.INS*
Inline XBRL Instance Document-this instance document does not appear in the Interactive Data File because its XBRL tags embedded within the Inline XBRL
document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
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155
Exhibit
Number
Description of Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (embedded within the Exhibit 101 Inline XBRL document set)
*
Filed with this Form 20-F.
**
Furnished with this Form 20-F.
†
Portions of this exhibit have been omitted for confidentiality purpose
SIGNATURES
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
By:
/s/ Jun Zhu
Name:
Jun Zhu
Title:
Chairman and Chief Executive Officer
Date: May 2, 2022
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F-1
THE9 LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 587)
F-2
Report of Independent Registered Public Accounting Firm (PCAOB ID: 1487)
F-7
Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended December 31, 2019, 2020 and 2021
F-8
Consolidated Balance Sheets as of December 31, 2020 and 2021
F-10
Consolidated Statements of Changes in (Deficit) Equity for the years ended December 31, 2019, 2020 and 2021
F-11
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2020 and 2021
F-14
Notes to the Consolidated Financial Statements
F-15
Schedule 1 – Additional Financial Information of Parent Company
F-56
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
The9 Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of The9 Limited, its subsidiaries and its consolidated variable interest entities (the “Group”) as of
December 31, 2021, and the related consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for the year then ended, and the
related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Group as of December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Group’s internal control
over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) and our report dated May 2, 2022, expressed an adverse opinion on the Group’s internal control over financial
reporting.
Basis for Opinion
These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group’s financial statements based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our
opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be
communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
Accounting for and Disclosure of Cryptocurrency Mining Revenue Recognized
Description of the Matter
As discussed in Note 2 to the consolidated financial statements, the Group recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers.
For cryptocurrency mining revenue, the Group provides computing power services to the mining pools and in exchange for providing such computing power, the Group
is entitled to a fractional share of the cryptocurrency award the pool operator receives for successfully adding a block to the blockchain. The Group’s fractional share is
based on the proportion of computing power the Group contributed to the mining pool operator to the total computing power contributed by all mining pool participants
in solving the current algorithm. During the year ended December 31, 2021, the Group recognized net cryptocurrency mining revenue of approximately RMB134.1
million (US$21.0 million). The Group’s management has exercised significant judgments in their determination of how existing accounting guidance should be applied
to the accounting for and disclosure of cryptocurrency mining revenue recognized.
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We identified the accounting for and disclosure of cryptocurrency mining revenue recognized as a critical audit matter due to the nature and extent of audit effort required
to address the matter, which includes significant involvement of more experienced engagement team members. Subjective auditor judgment was required in determining
the nature and extent of audit procedures to test the occurrence of the revenues recognized by the Group.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included the following:
●
Obtained an understanding, evaluated the design and operating effectiveness of controls over the Group’s IT environment and key systems that are relevant to
the cryptocurrency mining revenue;
●
Performed site visits of the facilities where the Group’s mining machines were located, which included an observation of the physical and environmental
controls and mining machines observation procedures;
●
Evaluated management’s rationale for the application of ASC 606 to account for its cryptocurrency mining revenue, which included evaluating the contract
between the Group and the mining pool operators;
●
Evaluated and tested management’s rationale and supporting documentation associated with the valuation of cryptocurrency awards earned;
●
Compared the Group’s wallet records of cryptocurrency mining revenue received to publicly available blockchain records and evaluated the relevance and
reliability of audit evidence obtained from the public blockchains; and
●
Evaluated management’s disclosures of its cryptocurrency mining revenue in the financial statement footnotes.
Evaluation of the Existence and Control of Cryptocurrencies Held
Description of the Matter
As discussed in Notes 2 and 9 to the consolidated financial statements, the Group accounts for its cryptocurrencies as indefinite-lived intangible assets, which have been
included in current assets on the consolidated balance sheet. The cryptocurrencies are recorded at cost, net of any impairment losses incurred since acquisition. The
Group’s cryptocurrencies as of December 31, 2021 amounted to approximately RMB86.1 million (US$13.5 million).
We identified the evaluation of the existence and control of the cryptocurrencies held as a critical audit matter due to the subjective auditor judgment involved in
determining the nature and extent of audit evidence required to address the risks of material misstatement related to the existence and rights and obligations of the
cryptocurrencies as the cryptocurrency holdings are stored using the custodial service provided by third parties. Control over cryptocurrencies is provided through private
cryptographic keys stored using third-party custodial services.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit matter included the following:
●
Tested the design and operating effectiveness of certain internal controls over the Group’s cryptocurrency assets process, including a reconciliation control over
the comparison of the Group’s records of cryptocurrencies held to the custodial records;
●
Independently and directly verified the balance of the Group’s cryptocurrencies in the custody of third parties, and compared the balance verified to the Group’s
record of cryptocurrency holdings;
●
Independently obtained evidence from public blockchains to test the existence of cryptocurrency transactions and balances and evaluated the relevance and
reliability of audit evidence obtained from public blockchains;
●
Reviewed and evaluated the custodian contracts, and observed the Group accessing its wallets under custody to conduct transactions and verified the
transactions on public blockchains independently; and
●
Evaluated the sufficiency and appropriateness of audit evidence obtained by assessing the results of procedures performed over the cryptocurrencies.
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/s/ RBSM LLP
We have served as the Group’s auditor since 2021.
New York, New York
May 2, 2022
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
The9 Limited
Adverse Opinion on Internal Control over Financial Reporting
We have audited The9 Limited, its subsidiaries and its consolidated variable interest entities (the “Group”’s) internal control over financial reporting as of December 31,
2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, because of the effect of the material weakness described in the following paragraph on the achievement of the objectives of the
control criteria, the Group has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control
—Integrated Framework (2013) issued by COSO.
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Group’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have
been identified and are included in management’s assessment: a) the Group failed to maintain and implement controls over its period-end closing and financial reporting
process in a timely manner, and b) the Group lacks accounting personnel with knowledge of U.S. GAAP and SEC financial reporting requirements, which resulted in a
number of adjustments detected and or proposed by us. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in
our audit of the December 31, 2021 consolidated financial statements, and this report does not affect our report dated May 2, 2022, on those consolidated financial
statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of
the Group as of December 31, 2021, and the related consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for the year then
ended, and our report dated May 2, 2022, expressed an unqualified opinion.
Basis for Opinion
The Group’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an
opinion on the Group’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Group; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Group are being made only in accordance with authorizations of
management and directors of the Group; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the Group’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ RBSM LLP
We have served as the Group’s auditor since 2021.
New York, New York
May 2, 2022
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F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of The9 Limited:
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of The9 Limited and its subsidiaries and its variable interest entities (the “Group”) as of December
31, 2020, the related consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for each of the two years in the period ended
December 31, 2020, and the related notes and the financial statement schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2020, and the results of its operations,
changes in equity, and cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the
United States of America.
Going concern
The accompanying consolidated financial statements have been prepared assuming that the Group will continue as a going concern. As discussed in Note 2.1 to the
2020 consolidated financial statements, the Group has an accumulated deficit of approximately RMB2,992.2 million (US$458.6 million) as of December 31, 2020. These
conditions, along with other matters set forth in Note 2.1 of those 2020 consolidated financial statements, raise substantial doubt about the Group’s ability to continue as
a going concern. Management’s plans regarding these matters are also discussed in Note 2.1 of those 2020 consolidated financial statements. The 2020 consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for opinion
These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the consolidated financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether due to error or fraud. The Group is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ GRANT THORNTON
We have served as the Group’s auditor from 2016 to 2021.
Shanghai, China
March 29, 2021
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F-8
THE9 LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021
2019
2020
2021
2021
RMB
RMB
RMB
US$
(Note 3)
Revenues:
Cryptocurrency mining revenue
—
—
134,122,954
21,046,818
Online game services and other revenues
343,077
625,488
1,752,186
274,956
,
343,077
625,488
135,875,140
21,321,774
Sales taxes
(1,582)
—
—
—
Total net revenues
341,495
625,488
135,875,140
21,321,774
Cost of cryptocurrency mining
—
—
(83,449,749)
(13,095,087)
Cost of online game services and other revenues
(1,342,266)
(814,136)
(4,584,754)
(719,447)
Total cost
(1,342,266)
(814,136)
(88,034,503)
(13,814,534)
Gross (loss) profit
(1,000,771)
(188,648)
47,840,637
7,507,240
Operating (expenses) income:
Product development
(13,090,530)
(2,438,095)
(1,917,562)
(300,907)
Sales and marketing
(2,114,519)
(646,492)
(22,039,467)
(3,458,473)
General and administrative
(113,867,000)
(108,747,919)
(293,152,801)
(46,002,072)
Impairment on other long-lived assets
(34,881,000)
(6,515,200)
—
—
Impairment on cryptocurrency
—
—
(50,887,472)
(7,985,355)
Impairment on equipment
—
—
(11,639,246)
(1,826,452)
Impairment on advance and other assets
—
(20,371,500)
—
—
Gain on disposal of subsidiaries
1,206,925
475,588,803
15,015,770
2,356,302
Total operating (expenses) income
(162,746,124)
336,869,597
(364,620,778)
(57,216,957)
Other operating income, net
30,240
27,358
—
—
(Loss) income from operations
(163,716,655)
336,708,307
(316,780,141)
(49,709,717)
Impairment on equity investments
(4,666,128)
(1,172,755)
(7,599,505)
(1,192,528)
(Impairment) gain on other investments
(3,791,039)
(18,000,000)
17,245,513
2,706,198
Impairment on other advances
(5,980,788)
—
—
—
Interest income
18,576
429,732
—
—
Interest expense
(34,501,556)
(4,070,179)
(119,174,037)
(18,701,007)
Fair value change on warrants liability
1,292,244
37,851
—
—
Gain from change in fair value of convertible feature derivative liability
—
—
62,246,860
9,767,891
Gain on disposal of equity investee and available-for-sale investments
694,628
174,295
—
—
Gain on disposal of other investments
13,430,588
2,818,643
—
—
Gain on extinguishment of convertible notes
—
56,755,902
—
—
Gain on waiver of interest-free loan
—
35,397,500
—
—
Foreign exchange loss
(5,474,002)
(8,319,669)
(6,449,136)
(1,012,010)
Other(expenses) income, net
9,372,652
2,005,143
(44,589,670)
(6,997,093)
(Loss) income before income tax expense and share of loss in equity method investments
(193,321,480)
402,764,770
(415,100,116)
(65,138,266)
Income tax expense
—
(7,165,097)
—
—
Share of loss in equity method investments
(2,847,260)
(2,165,935)
(1,725,152)
(270,714)
Net (loss) income
(196,168,740)
393,433,738
(416,825,268)
(65,408,980)
Net loss attributable to noncontrolling interest
(13,517,983)
(3,259,528)
(5,590,513)
(877,273)
Net loss attributable to redeemable noncontrolling interest
(4,855,589)
(1,190,122)
—
—
Net (loss) income attributable to The9 Limited
(177,795,168)
397,883,388
(411,234,755)
(64,531,707)
Change in redemption value of redeemable noncontrolling interest
(12,827,598)
(1,190,122)
—
—
Net (loss) income attributable to holders of ordinary shares
(190,622,766)
396,693,266
(411,234,755)
(64,531,707)
Other comprehensive (loss) income, net of tax:
Currency translation adjustments
(793,531)
3,516,774
3,984,443
625,246
Total comprehensive (loss) income
(196,962,271)
396,950,512
(412,840,825)
(64,783,734)
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F-9
THE9 LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 (Continued)
2019
2020
2021
2021
RMB
RMB
RMB
US$
(Note 3)
Comprehensive (loss) income attributable to:
Noncontrolling interest
(19,738,118)
13,157,497
(5,590,513)
(877,273)
Redeemable noncontrolling interest
(4,855,589)
(1,190,122)
—
—
The9 Limited
(172,368,564)
384,983,137
(407,250,312)
(63,906,461)
Net (loss) income per share attributable to holders of ordinary shares:
- Basic and diluted
(1.79)
2.42
(0.83)
(0.13)
Weighted average number of shares outstanding:
- Basic and diluted
106,407,008
163,599,920
495,304,894
495,304,894
The accompanying notes are an integral part of these consolidated financial statements.
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F-10
THE9 LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2020 AND 2021
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
ASSETS
Current assets:
Cash and cash equivalents
31,696,237
428,420,773
67,228,568
Short term investment
—
800,000
125,538
Accounts receivable, net of allowance for doubtful accounts of RMB233,213 and RMB552,542 as of December 31, 2020 and 2021, respectively
2,981
3,682,282
577,830
Advances to suppliers
27,725
2,781,139
436,421
Prepayments and other current assets, net of allowance for doubtful accounts of RMB6,619,312 and RMB5,655,941 as of December 31, 2020 and 2021, respectively
9,855,467
528,109,288
82,871,872
Amounts due from related parties
732,705
599,574
94,086
Intangible assets - cryptocurrencies, net
—
86,118,349
13,513,848
Total current assets
42,315,115
1,050,511,405
164,848,163
Investments
—
73,915,119
11,598,895
Property, equipment and software, net
977,102
172,980,284
27,144,382
Operating lease right-of-use assets, net
5,149,090
6,363,724
998,607
Other long-lived assets, net
—
6,547,843
1,027,499
TOTAL ASSETS
48,441,307
1,310,318,375
205,617,546
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable (including accounts payable of the consolidated VIEs without recourse to the Group of RMB5,133,008 and RMB9,186,474 as of December 31, 2020 and 2021,
respectively)
35,597,417
39,895,562
6,260,484
Other taxes payable (including other taxes payable of the consolidated VIEs without recourse to the Group of RMB1,416,209 and RMB1,407,802 as of December 31, 2020 and 2021,
respectively)
1,293,423
1,508,277
236,682
Advances from customers (including advances from customers of the consolidated VIEs without recourse to the Group of RMB15,005,074 and RMB 18,296,128as of December 31,
2020 and 2021, respectively)
38,011,992
18,984,340
2,979,057
Amounts due to related parties (including amounts due to related parties of the consolidated VIEs without recourse to the Group of RMB52,987,306 and RMB46,608,736 as of
December 31, 2020 and 2021, respectively)
30,258,237
23,790,959
3,733,321
Refund of game points (including refund of game points of the consolidated VIEs without recourse to the Group of RMB169,998,682 as of both December 31, 2020 and 2021)
169,998,682
169,998,682
26,676,504
Warrants (including warrants of consolidated VIEs without recourse to the Group of nil as of both December 31, 2020 and 2021)
1,854,957
—
—
Convertible notes (including convertible notes of cnsolidated VIEs without recourse to the Group of nil as of both December 31, 2020 and 2021)
—
92,848,377
14,569,936
Conversion feature derivative liability
51,825,629
8,132,572
Interest payable (including interest payable of consolidated VIEs without recourse to the Group of nil as of both December 31, 2020 and 2021)
—
937,328
147,087
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Group of RMB62,130,247
and RMB35,719,940 as of December 31, 2020 and 2021, respectively)
83,570,873
140,199,581
22,000,373
Current portion of operating lease liabilities of the consolidated VIE without recourse to the Group (including operating lease liabilities of consolidated VIEs without recourse to the
Group of RMB18,287 and RMB574,607 as of December 31, 2020 and 2021, respectively)
3,787,210
4,306,738
675,821
Total current liabilities
364,372,791
544,295,473
85,411,837
Non-current portion of operating lease liabilities of the consolidated VIE without recourse to the Group (including operating lease liabilities of consolidated VIEs without recourse to
the Group of nil and 370,877 as of December 31, 2020 and 2021, respectively)
2,464,495
2,567,342
402,872
TOTAL LIABILITIES
366,837,286
546,862,815
85,814,709
Commitments and contingencies (Note 25)
Redeemable noncontrolling interest (Note 23)
349,046,548
—
—
EQUITY (DEFICIT):
Class A ordinary shares (US$0.01 par value; 4,300,000,000 shares authorized, 247,090,351 and 677,781,251 shares issued and outstanding as of December 31, 2020 and 2021,
respectively)
17,197,060
45,233,784
7,098,168
Class B ordinary shares (US$0.01 par value; 600,000,000 shares authorized, 12,942,011 and 13,607,334 shares issued and outstanding as of December 31, 2020 and 2021, respectively)
900,741
943,789
148,101
Additional paid-in capital
2,695,763,016
4,139,122,755
649,518,682
Statutory reserves
7,326,560
7,326,560
1,149,697
Accumulated other comprehensive loss
(16,678,203)
(12,693,760)
(1,991,928)
Accumulated deficit
(2,992,227,421)
(3,403,462,176)
(534,077,484)
The9 Limited shareholders’ equity (deficit)
(287,718,247)
776,470,952
121,845,236
Noncontrolling interest
(379,724,280)
(13,015,392)
(2,042,399)
Total (deficit) equity
(667,442,527)
763,455,560
119,802,837
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND (DEFICIT) EQUITY
48,441,307
1,310,318,375
205,617,546
The accompanying notes are an integral part of these consolidated financial statements.
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F-11
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2019
Accumulated other
Equity (deficit)
Total
Additional
Statutory
comprehensive
Accumulated
attributable to
Noncontrolling
equity
Ordinary shares
paid-in capital
reserves
(loss) income
deficit
The9 Limited
interest
(deficit)
(US$0.01 par value)
Number of shares
Par value
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2019
91,315,465
6,502,658
2,496,069,065
28,071,982
(9,204,556)
(3,233,061,063)
(711,621,914)
(373,188,952)
(1,084,810,866)
Net loss
—
—
—
—
—
(177,795,168)
(177,795,168)
(13,517,983)
(191,313,151)
Currency translation
adjustments
—
—
—
—
5,426,604
—
5,426,604
(6,220,135)
(793,531)
Share-based compensation
6,169,335
425,593
21,279,647
—
—
—
21,705,240
45,293
21,750,533
Change in redemption value
of redeemable
noncontrolling interest
—
—
(12,827,598)
—
—
—
(12,827,598)
—
(12,827,598)
Issuance of shares
15,444,882
1,041,557
35,031,364
—
—
—
36,072,921
—
36,072,921
Balance as of
December 31, 2019
112,929,702
7,969,808
2,539,552,478
28,071,982
(3,777,952)
(3,410,856,231)
(839,039,915)
(392,881,777)
(1,231,921,692)
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F-12
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2020 (Continued)
Accumulated
Equity
Additional
other
Accumulated
(deficit)
Total
paid-in
Statutory
comprehensive
(deficit)
attributable to
Noncontrolling
equity
Ordinary shares
capital
reserves
loss
earnings
The9 Limited
interest
(deficit)
(US$0.01 par value)
Number of shares
Par value
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2020
112,929,702
7,969,808
2,539,552,478
28,071,982
(3,777,952)
(3,410,856,231)
(839,039,915)
(392,881,777)
(1,231,921,692)
Net income (loss)
—
—
—
—
—
397,883,388
397,883,388
(3,259,528)
394,623,860
Currency translation
adjustments
—
—
—
—
(12,900,251)
—
(12,900,251)
16,417,025
3,516,774
Change in redemption value of
redeemable noncontrolling
interest
—
—
(1,190,122)
—
—
—
(1,190,122)
—
(1,190,122)
Share-based compensation
35,100,000
2,412,325
52,644,101
—
—
—
55,056,426
—
55,056,426
Issuance of ordinary shares and
warrants, net of issuance
costs of RMB7,849,390
112,002,660
7,715,668
104,650,533
—
—
—
112,366,201
—
112,366,201
Equity on conversion option of
convertible notes
—
—
106,026
—
—
—
106,026
—
106,026
Reversal of statutory reserves
due to disposal of certain
subsidiaries
—
—
—
(20,745,422)
—
20,745,422
—
—
—
Balance as of
December 31, 2020
260,032,362
18,097,801
2,695,763,016
7,326,560
(16,678,203)
(2,992,227,421)
(287,718,247)
(379,724,280)
(667,442,527)
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F-13
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2021 (Continued)
Accumulated
Equity
Additional
other
(deficit)
Total
paid-in
Statutory
comprehensive
Accumulated
attributable to
Noncontrolling
equity
Ordinary shares
capital
reserves
loss
(deficit) earnings
The9 Limited
interest
(deficit)
(US$0.01 par value)
Number of shares
Par value
RMB
RMB
RMB
RMB
RMB
RMB
RMB
RMB
Balance as of January 1, 2021
260,032,362
18,097,801
2,695,763,016
7,326,560
(16,678,203)
(2,992,227,421)
(287,718,247)
(379,724,280)
(667,442,527)
Net income (loss)
—
—
—
—
—
(411,234,755)
(411,234,755)
(5,590,513)
(416,825,268)
Currency translation adjustments
—
—
—
—
3,984,443
—
3,984,443
—
3,984,443
Consolidated subsidiary
—
—
—
—
—
—
—
795,063
795,063
Share-based compensation
83,661,205
5,392,416
144,774,065
—
—
—
150,166,481
—
150,166,481
Issuance of ordinary shares
176,968,248
11,555,004
997,389,251
—
—
—
1,008,944,255
—
1,008,944,255
Purchase of equipment
50,258,970
3,302,261
140,914,432
—
—
—
144,216,693
—
144,216,693
Issuance of convertible debt
14,777,050
957,128
25,801,328
—
—
—
26,758,456
—
26,758,456
Conversion of convertible debt into
ordinary shares
21,618,840
1,383,990
45,335,212
—
—
—
46,719,202
—
46,719,202
Exercise of warrants
84,071,910
5,488,973
60,837,127
—
—
—
66,326,100
—
66,326,100
Disposal of Red 5
—
—
28,308,324
—
—
—
28,308,324
371,504,338
399,812,662
Balance as of December 31, 2021
691,388,585
46,177,573
4,139,122,755
7,326,560
(12,693,760)
(3,403,462,176)
776,470,952
(13,015,392)
763,455,560
Balance as of December 31, 2021
(US$except share data, Note 3)
691,388,585
7,246,269
649,518,682
1,149,697
(1,991,928)
(534,077,484)
121,845,236
(2,042,399)
119,802,837
The accompanying notes are an integral part of these consolidated financial statements.
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F-14
THE9 LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021
2019
2020
2021
2021
RMB
RMB
RMB
US$
(Note 3)
Cash flows from operating activities:
Net (loss) income
(196,168,740)
393,433,738
(416,825,268)
(65,408,980)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Gain on disposal of property, equipment and software
(2,153,158)
(29,793)
(3,908,778)
(613,373)
Gain on disposal of subsidiaries
(1,206,925)
(475,588,803)
(15,015,770)
(2,356,302)
Gain on disposal of other investments
(13,430,588)
(2,818,643)
—
—
Share-based compensation expenses
21,750,533
55,056,426
150,166,481
23,564,398
Impairment on equity investments
4,666,128
1,172,755
7,599,505
1,192,528
Impairment (gain) on other investments
3,791,039
18,000,000
(17,245,513)
(2,706,198)
Impairment on other long-lived assets
34,881,000
6,515,200
—
—
Impairment loss of equipment, intangible assets
—
—
11,639,246
1,826,452
Impairment of cryptocurrencies
—
—
50,887,472
7,985,355
Provision for doubtful accounts receivable
169,416
103,501
320,729
50,329
Impairment on advances to suppliers
—
20,699,885
—
—
Impairment on other advances
5,980,787
—
—
—
Provision for doubtful other receivables
—
2,244,446
298,221
46,797
Consulting fees paid by issuance of shares
35,091,686
6,781,815
—
—
Gain on extinguishment of convertible notes
—
(56,755,902)
—
—
Gain from change in fair value of conversion feature derivative liability
—
—
(62,246,860)
(9,767,891)
Depreciation and amortization of property, equipment and software
2,778,778
447,782
47,435,448
7,443,657
Amortization of land use right
1,440,682
—
—
—
Share of loss in equity method investments
2,847,260
2,165,935
1,725,152
270,714
Gain on disposal of investment in equity investee and available-for-sales investment
(694,628)
(174,295)
—
—
Foreign currency exchange loss
5,474,002
8,319,669
6,449,136
1,012,010
Fair value change on warrant liability
(1,292,244)
(37,851)
—
—
Exchange rate change on convertible notes face value
(2,296,722)
(360,406)
Amortization of discount and interest on convertible notes
33,154,191
2,923,316
120,626,467
18,928,925
Gain on waiver of interest-free loan
—
(35,397,500)
—
—
Payment of issuance cost by issuance of shares
—
455,658
—
—
Royalty fee paid by issuance of shares
—
—
1,188,828
186,553
Non-cash lease expense
409,048
699,733
3,893,019
610,900
Changes in operating assets and liabilities:
Change in accounts receivable
313,044
3,955
(13,628,485)
(2,138,607)
Change in advances to suppliers
(1,419,353)
(19,575,974)
(2,753,414)
(432,071)
Change in prepayments and other current assets
(6,628,897)
(2,877,084)
(537,076,522)
(84,279,025)
Change in right-of-use assets
(9,666,652)
3,408,781
—
—
Change in accounts payable
246,764
(2,635,008)
38,799,942
6,088,558
Change in amounts due to related parties
3,144,106
(1,550,100)
44,543
6,990
Change in other taxes payable
(491,112)
89,779
(2,833,161)
(444,585)
Change in advances from customers
(15,887)
(1,515,786)
3,174,181
498,098
Change in deferred revenue
(159,125)
—
—
—
Change in interest payable
1,457,811
(5,371,931)
937,328
147,087
Change in accrued expenses and other current liabilities
11,896,337
(21,039,288)
60,345,979
9,469,601
Change in lease liabilities
9,659,375
(3,407,670)
(4,485,278)
(703,838)
Change in intangible assets - cryptocurrencies
—
—
(114,904,483)
(18,031,021)
Net cash used in operating activities
(54,175,322)
(106,253,254)
(687,688,577)
(107,913,345)
Cash flows from investing activities
Proceeds from disposal of subsidiaries
—
443,939,997
—
—
Proceeds from disposal of assets and liabilities classified as held-for-sale
49,300,000
—
—
—
Proceeds from disposal of other investments
37,026,498
—
—
—
Proceeds from disposal of equity investee and available-for-sale investments
694,628
—
—
—
Proceeds from disposal of property, equipment and software
2,648,259
183,003
11,725,873
1,840,045
Proceeds from tokens transferred
6,887,915
—
—
—
Refund from subscribed tokens
—
5,838,471
—
—
Purchase of equity method investments
—
(3,338,690)
(13,934,157)
(2,186,573)
Purchase of other investments
—
(8,000,000)
(46,611,013)
(7,314,285)
Deposit for joint venture arrangement
(34,881,000)
—
—
—
Decrease in cash and cash equivalents on disposal of subsidiaries
—
—
(239,182)
(37,533)
Purchase of property, equipment and software
(796,921)
(359,573)
(75,621,008)
(11,866,586)
Purchase of intangible assets
—
—
(16,403,586)
(2,574,081)
Net cash (used in) provided by investing activities
60,879,379
438,263,208
(141,083,073)
(22,139,013)
Cash flows from financing activities:
Proceeds from the issuance of ordinary shares and warrants
—
47,430,195
1,011,476,118
158,722,675
Proceeds from warrants exercises
—
—
64,471,143
10,116,929
Proceeds from the issuance of convertible note
—
3,358,369
161,588,128
25,356,703
Loans from a related party
16,065,376
—
—
—
Repayment of loans to a related party
(10,023,576)
(42,545,136)
(6,378,690)
(1,000,956)
Proceeds from other loans
34,881,000
—
—
—
ADS issuance fee
—
—
(3,720,691)
(583,858)
Payment for financial products
—
—
(800,000)
(125,537)
Repayments of convertible notes
—
(318,929,623)
—
—
Net cash (used in) provided by financing activities
40,922,800
(310,686,195)
1,226,636,008
192,485,956
Effect of foreign exchange rate changes on cash and cash equivalents
1,257,310
259,337
(1,139,822)
(178,862)
Cash reclassified as held for sale
(43,027,475)
—
—
—
Net change in cash and cash equivalents
5,856,692
21,583,096
396,724,536
62,254,736
Cash and cash equivalents, beginning of year
4,256,449
10,113,141
31,696,237
4,973,832
Cash and cash equivalents, end of year
10,113,141
31,696,237
428,420,773
67,228,568
Supplemental disclosure of cash flow information:
Interest paid
—
47,695,297
—
—
Income taxes paid
—
7,165,097
—
—
Non-cash investing and financing activities
Shares issued for equity investments and other investments
236,667
—
—
—
Cash paid for amounts included in the measurement of operating lease liabilities
1,271,769
2,842,464
4,813,050
755,273
Operating lease right-of-use assets obtained in exchange for operating lease liabilities
—
—
5,107,653
801,502
Share issued for purchase of Bitcoin mining machine
—
—
144,216,693
22,630,746
Share issued for repayments of convertible notes
—
—
46,719,202
7,331,262
Conversion of warrant payable
—
—
1,854,957
291,083
The accompanying notes are an integral part of these consolidated financial statements.
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F-15
THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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”), (collectively referred to as the “Group”). The Company or The9
Limited, and its subsidiaries and consolidated VIE are also collectively referred to as the “Group”, or where appropriate, the terms the “ Group”,”we”,”our”, or “us” also
referred to The9 or the Company and its subsidiaries and the consolidated VIE as a whole.
The Group had been operating an online game business before the Group’s listing until this year, the Group has turned our business focus to blockchain business and are
primarily engaged in the operation of cryptocurrency mining and a Non-Fungible Token platform NFTSTAR.
The Company’s principal subsidiaries and VIEs are as follows as of December 31, 2021:
Date of
Place of
Legal
Name of Entity
Registration
Registration
Ownership
Principal subsidiaries:
GameNow.net (Hong Kong) Ltd. ("GameNow Hong Kon")
January‑2000
Hong Kong
100 %
China The9 Interactive Limited (“C9I”)
October‑2003
Hong Kong
100 %
China The9 Interactive (Beijing) Ltd. (“C9I Beijing”)
March‑2007
PRC
100 %
JiuTuo (Shanghai) Information Technology Ltd. ("Jiu Tuo")
July-2007
PRC
100 %
China Crown Technology Ltd. ("China Crown Technology")
November‑2007
Hong Kong
100 %
Asian Way Development Ltd. (“Asian Way”)
November‑2007
Hong Kong
100 %
New Star International Development Ltd. (“New Star”)
January‑2008
Hong Kong
100 %
The9 Interactive, Inc. (“The9 Interactive”)
June‑2010
USA
100 %
Shanghai Jiu Gang Electronic Technology Ltd. (“Jiu Gang”)
December‑2014
PRC
100 %
City Channel Ltd. (“City Channel”)
June‑2006
Hong Kong
100 %
NFTStar Singapore Pte. Ltd. (“NFTStar Singapore”)
August-2021
Singapore
100 %
NFTSTAR US Inc. (“NFTSTAR US”)
August-2021
USA
100 %
NFTSTAR LTD.UK (“NFTSTAR UK”)
July-2021
UK
100 %
NFTSTAR Hong Kong LTD. (“NFTSTAR Hong Kong”)
August-2021
Hong Kong
100 %
STARNFT HONG KONG LIMITED (“STARNFT Hong Kong”)
October-2021
Hong Kong
100 %
Nswap Singapore Pte. Ltd. (“Nswap Singapore”)
May-2021
Singapore
100 %
Montcrypto Limited (“Montcrypto”)
February-2021
Canada
61 %
Terry First Limited (“Terry First”)
June-2021
UK
100 %
System Run Limited (“System Run”)
September-2021
Cayman Islands
100 %
Lucky Pure Limited (“Lucky Pure”)
September-2021
Cayman Islands
100 %
Vast Ocean International Limited(“Vast Ocean”)
April-2021
Hong Kong
100 %
The9 Singapore Pte. Ltd. (“The9 Singapore”)
April‑2010
Singapore
100 %
1111 Limited (“1111”)
January -2018
Hong Kong
100 %
Supreme Exchange Limited (“Supreme”)
December‑2018
Malta
90 %
BET 111 Ltd. ("Bet 111")
January -2019
Malta
90 %
Coin Exchange Ltd ("Coin")
January -2019
Malta
90 %
The9 EV Limited ("The9 EV")
May-2019
Hong Kong
100 %
NBTC Limited (“NBTC”)
June-2019
Hong Kong
100 %
FF The9 China Joint Venture Limited ("FF The9")
September-2019
Hong Kong
50 %
Huiling Computer Technology Consulting (Shanghai) Co.Ltd. ("Huiling")
March-2019
PRC
100 %
Leixian Information Technology (Shanghai) Co., Ltd. ("Leixian")
March-2019
PRC
100 %
Shanghai Yuyou Network Technology Co., Ltd. (“Yuyou”)
December-2016
PRC
100 %
Hangzhou Niuxin Technology Co., Ltd. (“Niuxin”)
August-2021
PRC
100 %
Variable interest entity:
Shanghai The9 Information Technology Co., Ltd. (“Shanghai IT”) (Note 4)
September‑2000
PRC
N/A
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Subsidiaries and VIEs of Shanghai IT:
Legal
Date of
Place of
Ownership Held
Name of Entity
Registration
Registration
by Shanghai IT
Shanghai Jiushi Interactive Network Technology Co., Ltd. (“Jiushi”)
July‑2011
PRC
80 %
Shanghai ShencaiChengjiu Information Technology Co., Ltd. (“SH Shencai”)
May‑2015
PRC
60 %
Shanghai Zhiaojiqi Information Technology Co., Ltd. (“Shanghai Zhiaojiqi”)
November-2015
PRC
0 %
Wuxi Interest Dynamic Network Technology Co., Ltd. (“Wuxi Qudong”)
June‑2016
PRC
100 %
Silver Express Investments Ltd. (“Silver Express”)
November‑2007
Hong Kong
100 %
Shanghai Jiuciyuan Computer Co., Ltd. (“Jiuciyuan”)
July-2021
PRC
60 %
Shanghai Big data culture media Co., Ltd(“Big data”)
April-2007
PRC
51.80 %
2. PRINCIPAL ACCOUNTING POLICIES
<1> Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted 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.
The consolidated financial statements include the accounts of the Company and include the assets, liabilities, revenues and expenses of wholly owned subsidiaries, VIE
and subsidiaries of the VIE over which the Company exercises control and, when applicable, entity for which the Company has a controlling financial interest or is the
primary beneficiary. All inter-company accounts and transactions have been eliminated in consolidation.
<2> Consolidation
The consolidated financial statements include the financial statements of The9 Limited, its subsidiaries and VIEs in which it has a controlling financial interest. A
subsidiary is consolidated from the date on which the Group obtained control and continues 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. If the Group demonstrates its ability to control a VIE
through its rights to all the residual benefits of the VIE and its obligation to fund losses of the VIE, then the VIE is consolidated. All intercompany balances and
transactions between The9 Limited, its subsidiaries and VIEs have been eliminated in consolidation.
In April 2010, the Group acquired a controlling interest in Red 5. In June 2016, the Group completed a share exchange transaction with L&A International Holding
Limited (“L&A”) and certain other shareholders of Red 5. After the transaction, the Group owned 34.71% shareholding in Red 5. As the Group controls a majority of
Board of Director seats and has continuously funded to the operation of Red 5, the Group still retained effective control over Red 5 and Red 5 remained as a consolidated
entity of the Group as of June 29, 2021. On June 29, 2021, two directors appointed by the Group resigned from Red 5 and the Group confirm will not assign new
directors to Red 5 in the future. The Group lose control of Red 5 and no longer consolidate of Red 5 as of December 31, 2021.
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PRC laws and regulations currently prohibit or restrict foreign ownership of internet-related business. In September 2009, the General Administration of Press and
Publication Radio, Film and Television (“GAPPRFT”) 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 to Further Strengthen the Administration of Pre-approval on Online
Games and Approval on Import Online Games (the “GAPP Circular”). Pursuant to Administrative Measures on Network Publication (the “Network Publication
Measures”) jointly issued by GAPPRFT and the Ministry of Information Industry (which has subsequently been reorganized as the Ministry of Industry and Information
Technology) (“MIIT”) on February 4, 2016, effective from March 2016, wholly foreign-owned enterprises, Sino-foreign equity joint ventures and Sino-foreign
cooperative enterprises shall not engage in the provision of web publishing services, including online game services. Prior examination and approval by GAPPRFT are
required on project cooperation involving internet publishing services between an internet publishing services and a wholly foreign-owned enterprise, Sino-foreign equity
joint venture, or Sino-foreign cooperative enterprise within China or an overseas organization or individual. It is unclear whether PRC authorities will deem the Group’s
VIE structure as a kind of such “manners of cooperation” by foreign investors to gain control over or participate in domestic online game operators, and it is not clear
whether GAPPRFT and MIIT have regulatory authority over the ownership structures of online game companies based in China and online game operations in China.
Therefore, the Group believes that its ability to direct those activities of its VIEs that most significantly impact their economic performance is not affected by the GAPP
Circular.
<3> Use of estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated 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, revenue recognition, assessment of impairment of other
long-lived assets, assessment of impairment of advances to suppliers and other advances, incremental borrowing rates for lease assessment, fair value of redeemable
noncontrolling interest, fair value of the warrants, share-based compensation expenses, consolidation of VIEs, valuation allowances for deferred tax assets, and
contingencies. Such accounting policies are affected significantly by judgments, assumptions and estimates used in the preparation of the Group’s consolidated financial
statements, and actual results could differ materially from these estimates.
<4> Foreign currency translation
The Group’s reporting currency is the Renminbi (“RMB”). The Group’s functional currency, with the exception of its subsidiaries, The9 Interactive, NFTSTAR US Inc.,
NBTC US Inc., NFTStar Singapore Pte. Ltd. Nswapr Singapore Pte. Ltd., The 9 Singapore Pte. Ltd and MONTCRYPTO LTD. is the RMB. The functional currency of
The9 Interactive, NFTSTAR US Inc., NBTC US Inc., NFTStar Singapore Pte. Ltd. Nswapr Singapore Pte. Ltd. and The 9 Singapore Pte. Ltd, is the United States dollar
(“US$” or “U.S. dollar”). The functional currency of MONTCRYPTO LTD. is CAD. Assets and liabilities of The9 Interactive, NFTSTAR US Inc., NBTC US Inc.,
NFTStar Singapore Pte. Ltd. Nswapr Singapore Pte. Ltd.,The 9 Singapore Pte. Ltd. and MONTCRYPTO LTD. 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) income 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. 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 foreign exchange loss in the consolidated statements of operations and comprehensive (loss) income.
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<5> Cash and cash equivalents
Cash and cash equivalents represent cash on hand and highly liquid investments with a maturity date when acquired of three months or less. As of December 31, 2020
and 2021, cash and cash equivalents were comprised primarily of bank deposits where cash is deposited with reputable financial institutions. Included in cash and cash
equivalents as of December 31, 2020 and 2021 are amounts denominated in U.S. dollar totaling US$4.6 million and US$67.2 million, respectively.
The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the PBOC, 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 Group’s aggregate amount of cash and cash equivalents denominated in RMB amounted to
RMB1.1 million and RMB19.7 million (US$3.1 million) as of December 31, 2020 and 2021, respectively.
<6> Allowance for doubtful accounts
Starting from January 1, 2020, the Group adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at
amortized cost and is codified in Accounting Standards Codification (“ASC”) Topic 326, Credit Losses (“ASC 326”). ASU 2016-13 replaces the existing incurred loss
impairment model and introduces an expected loss approach with macroeconomic forecasts referred to as a current expected credit losses (“CECL”) methodology, which
will result in more timely recognition of credit losses. There was no significant impact on its consolidated financial statements and related disclosures as a result. Under
the incurred loss methodology, credit losses are only recognized when the losses are probable of having been incurred. The CECL methodology requires that the full
amount of expected credit losses for the lifetime of the financial instrument be recorded at the time it is originated or acquired, considering relevant historical experience,
current conditions and reasonable and supportable macroeconomic forecasts that affect the collectability of financial assets, and adjusted for changes in expected lifetime
credit losses subsequently, which may require earlier recognition of credit losses.
Accounts receivable mainly consist of receivables from third-party game platforms, and other receivables, which are included in prepayments and other current assets,
both of which are recorded net of allowance for doubtful accounts. Allowances for doubtful accounts are charged to general and administrative expenses. The Group
provided an allowance for doubtful accounts of RMB0.2 million, RMB2.3 million and RMB 0.6million (US$0.1 million) for the years ended December 31, 2019, 2020
and 2021, respectively. The Group has written-off an amount of RMB3.2 million, RMB2.1 million and RMB1.3 million (US$0.2 million) for the years ended December
31,2019, 2020 and 2021, respectively.
<7> Investments in equity method investee and loan to equity method 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 have 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 financial support to certain equity investees in the form of loans. If the Group’s share of the undistributed losses exceeds the carrying
amount of an investment accounted for by the equity method, the Group continues to report losses up to the investment carrying amount, including any loans balance due
from the equity investees.
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, 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.
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<8> Property, equipment and software, net
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
Shorter of respective lease term or estimated useful life
Computer and equipment
26 months to 4 years
Software
5 years
Office furniture and fixtures
3 years
Motor vehicles
5 years
Office buildings
10 to 20 years
In September 2019, the Group entered into a sale purchase agreement with Kapler Pte. Ltd. to sell three subsidiaries which hold the land use rights and office buildings
located at Zhangjiang, Shanghai. The transaction for the disposal of three subsidiaries was completed in February 2020 and the Group owned no office buildings as of
December 31, 2021.
Management has assessed the basis of depreciation of the Group’s Crypto-currency Machines used to verify digital currency transactions and generate digital currencies
and believes they should be depreciated over a 3 year period. The rate at which the Group generates digital assets and, therefore, consumes the economic benefits of its
transaction verification servers are influenced by a number of factors including the following:
●
the complexity of the transaction verification process which is driven by the algorithms contained within the bitcoin open source software;
●
the general availability of appropriate computer processing capacity on a global basis (commonly referred to in the industry as hashing capacity which is
measured in Petahash units); and
●
technological obsolescence reflecting rapid development in the transaction verification server industry such that more recently developed hardware is more
economically efficient to run in terms of digital assets generated as a function of operating costs, primarily power costs i.e. the speed of hardware evolution in the
industry is such that later hardware models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase.
The Group operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of specialized equipment. Property and
equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. This
assessment takes into consideration the availability of historical data and management’s expectations regarding the direction of the industry including potential changes
in technology. Management will review this estimate annually and will revise such estimates as and when data comes available.
To the extent that any of the assumptions underlying management’s estimate of useful life of its transaction verification servers are subject to revision in a future
reporting period either as a result of changes in circumstances or through the availability of greater quantities of data then the estimated useful life could change and have
a prospective impact on depreciation expense and the carrying amounts of these assets.
<9> Assets held for sale
Assets and asset disposal groups are classified as held-for-sale if their carrying amount will be recovered principally through a sale transaction rather than through
continuing use. Long-lived assets to be sold are classified as held for sale if all the recognition criteria in ASC 360-10-45-9 are met:
●
Management, having the authority to approve the action, commits to a plan to sell the asset;
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●
The asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;
●
An active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated;
●
The sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year;
●
The asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
●
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Assets and liabilities classified as held-for-sale are measured at lower of their carrying amount or fair value less costs to sell.
<10> Land use rights, net
Land use rights represents operating lease prepayments to the PRC’s Land Bureau for usage of the parcel of land located at Zhangjiang, Shanghai. Amortization is
calculated using the straight-line method over the estimated land use rights period of 44 years.
In September 2019, the Group entered into a sale purchase agreement with Kapler Pte. Ltd. to sell three subsidiaries which hold the land use rights and office buildings
located at Zhangjiang, Shanghai. The transaction for the disposal of three subsidiaries was completed in February 2020 and the Group owned no land use rights as of
both December 31, 2020 and 2021.
<11> Impairment of long-lived assets
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.
<12> Revenue recognition
The Group recognizes revenues when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration expected to
be entitled to in exchange for those goods or services. Depending on the terms of the contract and the laws that apply to the contract, control of the goods or services may
be transferred over time or at a point in time. The Group does not believe that significant management judgments are involved in revenue recognition. Under ASC 606,
Revenue from contracts with customers, the core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The
following five steps are applied to achieve that core principle:
●
Step 1: Identify the contract with the customer;
●
Step 2: Identify the performance obligations in the contract;
●
Step 3: Determine the transaction price;
●
Step 4: Allocate the transaction price to the performance obligations in the contract; and
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Step 5: Recognize revenue when the Company satisfies a performance obligation.
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each
promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of
the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the
customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The
consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must
consider the effects of all of the following:
●
Variable consideration
●
Constraining estimates of variable consideration
●
The existence of a significant financing component in the contract
●
Noncash consideration
●
Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation
on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at
a point in time or over time as appropriate.
Majority of the Group’s cryptocurrency mining revenues was Bitcoin. The Group generates our Bitcoin mining revenues through provision of computing power, or hash
rate, in crypto asset transaction verification services to Bitcoin mining pools. In exchange for that, the Group are entitled to receive a fractional share of the Bitcoin award
from the Bitcoin mining pools. The transaction consideration the Group receives is noncash consideration, which the Group measure at fair value on the date received,
which is not materially different than the fair value at contract inception. The consideration is all variable. Because it is not probable that a significant reversal of
cumulative revenue will not occur, the consideration is constrained until the mining pools successfully place a block and we receive confirmation of the consideration, at
which time revenue is recognized.
Fair value of the cryptocurrency award received is determined using the quoted price of the related cryptocurrency at the time of receipt. There is currently no specific
definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has
exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the Financial Accounting Standards
Board (“FASB”), the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from
operations.
Other than Bitcoins, the Group is also engaged in the mining of Chia and Filecoins. The Group generates Chia and Filecoins mining revenues through provision of
computing storage space to the main networks. In exchange for that, The Group is entitled to receive a fractional share of the Chia and Filecoins awards from the main
networks.
For Chia mining, the fact patterns of the mining are the same as Bitcoins, except that since the overall Chia network and much smaller and less established compared
with Bitcoins, there is no daily confirmation of the consideration of Chia to be received. Instead the Chia network will reward The9 and deliver Chia to The9’s wallet in
approximately weekly basis. The9 recognizes Chia mining revenue and the intangible assets at fair value on the date The9 receives Chia awards.
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For Filecoin mining, unlike other cryptocurrency mining, Filecoin mining main network requires miners not only to contribute mining machines with computing storage
space, but miners also need to pledge certain amount of Filecoins to the main network to start the Filecoin mining. Then Filecoin main network will continuously reward
the miners by Filecoin awards. Upon the end of the mining process, which is typically a 540 days process, the Filecoin main network will release the pledged Filecoins to
the miners. The Group cooperates with a third party company where we contribute mining machines and the third party contributes Filecoins for pledging to the Filcoin
main network. Under this mining cooperation, the Filecoins mined are distributed to the third party ahead of us according to the agreed distribution schedule. Therefore
in the early stage of the 540 days mining process, the Group does not own any Filecoin. Since it is not probable that a significant reversal of cumulative revenue will not
occur, the Group does not recognized any Filecoin mining revenue before the Group starts to own the Filecoins being mined. Only when the Group starts to own the
Filecoins being mined (after the distribution made to the third party under the agreed distribution schedule), the Group will start to recognize Filecoin mining revenue at
fair value on the date the Group receives and own the Filecoin awards.
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
platforms and overseas licensing of the online game to other operators. The Group grants operation right on authorized games, together with associated services which
are rendered to the customers over time. The Group adopts virtual item / service consumption model for the online game services. Players can access certain games free
of charge, but many purchase game points to acquire in-game premium features. The Group may act as principal or agent through the various transaction arrangements.
The determination on whether to record the revenue gross or net is based on an assessment of various factors, including but not limited to whether the Group (i) is the
primary obligor in the arrangement; (ii) has general inventory risk; (iii) changes the product or performs part of the services; (iv) has latitude in establishing the selling
price; (v) has involvement in the determination of product or service specifications. The assessment is performed for all licensed online games.
When acting as principal
Revenues from online game operation operated through telecom carriers and certain online games operators are recognized upon consumption of the in-game premium
features based on gross revenue sharing-payments to third-party operators, but net of value-added tax (“VAT”). The Group earns revenue from the sale of in-game virtual
items. Revenues are recognized as the virtual items are consumed or over the estimated lives of the virtual items, which are estimated by considering the average period
that players are active and players’ behavior patterns derived from operating data. Accordingly, commission fees paid to third-party operators are recorded as cost of
revenues.
When acting as agent
With respect to games license arrangements entered into by third-party operators, if the terms provide that (i) third-party operators are responsible for providing game
desired by the game players; (ii) the hosting and maintenance of game servers for running the games is the responsibility of third-party operators; (iii) third-party
operators have the right to review and approve the pricing of in-game virtual items and the specification, modification or update of the game made by the Group; and
(iv) publishing, providing payment solution and market promotion services are the responsibilities of third-party operators and the Group is responsible to provide
intellectual property licensing and subsequent technical services, then the Group considers itself as an agent of the third-party operators in such arrangement with game
players. Accordingly, the Group records the game revenues from these licensed games, net of amounts paid to the third-party operators.
Licensing revenue
The Group licenses its online games, most of which are developed in house, to third parties. The Group receives monthly revenue-based royalty payments from the third-
party licensee operators. Monthly revenue-based royalty payments are recognized when the relevant services are delivered, provided that collectability is reasonably
assured. The Group views the third-party licensee operators as its customers and recognizes revenues on a net basis, as the Group does not have the primary
responsibility for fulfillment and acceptability of the game services. The Group receives additional up-front license fees from certain third-party licensee operators who
are entitled to an exclusive right to access the games where initial license fee is allocated solely on the license. License fees are recognized as revenue evenly throughout
the license period after commencement of the game, given that the Group’s intellectual property rights subject to the license are considered to be symbolic and the
licensee has the right to access such intellectual property rights as they exist over time when the license is granted.
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Technical services
Technical services are blockchain-related consulting services where the Group is to provide designing, programming, drafting of white papers, and related services to
customers. These revenues are recognized when delivery of the services has occurred or when services have been rendered and the collection of the related fees is
reasonably assured.
Contract balances
Timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable represent amounts invoiced and revenue recognized prior to
invoicing, where the Group has satisfied its performance obligations and has the unconditional right to payment.
Contract liability related to unsatisfied performance obligations at the end of the period primarily consists of fees received from game players for online game services
and technical services. For deferred revenue, due to the generally short-term duration of the contracts, the majority of the performance obligations are satisfied in the
following reporting period. Of the deferred revenue balance at the beginning of the period, revenue of nil was recognized during the years ended December 31, 2020 and
2021, respectively.
<13> Advances from customers
The Group licenses proprietary games to operators in other countries and receives license fees and royalty income. License fees received in advance of the monetization
of the game is recorded in advances from customers.
<14> Convertible notes
Convertible Notes and Beneficial Conversion Feature (“BCF”)
The Group evaluates its convertible debt, options, warrants or other contracts, if any, to determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with Accounting Standards Codification Topic 815, Accounting for Derivative Instruments and Hedging
Activities (“ASC 815”) as well as related interpretations of this standard and Accounting Standards Update 2020-06, which was adopted by the Group effective January
1, 2021. The Group recognizes derivative instruments as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in
earnings. Embedded derivatives that are not clearly and closely related to the host contract are bifurcated and are recognized at fair value with changes in fair value
recognized as either a gain or loss in earnings. The result of this accounting treatment is that the fair value of the derivative instrument is marked-to-market each balance
sheet date and with the change in fair value recognized in the statement of operations as other income or expense.
Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation than that the
related fair value is removed from the books. Gains or losses on debt extinguishment are recognized in the statement of operations upon conversion, exercise or
cancellation of a derivative instrument after any shares issued in such a transaction are recorded at market value. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as
equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Instruments that become a
derivative after inception are recognized as a derivative on the date they become a derivative with the offsetting entry recorded in earnings.
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The Group determines the fair value of derivative instruments and hybrid instruments, considering all of the rights and obligations of each instrument, based on available
market data using the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated
terms, and risk-free rates) necessary to fair value these instruments. For instruments in default with no remaining time to maturity the Group uses a one-year term for
their years to maturity estimate unless a sooner conversion date can be estimated or is known. Estimating fair values of derivative financial instruments requires the
development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external
market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our
common stock.
ASU 2020-06 changed the accounting for convertible instruments. It requires convertible debt instruments to be accounted for under one of the following three models:
embedded derivative, substantial premium, or no proceeds allocated (traditional debt) models. It eliminated the cash conversion and beneficial conversion feature models.
<15>Warrants
The Group account for the warrants issued in connection with equity-linked instrument under authoritative guidance on accounting from ASC 480, Distinguishing
Liabilities from Equity and ASC 815, Derivatives and Hedging. The Group classify warrants in its consolidated balance sheet as a liability or equity based on the nature
and characteristics of each warrant issued. For those warrants classified as equity, there is no remeasurement to the warrants after initial recognition. For those warrants
classified as liability, the proceeds are allocated first to the liability classified warrants at the full fair value then the remaining proceeds allocated to the equity
instruments offered. The warrants are initially recognized on its fair value as of issuance date then remeasured at each reporting period and adjusted to fair value. The
changes in the fair value of the warrant liability are recorded in the income of the period.
<16> Cost of revenues
Cost of revenues consists primarily of electricity of cryptocurrency mining, fee deducted by the mining pools, online game royalties, payroll, revenue sharing to third-
party game platform, telecom carriers and other suppliers, maintenance and rental of Internet data center sites, depreciation and amortization of computer equipment and
software, and other overhead expenses directly attributable to the services provided.
<17> 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. For the years ended
December 31, 2019, 2020 and 2021, although software products have reached technological feasibility, total software costs incurred subsequent to reaching technological
feasibility were immaterial and therefore not capitalized.
For website and internally used software development costs, the Group expenses all costs 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, payroll, depreciation charges and other overhead 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.
<18> 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 RMB 0.2 million, RMB0.1 million and RMB20.0 million (US$3.5 million) for the years ended
December 31, 2019, 2020 and 2021, respectively, were expensed as incurred.
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<19> Government grants
Unrestricted government subsidies from local government agencies allowing the Group full discretion to utilize the funds were RMB1.2 million, RMB0.1 million and
RMB 0.1 million (US$0.02 million) for the years ended December 31, 2019, 2020 and 2021, respectively, which were recorded in other income, net in the consolidated
statements of operations and comprehensive loss.
<20> Share-based compensation
The Group has granted share-based compensation awards to certain employees under several equity plans. The Group measures the cost of employee services received in
exchange for an equity award, based on the fair value of the award at the date of grant. Share-based compensation expense is recognized net of estimated forfeitures,
determined based on historical experience. The Group recognizes share-based compensation expense over the requisite service period. For performance and market-based
awards which also require a service period, the Group uses graded vesting over the longer of the derived service period or when the performance condition is considered
probable. The Company determines the grant date fair value of stock options using a Black-Scholes Model with assumptions made regarding expected term, volatility,
risk-free interest rate, and dividend yield. The fair value of the stock options containing a market condition is estimated using a Monte Carlo simulation model. For
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. On January 1, 2019, the Group adopted ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvement to Nonemployee Share-based
Payment Accounting (“ASU 2018-07”) to amend the accounting for share-based payment awards issued to nonemployees. Under ASU 2018-07, the accounting for
awards to non-employees is similar to the model for employee awards.
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 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 or in the case of market-based awards, over the greater of the vesting period or derived service 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.
For stock option modifications, the Group compares the fair value of the original award immediately before and after the modification. For modifications, or probable-to-
probable vesting conditions, the incremental fair value of fully vested awards is recognized as expense on the date of the modification, with the incremental fair value of
unvested awards recognized ratably over the new service period.
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<21> Leases
The Group applied ASC 842, Leases, on January 1, 2019 on a modified retrospective basis and has elected not to recast comparative periods. Right-of-use (“ROU”)
assets represent the Group’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease.
The operating lease ROU assets and liabilities are recognized at lease commencement date based on the present value of lease payments over the lease term. As most of
the Group’s leases do not provide an implicit rate, the Company uses the PBOC’s incremental borrowing rate based on the information available at lease commencement
date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The
Group’s lease terms may include options to extend or terminate the lease. Renewal options are considered within the ROU assets and lease liability when it is reasonably
certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For operating leases with a term of one year or less, the Group has elected to not recognize a lease liability or ROU asset on its consolidated balance sheet. Instead, it
recognizes the lease payments as expense on a straight-line basis over the lease term. Short-term lease expense is immaterial to its consolidated statements of operations,
comprehensive loss, and cash flows. The Group has operating lease agreements with insignificant non-lease components and has elected the practical expedient to
combine and account for lease and non-lease components as a single lease component.
<22> 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. Since February 2021, we started our cryptocurrency mining
business in China. Since this is a new industry in China, there is no explicit tax law in China regarding whether such mining revenue is taxable in China, since such
revenue is non-cash before the cryptocurrencies are sold for fiat. As of December 31, 2021, we have not sold any cryptocurrency mined for fiat. As such, we believe that
it is more-likely-than-not such mining revenue is not taxable before sold for fiat upon audit by the relevant tax authority. Should there be any update in China tax laws on
mining revenue, we will accrue and pay any relevant taxes according to tax laws.
<23> Redeemable noncontrolling interests
Redeemable noncontrolling interests are equity interests of the Group’s consolidated subsidiary not attributable to the Group that has 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 noncontrolling interests adjusted for cumulative
earnings (loss) allocations.
<24> Noncontrolling interest
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 are presented as a separate component of equity in the consolidated balance sheets and modifies the presentation of net
(loss) income by requiring earnings and other comprehensive income loss to be attributed to controlling and noncontrolling interest.
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<25> (Loss) income per share
Basic (loss) income per share is computed by dividing net (loss) income attributable to the holders of ordinary shares by the weighted average number of ordinary shares
outstanding during the year. Diluted (loss) income per share is calculated by dividing net (loss) 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 and 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) income is recorded.
<26> Segment reporting
The Group has one operating segment whose business is crypto mining business. 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
Greater China and other areas.
<27> 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, 2020 and 2021, substantially all of the Group’s cash and cash equivalents were held by major financial
institutions, which management believes are of high credit worthiness.
<28> Fair value measurements
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 Group considers the principal or most
advantageous market in which it would transact and 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. Management develops these inputs based on the best information available, including their own data.
<29> Financial instruments
Financial instruments primarily consist of cash and cash equivalents, investments, accounts receivable, accounts payable, warrants, convertible notes and short-term
borrowings. The carrying value of the Group’s cash and cash equivalents, short-term investments, accounts receivable, accounts payable, convertible notes and short-term
borrowings approximate their market values due to the short-term nature of these instruments.
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<30> Deconsolidation of subsidiary
In accordance with ASC 810-40, deconsolidation of a subsidiary occurs when: (a) some or all of the ownership interests of the subsidiary are sold resulting in the loss of
a controlling financial interest; (b) a contractual agreement granting control of the subsidiary expires; (c) the subsidiary issues its shares to outsiders reducing the parent’s
ownership interest resulting in the loss of a controlling financial interest; or (d) the subsidiary becomes subject to the control of a government, court, administrator or
regulator.
The parent should recognize a gain or loss measured as the difference between: (a) the aggregate of: (i) the fair value of any consideration received, (ii) the fair value of
any retained non-controlling interest, and (iii) the carrying amount of any non-controlling interest at the date the subsidiary is deconsolidated; and (b) the carrying amount
of the subsidiary’s assets and liabilities.
A subsidiary should be deconsolidated from the date a controlling financial interest is lost and should also consider the equity components included in the non-controlling
interest and the amounts previously recognized in accumulated other comprehensive income (loss), i.e., the foreign currency translation adjustment.
<31> Recent accounting pronouncements
The Group considers the applicability and impact of all ASUs. The ASUs not listed below were assessed and determined to be either not applicable or are expected to
have minimal impact on the Group’s consolidated financial position and/or results of operations.
Recent Adopted Accounting Pronouncements
On February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This update requires an entity to recognize lease assets and lease liabilities on the balance sheet
and to disclose key information about the entity’s leasing arrangements. ASU 2016-02 is effective for annual reporting periods, and interim periods therein, beginning
after December 15, 2018, with early application permitted. The Group adopted this new accounting standard effective January 1, 2019. The adoption of this authoritative
guidance resulted in the recognition of operating lease assets and operating lease liabilities. The adoption of this authoritative guidance had no impact on the Group’s
consolidated operating results, beginning retained earnings, and cash flows since the lease commenced on January 1, 2019.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220). This update provides companies with the option to
reclassify stranded tax effects caused by the 2017 Tax Cuts and Jobs Act, or the 2017 Tax Act, from accumulated other comprehensive income to retained earnings. This
standard is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The
adoption of this standard had no material impact on the Group’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair
Value Measurement. The objective of ASU 2018-13 is to improve the effectiveness of disclosures in the notes to the financial statements by removing, modifying, and
adding certain fair value disclosure requirements to facilitate clear communication of the information required by generally accepted accounting principles. The
amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 with early adoption permitted
upon issuance of this ASU. The adoption of this standard had no material impact on the Group’s consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update 2019-12-Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU
summarizes the FASB’s recently issued Accounting Standards Update (ASU) No. 2019-12, simplifying the Accounting for Income Taxes. The ASU enhances and
simplifies various aspects of the income tax accounting guidance in ASC 740. The amendments in this update are effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2020. The adoption of this ASU had no material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
The Group considers the applicability and impact of all ASUs. The ASUs not listed below were assessed and determined to be either not applicable or are expected to
have minimal impact on the Group’s consolidated financial position and/or results of operations.
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In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU
2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing
incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual
reporting periods, and interim periods within those years, beginning after December 15, 2019, excluding entities eligible to be smaller reporting company. For all other
entities, the requirements are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2016-13 has been amended by ASU 2019-04, ASU 2019-05,
and ASU 2019-11. For entities that have not yet adopted ASU No. 2016-13, the effective dates and transition methodology for ASU 2019-04, ASU 2019-05, and ASU
2019-11 are the same as the effective dates and transition methodology in ASU 2016-13. The Group did not adopt this standard yet due to the status of smaller reporting
company. The Group plans to adopt this standard for the year beginning January 1, 2023. We do not expect the adoption of this standard will have material impact on the
Group’s consolidated financial statements.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption. The Group does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its
consolidated financial condition, results of operations, cash flows, or disclosures.
3. CONVENIENCE TRANSLATION
The Group, with the exception of its subsidiaries, The9 Interactive, NFTSTAR US Inc., NBTC US Inc., NFTStar Singapore Pte. Ltd., Nswapr Singapore Pte. Ltd. and
The 9 Singapore Pte. Ltd, maintains its accounting records and prepares its financial statements in RMB. The U.S. dollar amounts disclosed in the accompanying
consolidated financial statements are presented solely for the convenience of the readers at the rate of US$1.00 = RMB 6.3726, representing the noon buying rate in New
York for cable transfers of RMB, as certified for customs purposes by the Federal Reserve Bank of New York, on December 31, 2021. 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.
4. VARIABLE INTEREST ENTITIES
The Group is the primary beneficiary of its VIEs, including Shanghai IT 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.
Shanghai IT and its VIE subsidiaries
There are certain key contractual arrangements between the Group’s subsidiary, Huiling (wholly-owned foreign enterprise, the “WOFE”) and each of the VIEs that
provide the Group with control over the VIEs. As a result of these contracts, the Group concluded that it is required to consolidate the VIEs pursuant to the guidance in
ASC 810 Consolidation.
A summary of these contractual agreements 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. These loans have an
unspecified term and will remain outstanding for the shorter of the duration of WOFE or that of the VIE, 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.
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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 shareholders have 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)
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.
5)
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. The determination of service
fees, however, 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 Group is able to unilaterally renew, extend or amend the service agreements at its discretion.
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 that 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.
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In conclusion, because the Group, through its wholly owned subsidiary Huiling, 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, the Group has been deemed to be the
primary beneficiary of the VIEs and has consolidated the 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 Group. As a result, the Group may have to initiate legal proceedings, which involve significant
uncertainty. Such disputes and proceedings may significantly disrupt the Groups business operations and adversely affect the Group’s ability to control the VIEs. As most
of the shareholders of the VIEs are directors, officers, shareholders or employees of the Group, management is of the view that the risk that misaligned interests may lead
to deconsolidation in the foreseeable future is remote and insignificant.
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 to operate online games in the PRC. The9 Limited is incorporated in the Cayman
Islands and is considered a foreign entity under PRC laws. Due to restrictions on foreign ownership of companies that provide online games, the Group has entered into
contractual arrangements with Shanghai IT to conduct its online games business through its VIEs in the PRC. Shanghai IT holds the necessary licenses and approvals that
are essential for the online game business in China. Shanghai IT is principally owned by certain shareholder and employee of the Company. Pursuant to certain other
agreements and undertakings, The9 Limited in substance controls Shanghai IT. The Group believes that its current ownership structures and contractual arrangements
with Shanghai IT and its equity owners, as well as its operations, are in compliance with all existing PRC laws and regulations. There may, however, be changes and
other developments in the PRC laws and regulations or their interpretation. Specifically, following the recent promulgation of the GAPPRFT Circular, it is unclear
whether the authorities will deem the Group’s VIE structure and contractual arrangements with Shanghai IT as an “indirect or disguised” way for foreign investors to
gain control over or participate in domestic online game operators, and challenge the Group’s VIE structure accordingly.
If the Group is found to be in violation of any existing or future PRC laws or regulations, or fails 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 Group to undergo a costly and disruptive
restructuring, such as forcing The9 Limited to transfer its equity interest in the VIEs to a domestic entity or invalidating the VIE agreements. If the PRC government
authorities impose penalties which cause the Group to lose its rights to direct the activities of and receive economic benefits from the VIEs, the Group may lose the
ability to consolidate and reflect in its financial statements the financial position, and results of operation of the VIEs. The Group, however, does not believe such actions
would result in the liquidation or dissolution of the Group, the WOFEs or VIEs.
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.
●
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 The9 Limited to the VIEs must be approved by the relevant PRC
government body and such approval may be difficult or impossible to obtain. The VIEs are domestic PRC enterprises owned by nominee shareholders, thus the
Group is not likely to finance activities of the VIEs by means of direct capital contributions.
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Summary financial information of the VIE subsidiaries included in the accompanying consolidated financial statements with intercompany balances and transactions
eliminated are as follows:
December 31, 2020
December 31, 2021
December 31, 2021
RMB
RMB
US$
(Note 3)
Total assets
10,357,329
28,596,733
4,487,451
Total liabilities
313,608,879
282,163,247
44,277,571
2019
2020
2021
2021
RMB
RMB
RMB
US$
(Note 3)
Net revenues
182,119
625,488
1,278,918
200,690
Net loss
(51,667,515)
(52,410,094)
(23,621,808)
(3,706,777)
The VIEs contributed an aggregate of 53.3%, 100.0% and 0.9% of the consolidated net revenues for the years ended December 31, 2019, 2020 and 2021, respectively.
As of the fiscal years ended December 31, 2020 and 2021, the VIEs accounted for an aggregate of 21.4% and 2.2%, respectively, of the consolidated total assets, and
85.5% and 51.6%, respectively, of the consolidated total liabilities.
The VIE’s assets are not used as 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 subsidiaries from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and share
capital, to the Group in the form of loans and advances or cash dividends. See Note 21 for disclosure of restricted net assets.
5. ADVANCES TO SUPPLIERS
Advances to suppliers are as follows:
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
Other
27,725
2,781,139
436,421
27,725
2,781,139
436,421
On February 6, 2018, the Group entered into an agreement with a third-party company to subscribe to a total of 5,297,157 tokens for digital assets at a consideration of
US$2.0 million and the Group has paid a total of RMB2.1 million (US$0.3 million) for the advance administrative expenses. In July 2019, the Group received an
advance of RMB6.9 million (US$1.1 million) from another third-party to transfer approximately 2,222,222 tokens. The Group has provided an impairment loss of
RMB6.0 million (US$0.9 million) during the year ended December 31, 2019. In May 2020, the Group received a letter from the token issuer that due to the inability to
deliver tokens as scheduled and the issuer had terminated the purchase agreement on April 30, 2020. Upon termination, the issuer is to refund to the participant the net
amount and the Group has received a refund of US$0.8 million in July 2020 for the remaining 3,075,035 subscribed tokens. The transfer of tokens to a third-party to
transfer of approximately 2,222,222 tokens was completed on the termination date of the purchase agreement. The Group has recognized a gain of RMB2.8 million
(US$0.4 million) from the disposal and refund transactions to the subscribed tokens in 2020.
In September 2020, the Group entered into a master cooperation and publishing agreement with Voodoo SAS (“Voodoo”), a French game developer and publisher, to
cooperate on the publishing and operations of casual games in China for a period of maximum three years upon the launch of the games. In consideration for the
exclusive license granted to the Group by Voodoo and as a minimum guarantee payment, the Group should pay Voodoo an aggregate amount of US$13.0 million in cash
based on the agreed timetable, including an upfront payment of US$3.0 million that the Group has paid in September 2020. Due to uncertain events to the development
and the probability to successfully launch the casual games in the future, the Group has performed an impairment assessment to consider the recoverable amount. As the
advance on minimum guarantee payment is non-refundable in nature, the Group has fully impaired the advance paid in 2020.
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The Group has obtained financing for the early phase development of CrossFire New Mobile Game from the Inner Mongolia Culture Assets and Equity Exchange. As of
December 31, 2020, the Group had paid RMB7.5 million (US$1.2 million) as the financing fee of the total funds raised and to be raised amounting to RMB157.5 million
(US$24.7 million). According to the agreement, the Group paid the total financing fee of RMB7.5 million (US$1.2 million) upon receipt of the first payment in October
2016 (see Note 12). Due to unforeseen circumstances, the Group is not planning to finance the remaining RMB100.0 million (US$15.7 million) and due to non-recovery
of the advance financing fee, the Group has fully impaired the advance financing fee in 2018.
In total, the Group recorded impairment charges relating to the advances to suppliers and other advances of RMB6.0 million, RMB20.7 million and nil for the years
ended December 31, 2019, 2020 and 2021, respectively.
6. PREPAYMENTS AND OTHER CURRENT ASSETS, NET
Prepayments and other current assets are as follows:
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
Employee advances
2,292,700
1,294,840
203,189
Input VAT recoverable
1,780,484
2,310,475
362,564
Prepayments and deposits
1,551,118
465,073,710
72,980,215
Receivable in relating to disposal of a subsidiary
—
55,251,240
8,670,125
Other receivables, net of allowance for doubtful accounts of RMB6,619,312 and
RMB5,655,941, as of December 31, 2020 and 2021, respectively
4,231,165
4,179,023
655,779
9,855,467
528,109,288
82,871,872
In March 2021, the Group signed a Bitcoin mining machine purchase agreement with Bitmain Technologies Limited. Pursuant to the purchase agreement, the Company
will purchase 24,000 Antminer S19j Bitcoin mining machines, for a total consideration of US$82.8 million payable in installments according to the agreed time schedule.
As of December 31,2021, the group prepaid RMB 346.5 million (US$54.4 million).
In August 2021, we formally stepped into the NFT business. In November 2021, we have entered into license agreements with international sports stars pursuant to
which they have, respectively, granted us license to use their likeness for production of NFTs. As of December 31,2021, The total sum prepaid amount under license
agreements is RMB 98.2 millon (US$15.4 million), the Group still has payment commitment amounting to US$ 44.8 million as of December 31,2021.
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7. INVESTMENTS
The Group’s investments comprise the following:
Share
ownership as of
December 31,
December 31,
December 31,
December 31,
2020
2021
2021
2021
RMB
RMB
US$
( Note 3)
Investments accounted for under equity method:
ZTE9 Network Technology Co., Ltd., Wuxi (“ZTE9”)
—
—
—
5.00 %
Skychain Technologies Inc. (“Skychain”) <1>
—
4,609,500
723,331
15.11 %
Maxline Holdings Limited (“Maxline”)
—
—
—
29.00 %
Nanyang Herbs Pte. Ltd. (“Nanyang Herbs”) <2>
—
—
—
50.00 %
Leading Choice Holdings Limited (“Leading Choice”) <9>
—
—
—
0 %
Investments accounted for under cost method:
—
—
—
Smartposting Co, Ltd. (“Smartposting”)
—
—
—
14.55 %
Beijing Ti Knight Network Technology Co., Ltd. (“Beijing Ti Knight”)
—
—
—
9.90 %
Shanghai The9 Education Technology Co., Ltd. (“The9 Education Technology”)
—
—
—
19.20 %
Dragonfly Ventures II, L.P. (“Dragonfly”)<3>
—
19,519,950
3,063,106
1.19 %
Redblock Inc. (“Redblock”) <4>
—
1,942,860
304,877
1.00 %
Plutux Limited (“Plutux”)
—
—
—
8.00 %
Zhenjiang Kexin Power System Design and Research Co., Ltd. (“Zhenjiang Kexin”)
—
—
—
9.90 %
Shangdong Shanyeyunye Culture Co., Ltd. (“Shanyeyunye”) <10>
—
—
—
10.00 %
Beijing Weiming Naonao Technology Co., Ltd. (“BeijingNaonao”) <11>
—
—
—
9.09 %
Shanghai Lingjun Sports Culture Development Co., Ltd. (“Shanghai Lingjun”) <6>
—
6,000,000
941,531
12.76 %
Hangzhou Lianfang Technology Co., Ltd. (“Hangzhou Lianfang”) <7>
—
2,000,000
313,844
4.00 %
Skychain Technologies Inc. (“Skychain”) <1>
—
10,653,015
1,670,121
15.11 %
Shanghai Institute of Visual Art of Fudan University (“SIVA”) <12>
—
—
—
1.28 %
Investments accounted for under readily determinable fair values
SMI Vantage(“SMI”) <5>
—
14,850,376
2,330,348
12.6 %
FF Intelligent Mobility Global Holdings Ltd. (“FF Intelligent”) <8>
—
14,349,418
2,251,737
*
Total
—
73,915,119
11,598,895
*Less than 1%
<1> Skychain
In April 2021, the Group signed a legally binding term sheet on a CAD4 million investment in Skychain Technologies Inc., a company listed in TSX Venture Exchange
in Canada. The purpose of the investment is for the construction and operation of a 12 MW cryptocurrency mining facility located in Birtle, Manitoba, Canada. In June
2021, we announced the closing of the investment in Skychain and entered into subscription agreements to purchase share units and debentures issued by Skychain
Technologies Inc. Upon the completion of construction, we plan to deploy our cryptocurrency mining machines there. The Group invested RMB10.6 million (US$1.7
million) to get 15.11% of shares and RMB10.6 million (US$1.7 million) to get the Debentures of Skychain, the Debentures shall mature on the fourth anniversary of the
closing date，the Group have an option to extend maturity for additional 12 months, and the Debentures bear interest at a rate of 1% per annum. The Group recorded
share of loss of RMB1.7 million (US$0.3 million) and impairment of loss of RMB 4.3 million (US$0.7 million) for the year ended December 31, 2021.
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<2> Nanyang Herbs
In February 2020, the Group entrusted a nominee to hold trust shares of 50% in Nanyang Herbs and the nominee is to exercise rights in accordance with the instruction of
the Group. In February 2020, Nanyang Herbs entered into a research collaboration agreement with Nanyang Technological University (“NTU”) to jointly provide
technology and financial support to fund the research project to embark on evidence-based study to illustrate the medicinal values and efficacies of certain herbs. The
Group has invested an amount of RMB3.3 million (US$0.5 million) to Nanyang Herbs in 2020 and amount of RMB3.3 million (US$0.5 million) in 2021. Because of the
uncertainty of medical research projects, the Group incurred loss of RMB 3.3 million (US$0.5 million) for the year ended December 31, 2020. Also, the Group incurred
another loss of RMB 3.3 million (US $0.5 million) for the ended December 31, 2021.
<3> Dragonfly
In March 2021, the Group entered into an investment agreement with Dragonfly Ventures II, L.P. (“Dragonfly”). The Group invested RMB19.5 million (US$3.0 million)
in 2021.
<4> Redblock
In July 2021, the Group entered into an investment agreement with Redblock Inc. (“Redblock “). The Group invested RMB1.9 million (US$0.3 million) in 2021.
<5> SMI
In June 2021, the Group entered into a subscription agreement with SMI Vantage (“SMI”), which we paid RMB 1.6 million (US$0.25 million) to subscribe shares and
options of SMI. In August 2021 we exercised the options, and paid RMB 4.9 million (US$0.77 million) to obtain additional shares. The Group recorded an investment
income of RMB 8.3 million (US$1.3 million) for the year ended December 31, 2021.
<6> Shanghai Lingjun
In August 2021, the Group enterd into an agreement with Shanghai Lingjun Sports Culture Development Co., Ltd. (“Shanghai Lingjun”). The Group invested RMB6.0
million (US$0.9 million) in Shanghai Lingjun for an equity interest of 12.76%.
<7> Hangzhou Lianfang
In August 2021, the Group entered into an investment agreement with Hangzhou Lianfang Technology Co., Ltd. (“Hangzhou Lianfang”). The Group invested RMB2.0
million (US$0.3 million) in Hangzhou Lianfang for an equity interest of 4.00%.
<8> FF Intelligent (formerly known as Smart King Limited)
In March 2019, the Group entered into a joint venture agreement with Faraday & Future Inc. (“F&F”) in an attempt to enter into electric vehicle business. In April 2019,
the Group paid an initial deposit of US$5.0 million to F&F through an interest-free loan from Ark Pacific Associates Limited (“Ark Pacific Associates”), an entity
affiliated with the Group’s former president. In November 2020, the Group converted the initial deposit of US$5.0 million into 2,994,011 Class B ordinary shares of FF
Intelligent, the holding company of F&F that operates its electric vehicles business, at a pre-agreed conversion price set forth in the joint venture agreement. As a result
of this conversion, the capital commitment in the joint venture agreement was deemed released. The prepaid deposit for joint venture was fully impaired in 2019 as the
actual progress of the joint venture was below expectations. The initial recognition for the investment in FF Intelligent is recorded at nil. On July 21, 2021, FF Intelligent
completed a merger with a SPAC company and became a public company FF Intelligent Electric Inc. (Nasdaq: FFIE). The Group owns 423,053 shares of FFIE after the
merger. Such shares are subject to a 6-month lock-up period and were released to The9’s brokerage account in January 2022. The Group rebooked the investment for the
423,053 shares of FFIE received from F&F and recognized a gain on investments of RMB 37.7 million (US$ 5.9 million), The Group recognized a loss on change in
investment of RMB 23.4 million (US$ 3.7 million) based on its fair value as of December 31, 2021. As the result, the Group recognized a net gain of RMB 14.3 million
(US$ 2.2 million) for the year end December 31, 2021
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<9>Leading Choice
In September 2018, the Group completed a share exchange transaction with Leading Choice, which is a private company incorporated under the laws of Hong Kong for
issuance and sale of 21,000,000 ordinary shares of the Company with a specific lock-up period. In exchange, the Company obtained 20% equity interest in Leading
Choice. The fair value of 20% equity interest in Leading Choice was considered to be the nominal value of ordinary shares of the Group in the nonmonetary exchange
transaction. The investment was fully impairment in 2018. In 2020, the Group disposed its 20% equity interest in Leading Choice to a third for a consideration of
RMB0.2 million (US$0.03 million) and recorded a gain on disposal of RMB0.2 million (US$0.03 million).
<10>Shanyeyunye
In June 2020, the Group entered into an investment agreement with third parties to establish Shandong Shanyeyunye. The Group invested a total of RMB5.0 million
(US$0.8 million) in Shanyeyunye for an equity interest of 10%. Shanyeyunye is to establish a joint venture with Shandong Dazhong Digital Culture Technology Co., Ltd.
to develop and operates chess and card leisure games in the Province of Shandong. Due to level of uncertainty involved to the succeed to develop and launch the game in
the future, the Group recorded an impairment loss of RMB5.0 million (US$0.8 million) for the year ended December 31, 2020.
<11>BeijingNaonao
In August 2020, the Group entered into an investment agreement with Beijing Weiming Naonao Technology Co., Ltd. (“Beijing Naonao”), which aims to develop and
operate games designed for therapy purposes. The Group invested RMB3.0 million (US$0.5 million) in Beijing Naonao for an equity interest of 9.09%. Due to level of
uncertainty involved to succeed to develop and launch the game in the future, the Group recorded an impairment loss of RMB3.0 million (US$0.5 million) for the year
ended December 31, 2020.
<12> SIVA
In 2020, the Group considered to dispose its investment in SIVA and has performed an impairment assessment to consider the recoverable amount of the investment. The
Group recorded an impairment loss of RMB10.0 million (US$1.6 million) for the year ended December 31, 2020.
For the investments in equity, the Group has recorded share of loss of RMB2.8 million, RMB2.2 million and RMB1.7 million (US$0.3 million) for the years ended
December 31, 2019, 2020 and 2021, respectively.
In total, the Group recorded impairment charges relating to its investments in equity and other of RMB8.5 million, RMB19.2 million and RMB3.3 million (US$0.5
million) for the years ended December 31, 2019, 2020 and 2021, respectively.
8. PROPERTY, EQUIPMENT AND SOFTWARE, NET
Property, equipment and software and related accumulated depreciation and amortization are as follows:
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
Computers and equipment
4,989,121
215,468,985
33,811,787
Office furniture and fixtures
1,720,139
1,738,419
272,796
Motor vehicles
4,376,821
3,982,228
624,898
Software
10,511,865
10,524,000
1,651,445
Less: accumulated depreciation and amortization
(20,620,844)
(58,733,348)
(9,216,544)
Net book value
977,102
172,980,284
27,144,382
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Depreciation and amortization charges for the years ended December 31, 2019, 2020 and 2021 amounting to RMB2.8 million, RMB0.4 million and RMB47.4 million
(US$7.4 million), respectively. The Group has recorded a gain on disposal of property, equipment and software amounting to RMB2.2 million, RMB0.03 million,
RMB3.9 million (US$0.6 million), as other income, net for the years ended December 31, 2019, 2020 and 2021.
9. INTANGIBLE ASSETS- CRYPTOCURRENCIES
The Group’s intangible assets - cryptocurrencies comprise the following:
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
Bitcoins (BTC) <1>
—
128,581,349
20,177,220
Tether (USDT) <3>
—
8,424,472
1,321,983
Less: Impairment of cryptocurrencies
—
(50,887,472)
(7,985,355)
Total
—
86,118,349
13,513,848
<1> Bitcoins (BTC)
Since February 2021, the Group has generated Bitcoin mining revenues through provision of computing power, or hash rate, in crypto asset transaction verification
services to Bitcoin mining pools. In exchange for that, the Group is entitled to receive a fractional share of the Bitcoin award from the Bitcoin mining pools. The
transaction consideration received is noncash consideration, which the Group measures at fair value on the date received, which is not materially different than the fair
value at contract inception. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration
is constrained until the mining pools successfully place a block and the Group received the consideration, at which time revenue and intangible assets are recognized. As
of December 31, 2021, the Group owned 393 Bitcoins.
To ensure the safety of the Group’s Bitcoins, the Group keeps 200 of its Bitocoins in Coinbase Custody and the remaining in the Group’s Bitcoin electronic wallet. The
wallet was designated to have a dedicated multi-signature system. More than half of the signatories’ approval is required for transferring Bitcoins out from the wallet. Six
management level employees of The9 were assigned as the signatories. Each signatory holds an electronic private key, or password. In order to ensure the password will
not be forgotten or lost by the signatory, each password was kept in a safe box at a bank. The safe boxes were opened under the names of two wholly-owned subsidiaries
of the Company.
<2> Chia (XCH)
Since June 2021, the Group also started the mining of Chia. The Group generates Chia mining revenues through provision of computing storage space to the main
networks. In exchange for that, the Group is entitled to receive a fractional share of the Chia awards from the main networks. The Group recognizes Chia mining revenue
and the intangible assets at fair value on the date the Group received the Chia awards. The Group received 3,113 Chia coins in total in 2021. As of December 31, 2021,
all the Chia that the Group owned have been converted into 547,966 USDT.
<3> Tether (USDT)
Tether is a stablecoin because it was originally designed to always be worth US$1. Since the Group turned the business focus to blockchain industry, from time to time
the Group needs to make certain payments in USDT. Therefore the Group uses US$ to purchase USDT from time to time. As of December 31, 2021, the Group owned
1,321,341 USDT.
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Among these intangible assets, the Group had pledged 110 Bitcoins and 1,500,000 USDT to a third party company for the cooperation on Filecoin mining. Since March
2021, the Group started the mining of Filecoin. Unlike other cryptocurrency mining, Filecoin mining main network requires miners not only to contribute mining
machines with computing storage space, but miners also need to pledge certain amount of Filecoins to the main network to start the Filecoin mining. Then Filecoin main
network will reward the miners by Filecoin awards. As such, the Group cooperated with a third-party company where the Group contributes mining machines and the
third party contributes Filecoins for pledging to the Filcoin main network. Under this mining cooperation, the Group pledged 110 Bitcoins and 1,500,000 USDT to the
third party as security to ensure the third party can receive Filecoins being mined according to the agreed distribution schedule. As of December 31, 2021, all the
Filecoins being mined were distributed to the third party according to the agreed distribution schedule and the Group did not own Filecoin as of December 31, 2021.
Since it is not probable that a significant reversal of cumulative revenue will not occur, the Group had not recognized any Filecoin mining revenue yet as of December
31, 2021. When the Group starts to own the Filecoins being mined, the Group will start to recognize Filecoin mining revenue and the intangible assets at fair value on the
date the Group receives and owns the Filecoin awards. Based on the agreed mining distribution schedule with the third party company, 40 Bitcoins and 1,500,000 USDT
were release from the pledge in September 2021 and only 70 Bitcoins were still under pledge.
The useful life of a digital asset is indefinite, thus it shall not be amortized but should be tested for impairment on annually and more frequently if events or changes in
circumstances indicate that it is more likely than not that the indefinite-lived asset is impaired. Impairment of cryptocurrency exists when the carrying amount exceeds its
fair value at any time subsequent to its acquisition and will require us to recognize an impairment charge. To the extent an impairment loss is recognized, the loss
establishes the new cost basis of the asset. Subsequent reversal of impairment losses is not permitted.
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10. LEASES
The Group has operating leases primarily for office space, parking lots and warehouse after relocation of their principal office since August 2019. Operating lease ROU
assets and operating lease liabilities are recognized based on the present value of the lease payments over the lease term at commencement date.
As the leases do not provide an implicit rate, an incremental borrowing rate is used based on the information available at commencement date, to determine the present
value of lease payments. The incremental borrowing rates approximate the rate the Group would pay to borrow in the currency of the lease payments for the weighted-
average life of the lease.
The operating lease ROU assets also include any lease payments made prior to lease commencement and excludes lease incentives and initial direct costs incurred if any.
Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Group will exercise that option. Lease expense for minimum lease
payments is recognized on a straight-line basis over the lease term.
Operating lease costs are recognized on a straight-line basis over the lease term. The prepaid rental expense recorded in operating lease right-of-use assets amounting to
nil and nil as of December 31, 2020 and 2021, respectively.
The items related to operating lease in the consolidated balance sheets are summarized below:
December 31, 2020
December 31, 2021
December 31, 2021
RMB
RMB
US$
(Note 3)
Operating lease right-of-use assets
5,149,090
6,363,724
998,607
Operating lease liabilities-current portion
3,787,210
4,306,738
675,821
Operating lease liabilities-non-current portion
2,464,495
2,567,342
402,872
Lease cost recognized in the Group’s consolidated statements of operations and comprehensive loss is summarized as follows:
Classification in Consolidated
Statements of Operations
and Comprehensive (Loss) Gain
December 31, 2020
December 31, 2021
December 31, 2021
RMB
RMB
US$
(Note 3)
Operating lease cost
Operating expenses
3,539,374
4,220,789
662,334
Cost of other leases with terms less than one year
Operating expenses
67,281
62,430
9,797
Total
3,606,655
4,283,219
672,131
Maturities of operating lease liabilities are as follows:
December 31, 2020
December 31, 2021
December 31, 2021
RMB
RMB
US$
(Note 3)
Due within one year
3,995,768
4,511,953
708,024
Due in the second year
2,502,839
1,780,332
279,373
Due in the third year
—
882,132
138,426
Total lease payments
6,498,607
7,174,417
1,125,823
Less: imputed interest
(246,902)
(300,337)
(47,129)
Total
6,251,705
6,874,080
1,078,694
The following table summarizes the lease term and discount rate for the Company’s operating lease as of December 31, 2021:
Operating Lease
Weighted average remaining lease term (in years)
1.25
Weighted average discount rate
4.65 %
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As of December 31, 2021, the Group does not have significant operating or finance leases that have not yet commenced. The Group’s lease agreements do not contain
any material residual value guarantees or material restrictive covenants.
Supplemental cash flow information related to operating leases is as follows:
December 31, 2020
December 31, 2021
December 31, 2021
RMB
RMB
US$
(Note 3)
Cash paid for amounts included in the measurement of operating
lease liabilities
2,842,464
4,813,050
755,273
11. TAXATION
Cayman Islands
Under the current tax laws of the Cayman Islands, the Group is not subject to tax on its income or capital gains. In addition, upon payment of dividends by The9 Limited
to its shareholders, no Cayman Islands withholding tax will be imposed.
Hong Kong
The Group’s subsidiaries incorporated in Hong Kong did not have assessable profits that were derived in Hong Kong during the years ended December 31, 2019, 2020
and 2021. Therefore, no Hong Kong income tax has been provided for in the years presented.
Singapore
The Group’s subsidiaries incorporated in Singapore did not have assessable profits that were derived in Singapore during the years ended December 31, 2019, 2020 and
2021. Therefore, no Singapore income tax has been provided for in the years presented.
PRC
The Group’s subsidiaries and VIE subsidiaries incorporated 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%. The subsidiaries that hold a “High and New Technology Enterprise”
(“HNTE”) qualification are subject to a 15% preferential EIT rate. 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 2017, Shanghai IT renewed its HNTE qualification and obtained approval in 2018, which entitles
Shanghai IT to enjoy a preferential EIT rate of 15% during the period from 2018 to 2020. As HNTE qualification has expired in November 2020, Shanghai IT is no
longer entitled the HNTE qualification benefits. As Shanghai IT did not have taxable income for the years ended December 31, 2019, 2020 and 2021, Shanghai IT has
not benefited from this preferential income tax rate.
United States
The Group’s subsidiaries incorporated in the U.S. are registered in the state of Delaware and are subject to U.S. federal corporate marginal income tax rate of 21% and
state income tax rate of 8.7%, respectively.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income
tax system including a federal corporate rate reduction from 34% to 21%; limitations on the deductibility of interest expense and executive compensation; creation of the
base erosion anti-abuse tax (“BEAT”), a new minimum tax; and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax
system. A majority of the provisions in the Tax Act are effective January 1, 2018.
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The Tax Act creates a new requirement that certain income such as Global Intangible Low-Taxed Income (“GILTI”) earned by a controlled foreign corporation (“CFC”)
must be included in the gross income of the CFC U.S. shareholder. The Group has evaluated these provisions of the Tax Act and whether taxes due on future U.S.
inclusions related to GILTI be recorded as current-period expense when incurred, or factored into measurement of deferred taxes. The Group concluded that the Tax Act
had no material effect to the financial statements.
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:
For the year ended December 31,
2019
2020
2021
2021
RMB
RMB
RMB
US$
(Note 3)
Current income tax expense
—
PRC
—
7,165,097
—
Other jurisdictions
—
—
—
Deferred tax assets
PRC
(5,772,005)
25,905,564
4,915,611
771,367
Other jurisdictions
(15,151,553)
(44,312,311)
(183,867,203)
(28,852,776)
Subtotal
(20,923,558)
(18,406,747)
(178,951,592)
(28,081,409)
Change in valuation allowance
PRC
5,772,005
(25,905,564)
(4,915,611)
(771,367)
Other jurisdictions
15,151,553
44,312,311
183,867,203
28,852,776
Subtotal
20,923,558
18,406,747
178,951,592
28,081,409
Income tax expense
—
7,165,097
—
—
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
For the year ended
For the year ended
December 31,
December 31,
December 31,
2019
2020
2021
PRC statutory EIT rate
25 %
25 %
25 %
Effect of different tax rates in other jurisdictions
1 %
(10)%
0 %
Change in future tax rate (upon expiration of preferential
rate)
2 %
0 %
0 %
Change of prior year deferred tax assets
(15)%
1 %
(19)%
Change of valuation allowance
(18)%
(10)%
(28)%
Income not subject to tax and non-deductible expenses, net
0 %
0 %
0 %
Effect of expired net operating loss
5 %
(6)%
22 %
PRC withholding tax
0 %
2 %
0 %
Effective EIT rate
0 %
2 %
0 %
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Significant components of deferred tax assets
For the year ended
For the year ended
For the year ended
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
Temporary differences related to expenses and accruals
615,041
1,059,821
166,309
Temporary differences related to impairment on advances to suppliers
2,942,771
1,955,941
306,930
Temporary differences related to provision for doubtful accounts
689,811
631,200
99,049
Others
8,221,500
—
—
Temporary differences related to depreciation, amortization, and impairment of equipment and intangible assets
15,396,549
17,022,219
2,671,158
Startup expenses and advertising fees
212,880
105,917
16,621
Temporary differences related to research and development credits
1,057,050
—
—
Temporary differences related to equity investments
11,740,058
11,740,058
1,842,271
Foreign tax credits
—
—
—
Temporary differences related to provision for prepayment for equipment
5,000,000
5,000,000
784,609
Tax loss carry forwards
256,958,435
86,367,347
13,552,921
Total deferred tax assets
302,834,095
123,882,503
19,439,868
Less: Valuation allowance
(302,834,095)
(123,882,503)
(19,439,868)
Total deferred tax assets
—
—
—
Movement of valuation allowance on deferred tax assets
For the year ended
For the year ended
For the year ended
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
Beginning balance
321,240,842
302,834,095
47,521,277
Decrease in valuation allowance
(18,406,747)
(178,951,592)
(28,081,409)
Ending balance
302,834,095
123,882,503
19,439,868
For the years ended December 31, 2020 and 2021, the Group recorded an Decrease of valuation allowance of approximately RMB 18.4 million and RMB 179 million
(US$28.1 million), 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 as 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.
As of December 31, 2021, the Group’s PRC subsidiaries had net operating loss carry forwards amounting to RMB 345.5 million which will expire from 2022 to 2026.
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. According to Caishui [2018]
No. 76, with effect from January 1, 2018, losses of qualified HNTE in the current year occurred five years before the year in which the entity qualified for HNTE and
have not been made up shall be allowed to be carried forward to subsequent years to be made up, and the maximum carry-forward period shall be extended from five
years to ten years.
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In accordance with the 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 Group 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 PRC subsidiaries with operations in the PRC. Therefore, no withholding income taxes for undistributed profits of the
Company’s subsidiaries established in PRC have been provided as of December 31, 2020 and 2021. 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 VIEs do not have any accumulated earnings as of December 31, 2020 and 2021. 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, 2020 and 2021. 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, 2019, 2020 and 2021, 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. 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 2019, the Group is subject to
examination by the PRC tax authorities. Red 5’s U.S. federal income tax returns and state income tax returns for 2015 through 2019 are open tax years, subject to
examination by the relevant tax authorities.
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are as follows:
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
Funds raised for CrossFire New Mobile Game
56,311,274
30,384,772
4,768,034
Professional services
9,866,284
4,480,561
703,098
Agency commission fees payable
6,397,096
6,397,096
1,003,844
Staff cost related payables
3,842,856
6,505,481
1,020,852
Office expenses
1,920,735
1,439,218
225,845
Product development services
848,237
992,730
155,781
Other payables
—
33,808,410
5,305,277
Lawsuit dues
—
54,703,506
8,584,173
Others
4,384,391
1,487,807
233,469
Total
83,570,873
140,199,581
22,000,373
The Group has financed the early phase development of CrossFire New Mobile Game through fundraising from the Inner Mongolia Culture Assets and Equity Exchange.
As of December 31, 2021, the Group had raised RMB57.5 million (US$9.0 million). The Group does not plan to finance the remaining RMB100.0 million (US$15.7
million) from the planned fundraising arrangement, and due to non-recovery of the advance financing fee, the Group fully impaired the advance financing fee in 2018.
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In April 2020, Inner Mongolia Culture Assets and Equity Exchange filed a civil claim against the Group to recover RMB57.5 million (US$9.0 million) of principal and
RMB4.6 million (US$0.7 million) of interest that the Group has previously raised to finance the early phase development of CrossFire New Mobile Game. The Group
cooperated with a third-party company for development and operation of CrossFire New Mobile Game and plan to apply for the requisite license from GAPPRPT for
CrossFire New Mobile Game as soon as development of the game is finalized to launch the game. In October 2020, Intermediate Court of Changsha City, Hunan
Province issued a decision to reject all claims against the Group. As of the filing date, no appeal claim has been made by Inner Mongolia Culture Assets to the sentence
of the court.
In April 2022, the Group has negotiated and intends to sign another settlement deed pursuant to which the Group agreed to pay Splendid Days and a third-party total of
approximately USD 8.6 million in order to settle outstanding claims under the Convertible Notes. The Group record other payables for such estimated settlement
amounts for RMB54.7 million (US$8.6 million) for the year ended December 31, 2021. Upon the satisfaction of certain conditions set forth in the foregoing settlement
deed, the arbitration proceeding will be terminated.
In late 2021, the Group entered into a share purchase agreement with a third party 51miner Limited (“51miner”) to sell all its equity interest in Niulian Technology
(Shaoxing) Co. Ltd. (“Niulian”) to 51miner. Before the disposal, Niulian held certain BTC, FIL and XCH mining machines and mined these cryptocurrencies in China.
Since the regulatory risk of mining in China had been increasing, The9 decided to transfer those machines which can mine overseas to NBTC based on net book value.
Therefore, as of the disposal date, the Group recorded an other payables for RMB30.6 million (US$4.8 million).
13. Refund of WoW game points
As a result of the loss of the World of Warcraft (“WoW”) license on June 7, 2009, the Group announced a refund plan in connection with inactivated WoW game point
cards, which the Group recorded as refund of game points. According to the plan, inactivated WoW game point card holders are eligible to receive a cash refund from the
Group. The Group recorded a liability in connection with both inactivated points cards and activated but unconsumed point cards of approximately RMB200.4 million
(US$31.4 million).
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
responsibility 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 inactivated 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$4.1 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$26.7million) as of both December 31, 2020 and
2021
14. CONVERTIBLE NOTES
On February 2, 2021 (the “Original Issue Date”), the Group entered into a Securities Purchase Agreement (“Purchase Agreement”) and a 6% Convertible Debenture
Agreement (the “Note Agreement”) with an accredited private investor (the “Investor” or “Holder”) pursuant to which the Group agreed to issue and sell in a private
placement to the Investor an aggregate principal amount of $5,000,000 of convertible notes due February 2, 2022 (the “February Note”) and sold 50,000 American
Depositary Shares (“ADSs”) at $18.5 per share, having a fair value of $0.9 million. The Group also issued as collateral 10 million ordinary common shares (each ADSs
share is worth 30 Class A ordinary shares). The collateral Class A ordinary shares subject to redemption at $0.0001 per share if not utilized to settle the outstanding
convertible debenture.
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The Group issued a convertible promissory note on February 2, 2021 at $5 million that mature on February 2, 2022 and accrued interest at 6.00% per annum. In
connection with the promissory note, the Group issued 50,000 ADSs. The note is convertible into ADSs at a conversion price of $14 per share.The Group evaluated the
potential embedded derivative resulting from the conversion feature within the Indenture for bifurcation from the February Note. The conversion feature of the February
Note was deemed clearly and closely related to the February Note and accordingly was not bifurcated as a standalone derivative. Upon issuance of the February Note, the
Group allocated the proceeds received to the February Note and ADSs on a relative fair value basis. As a result of such allocation, the Group determined the initial
carrying value of the February Note to be $1.7 million. The Group recorded the relative fair value of the ADSs as a debt discount of $0.6 million and amortized the
discount over the life of the note (12 months). The $5,000,000 convertible note was repaid in full in 2021.
On March 17, 2021 (the “Original Issue Date”), the Group entered into a Securities Purchase Agreement (“Purchase Agreement”) and a 6% Convertible Debenture
Agreement (the “Note Agreement”) with an accredited private investor (the “Investor” or “Holder”) pursuant to which the Group agreed to issue and sell in a private
placement to the Investor an aggregate principal amount of $20,000,000 of convertible note due March 17, 2022 (the “March Note”) and was required to issue ADSs,
having a fair value of $2,444,444 as commitment shares value.
The Group issued a convertible promissory note on March 17, 2021 at $20 million that matures on March 17, 2022 and accrued interest at 6.00% per annum. The Group
also was required to issue ADSs having a fair value of $2,444,444 as commitment shares value, subsequent to the Group having an effective registration statement for the
underlying shares or on September 17, 2021. The Group issued 3,277,050 shares on May 6, 2021 having a fair value of $2,444,444. The March Note is convertible into
shares of ADSs at the lower of the conversion price of 90% of the average 5 day trading price preceding the redemption notice or 90% of the closing price on the day
before the redemption notice. The February Note and March Note have anti-dilution protection in the event of certain stock splits.
Interest on the February and March Notes is payable by shares. Under certain circumstances, interest on the Notes will be payable in cash at the election of the holder if
such payments are permitted under the Notes Agreement. The indenture governing the February and March Notes contains customary events of default. No event of
default existed as the date of this annual report.
The Group evaluated the embedded derivative resulting from the conversion feature within the Indenture for bifurcation from the March Note. The conversion feature of
the March Note was not deemed clearly and closely related to the March Note and was bifurcated as a standalone derivative. The Group recorded this embedded
derivative liability as a current liability on its consolidated balance sheets with a corresponding debt discount, which is netted against the principal amount of the 6.0%
Notes. The Group is accreting the debt discount associated with the March Note and ADSs to interest expense over the term of the agreement using the effective interest
rate method. The fair value of the conversion option related to the March 2021 Note was calculated using the Black-Scholes option pricing model, using the following
assumptions at issuance: (1) dividend yield of 0%; (2) expected volatility of 205.94%, (3) weighted average risk-free interest rate of 0.07%, (4) expected life of 1 year,
and (5) estimated fair value of the Group’s ADSs of $42.39 per share. The following assumptions used at December 31, 2021: (1) dividend yield of 0%; (2) expected
volatility of 192.19%, (3) weighted average risk-free interest rate of 0.39%, (4) expected life of 0.21 year, and (5) estimated fair value of the Group’s ADSs of $2.50 per
share.
The following table provides a summary of the changes in convertible debt, net of unamortized discount, during 2021:
2021
Balance at January 1,
RMB
—
Issuance of convertible debt, face value
162,151,500
Debt discount from issuance/sale of ADS shares
(10,823,428)
Debt discount from derivative liability (embedded conversion option)
(129,956,000)
Deferred financing fees
(194,169)
Repayment of convertible debt
—
Conversion of convertible debt into ordinary shares
(39,926,775)
Amortization of debt discount
113,893,971
Exchange rate change on convertible notes face value
(2,296,722)
Convertible debt, net at December 31,
RMB
92,848,377
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As of December 31, 2021 and December 31, 2020, the Group had the following convertible notes outstanding:
December 31, 2021
December 31, 2020
Accrued
Accrued
Principal
Interest
Principal
Interest
February 2021 $5,000,000 Notes convertible into ADS common stock at $14.00
per share, 6% interest, due February 2022
RMB
32,195,500 RMB
12,388,301
—
—
March 2021 $20,000,000 Notes convertible into ADS common stock, 6% interest,
due March 2022
RMB
129,956,000
RMB
6,201,653
Penalties on notes in default
—
—
—
—
Repayment of convertible debt
RMB
(39,926,775)
RMB
(17,652,626)
Exchange rate change on convertible notes face value
RMB
(2,296,722)
RMB
—
Total Convertible Notes Payable, Net
RMB
119,928,003 RMB
937,328 RMB
— RMB
—
Less: Debt Discount
(27,079,626)
—
—
—
RMB
92,848,377 RMB
937,328 RMB
— RMB
—
Amortization of debt discount and interest expense for the ended December 31, 2021 and 2020 on the convertible notes payable amounted to RMB 120.6 million (US$
18.9 million) and nil, respectively.
15. WARRANTS
In January 2021, the Group entered into a share subscription and warrant purchase agreement with the holding entities of several investors (“Investors”) in the
cryptocurrencies mining industry based on the pre-agreed legally-binding term sheet. Pursuant to the purchase agreement, the Group issued 8,108,100 Class A ordinary
shares in aggregate at US$0.1233 per Class A ordinary share and 207,891,840 warrants in aggregate, each warrant representing the right to purchase one Class A
ordinary share, to the Investors in February 2021. The warrants are divided into four equal tranches: Tranche IWarrants, Tranche II Warrants, Tranche III Warrants and
Tranche IV Warrants. The exercise price of each of the Tranche I Warrants, Tranche II Warrants and Tranche III Warrants is US$0.1233 per Class A ordinary share while
the exercise price of the Tranche IV Warrants is US$0.2667 per Class A ordinary share. The warrants will only be exercisable upon the satisfaction of its respective
condition in connection with the market capitalization of the Company reaching US$100 million, US$300 million, US$500 million and US$1 billion within the time
frames of 6 months, 12 months, 24 months and 36 months from its issuance date, respectively. The transaction was closed in February 2021. These warrants are classified
as equity and so there is no remeasurement to the warrants after initial recognition. The fair value of these warrants as of the initial recognition was US$122 million.
Variables used in the option-pricing model include (1) risk-free interest rate at the date of grant (0.18%), (2) expected warrant life of 3 years, (3) expected volatility of
190%, and (4) expected dividend yield of 0.
In April 2021, the Group completed an underwritten offering with Maxim Group LLC. In this transaction, The Group issued 112,953,000 Class A ordinary shares, or
3,765,100 American Depositary Shares (“ADSs”) and warrants to purchase 2,823,825 ADSs. The offering price of each ADS and accompanying 0.75 of an ADS warrant
is $33.20. Each warrant has an exercise price of $36.00 per ADS, will be exercisable upon issuance, and will expire three years from the date of issuance. In addition, the
underwriter Maxim Group LLC also subscribed the over-allotment for an additional 16,942,800 Class A ordinary shares, or 564,760 ADSs and warrants to purchase
423,570 ADSs at the same price. The over-allotment warrants also have an exercise price of $36.00 per ADS, will be exercisable upon issuance, and will expire three
years from the date of issuance. These warrants are classified as equity and so there is no remeasurement to the warrants after initial recognition. The fair value of these
warrants as of the initial recognition was US$94 million. Variables used in the option-pricing model include (1) risk-free interest rate at the date of grant (0.37%), (2)
expected warrant life of 3 years, (3) expected volatility of 236%, and (4) expected dividend yield of 0.
16. 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, June 8, 2017, and June 16, 2017.
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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 expired on January 8, 2019. The plan
has not been exercisable as of the expiration date and has not been extended.
On May 6, 2019, an extraordinary general meeting was held to adjust the authorized share capital and to adopt a dual-class share structure, consisting of Class A ordinary
shares and Class B ordinary shares. Each Class A ordinary share is entitled to one vote per share on all matters subject to vote at general meetings of the Group. Each
Class B ordinary share is entitled to fifty (50) votes per share on all matters subject to vote at general meetings of the Group. Class A ordinary shares and Class B
ordinary shares were split from the ordinary shares issued at the time of change. No new shares were issued.
As a special resolution in the annual general meeting of shareholders and the class meeting of holders of the Class B ordinary shares held on December 22, 2021, the
Company’s Second Amended and Restated Memorandum and Articles of Association was amended so that each Class B ordinary share of the Company shall entitle the
holder thereof to one hundred (100) votes per share on all matters subject to vote at general meetings of the Company.
Only Mr. Jun Zhu and Incsight Limited (“Incsight”) hold Class B ordinary shares. As of December 31, 2021, there were 691,388,585 ordinary shares issued or
outstanding, being the sum of 677,781,251 Class A ordinary shares and 13,607,334 Class B ordinary shares.
17. EMPLOYEE BENEFITS
Full-time employees of the Group’s subsidiaries and VIE subsidiaries registered in the PRC are entitled to statutory staff welfare benefits, including medical care, welfare
subsidies, unemployment insurance and pension benefits through a PRC government-mandated multi-employer defined contribution plan. These subsidiaries and VIE
subsidiaries 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 gain (loss) for such employee benefits amounted to RMB4.5 million, RMB1.2 million and RMB4.1 million
(US$0.64 million) for the years ended December 31, 2019, 2020 and 2021, respectively. The PRC government is responsible for the medical benefits and ultimate
pension liability to these employees.
18. SHARE-BASED COMPENSATION
18.1 Share Option Plan
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. The 2004 Option Plan was amended in November 2015 to increase the maximum aggregate
number of ordinary shares to 14,449,614 shares. The 2004 Option Plan was amended in August 2016 to increase the maximum aggregate number of ordinary shares to
34,449,614 shares. On June 6, 2017, the Group and optionees have entered into certain stock option agreements, pursuant to which the Group has granted to the optionees
options to acquire the ordinary shares, par value US$0.01 each, of the Group. According to the agreements, 6,328,535 options were exercised to ordinary shares, and
10,806,665 options were canceled. In December 2018, the 2004 Option Plan was amended to increase the maximum aggregate number of ordinary shares to 100,000,000
shares. By the amendment to the Option Plan in August 2021, we increased the total number of ordinary shares reserved under the Option Plan from 100,000,000 to
250,000,000. As of December 31, 2021, options to purchase 50,000 ordinary shares were outstanding and options to purchase 108,073,400 ordinary shares were available
for future grant under the 2004 Option Plan.
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Stock Options
The following table summarizes the Group’s share option activities with its employees and directors:
Weighted-Average
Remaining
Number of
Weighted-Average
Contractual Term
Aggregate
Options
Exercise Price
(years)
Intrinsic Value
Outstanding as of January 1, 2021
50,000
US$
0.93
2.07
Nil
Granted
—
—
—
Nil
Exercised
—
—
—
Nil
Forfeited
—
—
—
Nil
Outstanding as of December 31, 2021
50,000
US$
0.93
1.07
Nil
Vested and expected to vest as of December 31, 2021
50,000
US$
0.93
1.07
Nil
Exercisable as of December 31, 2021
50,000
US$
0.93
1.07
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 nil for years ended December 31, 2019, 2020 and 2021.
On January 24, 2018, as approved by the Board of Directors, the Group granted share options totaling 5,750,000 shares to directors, officers and consultants. The
remaining shares shall become vested in a series of 36 successive equal monthly installments upon grantees’ completion of each month of service to the Company over
the 36-month period measured from the grant date. On September 4, 2018, the Group canceled a portion of the options totaling 4,700,000 share options granted to
directors, officers and consultants. The 1,000,000 share options were forfeited due to the resignation of the Group’s former president.
The weighted-average grant-date fair value of options granted during 2018 was US$0.51. The fair value of the share options was measured on the respective grant dates
based on the Black-Scholes option pricing model, with below assumptions made regarding expected term and volatility, risk-free interest rate and dividend yield:
Risk-free interest rate
2.19 %
Expected life (years)
2.93
Expected dividend yield
0.00 %
Volatility
78.55 %
Fair value of options at grant date
US$
0.51
Restricted Ordinary Shares
On September 4, 2018, the Group granted an aggregate amount of 30,000,000 restricted ordinary shares to directors, officers and consultants. In exchange for such
restricted ordinary shares granted, the Group forfeited and canceled the stock options in the total amount of 6,200,000 shares previously granted on January 24, 2018.
Half of each individual’s shares will only vest if the Group meets certain target on non-GAAP profit before tax in 2019. If the Group fails to achieve this target, such half
of each individual’s shares will be forfeited and canceled. The remaining half of each individual’s shares is subjected to a half year lock-up period. After the half year
lock-up period, such remaining shares shall become vested in 36 successive equal monthly installments upon grantees’ completion of each month of service to the Group
measured from the last day of each month after the vesting commencement date.
On January 21, 2019, the Group forfeited and canceled an aggregate amount of 15,000,000 restricted ordinary shares with the vesting condition that the Group meets
certain target on non-GAAP profit before tax in 2019 previously granted on September 4, 2018. The vesting conditions of the remaining 15,000,000 ordinary shares are
subjected to a half year lock-up period. After the half year lock-up period, such remaining shares shall become vested in 24 successive equal monthly installments instead
of 36 installments upon grantees’ completion of each month of service to the Group measured from the last day of each month after the Vesting Commencement Date
dated on March 5, 2019.
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On June 17, 2020, the Group granted an aggregate amount of 29,100,000 restricted Class A ordinary shares to directors, officers and consultants as share incentive
awards for their services to the Company pursuant to Eighth Amended and Restated 2004 Stock Option Plan. Among those restricted Class A ordinary shares grants,
15,600,000 restricted Class A ordinary shares are subject to restrictions on transferability that would be removed once certain pre-agreed performance targets are met,
and 13,500,000 restricted Class A ordinary shares are subject to restrictions on transferability for a six-month period that would be removed in installments once certain
service period conditions are met. All the restrictions attached to those shares have been removed upon the satisfaction of the underlying targets and conditions as of
December 31, 2021.
On February 14, 2021, our board of directors and board committees authorized and approved the issuance of an aggregate number of 33,090,000 Class A ordinary shares
of our company to certain directors, executive officers, employees and consultants of our company as share incentive awards for their services to us pursuant to the
Option Plan. Among those Class A ordinary shares grants, 32,190,000 shares were restricted Class A ordinary shares, subject to restrictions on transferability to be
removed upon the satisfaction of the conditions that half of the restricted shares should vest if our market capitalization reaches US$400 million and the other half should
vest if our market capitalization reaches US$500 million. We also granted 900,000 restricted Class A ordinary share units to our directors which are immediately vested
and issued the same number of shares.
In September 15, 2021, our board of directors and board committees authorized and approved the issuance of an aggregate number of 44,290,560 Class A ordinary shares
of our company to certain directors, executive officers, employees and consultants of our company as share incentive awards for their services to us pursuant to the
Option Plan. Among those Class A ordinary shares grants, 44,290,560 shares were restricted Class A ordinary shares, subject to the following vesting condition:
restricted shares shall vest within two years, i.e., 1/24th of all restricted share grants shall vest on the last day of each month after the date of the grant. We also granted
4,950,000 restricted Class A ordinary share units to our directors which are immediately vested and issued the same number of shares.
Share-Based Compensation
For the years ended December 31, 2019, 2020 and 2021, the Group recorded share-based compensation of RMB21.3 million, RMB55.1 million and RMB150.2 million
(US$23.6 million), respectively, for options granted to the Group’s employees and directors.
As of December 31, 2021, there was approximately RMB263.3 million (US$41.3 million) unrecognized compensation cost, adjusted for estimated forfeitures, related to
non-vested options and restricted shares with performance condition. Total unrecognized compensation cost may be adjusted for future changes in estimated forfeitures.
19. RELATED PARTY TRANSACTIONS AND BALANCES
Transaction with equity investee
In 2013, the Group entered into an agreement with ZTE9, an equity investee of the Group, to jointly operate IPTV games in the PRC. According to the agreement, the
Group pays ZTE9 a royalty fee for providing game contents on IPTV. In July 2020, ZTE9 initiated the liquidation process given its inability to repay its liabilities due. In
September 2020, the Group entered into a debt settlement agreement with ZTE9 by paying ZTE9 an amount of RMB1.0 million (US$0.2 million) and all outstanding
balances have been offset. No IPTV business transaction in 2020 and 2021 and total amount due to ZTE9 for IPTV business was nil and nil as of December 31, 2020 and
2021, respectively. No borrowing lent to ZTE9 in 2020 and 2021 and total amount due from ZTE9 for outstanding loans was nil and nil as of December 31, 2020 and
2021, respectively.
Transaction with Mr. Jun Zhu
Mr. Jun Zhu, the chairman and chief executive officer, provided loans of nil and nil to the Group in 2020 and 2021, respectively. The Group has repaid a total of
RMB42.5 million and RMB6.4 million (US$1.0 million) for the years ended December 31, 2020 and 2021, respectively. The loans were interest-free and the outstanding
balance of RMB20.6 million and RMB14.1 million (US$2.2 million) remained as of December 31, 2020 and 2021, respectively.
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In May 2019, the issued and outstanding ordinary shares then held by Incsight, which is wholly owned by Mr. Jun Zhu, and the issued and outstanding ordinary shares
then held by Mr. Jun Zhu himself, were re-designated and re-classified as Class B ordinary shares. All other ordinary shares then issued and outstanding were re-
designated and re-classified as Class A ordinary shares. On the same date, the Company amended and restated then effective Amended and Restated Memorandum of
Association and Articles of Association in their entirety and adopted the Second Amended and Restated Memorandum and Articles of Association which reflect, among
other things, the changes to the capital structure of the Company. As a result of such changes, Mr. Jun Zhu holds the majority of the Company’s outstanding voting power
and the Company became a “controlled company” as defined under Nasdaq Stock Market Rules.
Transaction with Comtec
In June 2019, the Group entered into a share purchase agreement with Comtec Windpark Renewable (holdings) Co., Ltd. (“Comtec”), a wholly-owned subsidiary of
Comtec Solar Systems Group Limited (SEHK: 00712) (“Comtec Group”), an entity affiliated with Kwok Keung Chau at that time., Kwok Keung Chau is an independent
director of the Company. He resigned from Comtec Group in January 2020 so he is no longer an affiliate with Comtec. Pursuant to the share purchase agreement, the
Company has issued 3,444,882 Class A ordinary shares to purchase 9.9% equity interest in Zhenjiang Kexin, a lithium battery management system and power storage
system supplier.
20. (LOSS) INCOME PER SHARE
Loss per share is calculated as follows:
For the year
For the year
For the year
For the year
ended December
ended December
ended December
ended December
31, 2019
31, 2020
31, 2021
31, 2021
RMB
RMB
RMB
US$
(Note 3)
Numerator:
Net (loss) income attributable to ordinary shareholders before change in redeemable
noncontrolling interest
(177,795,168)
397,883,388
(411,234,755)
(64,531,707)
Change in redeemable noncontrolling interest
(12,827,598)
(1,190,122)
—
—
Net (loss) income attributable to ordinary shareholders
(190,622,766)
396,693,266
(411,234,755)
(64,531,707)
Denominator:
Denominator for basic and diluted (loss) income per share – weighted-average shares
outstanding
106,407,008
163,599,920
495,304,894
495,304,894
Net (loss) income attributable to holders of ordinary shares per share
- Basic and diluted
(1.79)
2.42
(0.83)
(0.13)
The Company had 13,213,978, 4,200,645 and 366,148,968 stock options, warrants and non-vested shares outstanding as of December 31, 2019, 2020 and 2021,
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.
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21. RESTRICTED NET ASSETS
Pursuant to laws applicable to entities incorporated in the PRC, the subsidiaries and the VIEs of the Group established in the PRC must make appropriations from after-
tax profit to non-distributable reserved funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a
staff bonus and welfare fund. Subject to certain cumulative limits, the general reserve fund requires annual appropriation of 10% of after tax profit (as determined under
accounting principles generally accepted in the PRC at each year-end) until the accumulative amount of such reserved fund reaches 50% of their registered capital; the
other fund appropriations are at the subsidiaries’ discretion. These reserve funds can only be used for specific purposes of enterprise expansion, and the staff bonus and
welfare are not distributable as cash dividends. The appropriation to these reserves by the Group’s PRC entities was nil for the years ended December 31, 2019, 2020 and
2021. The accumulated reserves as of December 31, 2021 were RMB7.3 million (US$1.1 million). In addition, due to restrictions on the distribution of registered capital
from the Company’s PRC subsidiaries, the PRC subsidiaries’ registered capital of RMB73.2 million (US$11.5 million) as of December 31, 2021, were considered
restricted. As a result of these PRC laws and regulations, as of December 31, 2021, approximately RMB65.9 million (US$10.4 million), were not available for
distribution to the Company by its PRC subsidiaries in the form of dividends, loans or advances.
22. NONCONTROLLING INTEREST
As of December 31, 2020, the Group’s noncontrolling interests mainly included equity interest in Red 5 and equity awards granted as compensation by the Group’s
subsidiaries. The following schedule shows the effects of changes in the ownership interest of The9 Limited in its subsidiaries on equity attributed to The9 Limited for
the years ended December 31, 2019, 2020 and 2021.
December 31,
December 31,
December 31,
December 31,
2019
2020
2021
2021
RMB
RMB
RMB
US$
(Note 3)
Net (loss) income attributable to The9 Limited
(177,795,168)
397,883,388
(13,015,392)
(2,042,399)
Transfers (to) from the noncontrolling interest:
Change in The9 Limited’s additional paid-in capital for adjustment on noncontrolling
interest as a result of issuance of common shares of Red 5 upon vesting of stock options
and restricted shares
—
—
—
—
Change from net (loss) income attributable to The9 Limited and transfers to noncontrolling
interests
(177,795,168)
397,883,388
(13,015,392)
(2,042,399)
23. REDEEMABLE NONCONTROLLING INTEREST
On December 31, 2014, the Group considered the redemption of the SBPS to be probable. 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. As the Group lost control of Red 5 and no longer consolidated of Red 5,
redeemable noncontrolling interest record as nil on December 31, 2021.
A reconciliation of redeemable noncontrolling interest is as follows:
For the year ended
For the year ended
For the year ended
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
Redeemable noncontrolling interest opening balance
349,046,548
349,046,548
54,773,020
Net loss attributable to redeemable noncontrolling interest
(1,190,122)
—
—
Change in redeemable noncontrolling interest
1,190,122
(349,046,548)
(54,773,020)
Redeemable noncontrolling interest ending balance
349,046,548
—
—
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24. DISPOSAL OF SUBSIDIARIES
On September 26, 2019, the Group entered into an agreement with Kapler Pte. Ltd. to sell three subsidiaries namely, The9 Computer, C9I Shanghai and Shanghai Kaie
for total consideration of RMB493.0 million (US$77.4 million). These subsidiaries hold the land use rights and office buildings located at Zhangjiang, Shanghai. The
transaction was completed on February 21, 2020 and the Group has recorded a gain of RMB391.8 million (US$61.5 million).
On September 9, 2020, the provisional liquidator of Asian Development made a winding-up order and the High Court of Hong Kong gazetted this order on September
18, 2020. The Official Receiver’s Office has appointed a liquidator to perform the work and duties to the winding-up of Asian Development, including the prosecution of
insolvency offences and disqualification of directors. Followed by the winding-up order issued by the court, the Group has lost control of Asian Development and
deconsolidated Asian Development as of the date of the court order. The obligation for the payment of pledged loan remained with Asian Development as it is a limited
liability company and the Group has recognized an amount of RMB83.7 million (US$13.1 million) to the gain on disposal of Asian Development.
In April 2010, the Group acquired a controlling interest in Red 5 Studios, Inc. (“Red 5”), an online game development studio based in the U.S. Thereafter till 2016, the
Group and Red 5 entered into several equity transactions with several third party investors and the Group’s equity holding to approximately 35%. Nevertheless, the
Group retained the control of the Board of Red 5 at that time. The performance of Red 5 was under expectation afterwards and has become an inactive company. In June
2021, the two directors of Red 5 appointed by the Group resigned from Red 5 and the Group issued a letter of renunciation to Red 5 confirming the Group had renounced
its right of business control of Red5 and confirmed the Group will not assign any new director to Red 5 in the future. Accordingly, the Group lost control of Red 5 and no
longer consolidated of Red 5 as of June 30, 2021. The Group recognized a net gain on deconsolidation of subsidiaries amounted to RMB 9.5 million (US$1.5 million) for
the year ended December 31, 2021.
a. Consideration received
The Company did not receive any consideration in the deconsolidation of Red5 Studio Inc.
b. Analysis of assets and liabilities over which the Company lost control on June 30, 2021:
As of Control Lost on June 30, 2021
Current assets
Cash and cash equivalents
RMB
7,581
Others
136,483
Current liabilities
Account payable
(34,501,797)
Advances from customers
(22,201,833)
Accrued expense
(3,206,952)
Others
(465,115)
Net liabilities deconsolidated
(60,231,633)
c. Gain on deconsolidation of subsidiary
Year Ended
December 31,2021
Fair value of consideration received
—
Fair value of retained investment
—
Carrying amount of Red5’s net liabilities deconsolidated
60,231,633
Less: Carrying amount of noncontrolling interest
(47,945,622)
Gain on deconsolidated of subsidiary
12,286,011
Company: The9 LTD
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In December 7, 2021, NBTC entered into a share purchase agreement with a third party 51miner Limited (“51miner”) to sell all its equity interest in Niulian Technology
(Shaoxing) Co. Ltd. (“Niulian”) to 51miner. Before the disposal, Niulian held certain BTC, FIL and XCH mining machines and mined these cryptocurrencies in China.
Since the regulatory risk of mining in China had been increasing, The9 decided to transfer those machines which can mine overseas to NBTC based on net book value.
Such transfer was completed before the disposal. Therefore as of the disposal date, Niulian’s assets only included approximately US$0.04M cash, US$4.3M receivable
from NBTC and US$2M FIL and XCH mining machines and mining related prepayments. Group has recorded a net gain of RMB 5.6 million (US$0.9 million) of and for
the year ended December 31, 2021.
25. COMMITMENTS AND CONTINGENCIES
25.1 Other operating commitments
In October 2016, the Group had raised RMB57.5 million (US$9.0 million), and the Group planned to raise an additional RMB100.0 million (US$15.7 million) until
CrossFire New Mobile Game is launched. Under this fundraising arrangement, the Group will share certain percentages of revenues from CrossFire New Mobile Game
to investors providing funding to the Group. The Group does not plan to finance the remaining RMB100.0 million (US$15.7 million) from the planned fundraising
arrangement. The Group is obligated to pay an amount of US$2.0 million within 30 days after commercial launch date of the game to Smilegate as minimum guarantee
for royalty. In April 2020, Inner Mongolia Culture Assets and Equity Exchange filed a civil claim against Wuxi Qudong and Shanghai IT based on the cooperation
agreement entered in September 2016. Inner Mongolia Culture Assets and Equity Exchange claims to request a refund of RMB57.5 million (US$9.0 million) which the
Group has previously raised to finance the early phase development of CrossFire New Mobile Game and the interest compensation on the fund raised amounting to
RMB4.6 million (US$0.7 million). On October 20, 2020, Intermediate Court of Changsha City, Hunan Province issued a decision to reject all claims against the Group.
As of the filing date of this report, Inner Mongolia Culture Assets and Equity Exchange did not appeal against the sentence of the court in the period granted and no
further claim filed by Inner Mongolia Culture Assets and Equity Exchange against the Group.
In June 2017, Shanghai IT entered into an investment agreement with the shareholders of Beijing Ti Knight where Shanghai IT will invest a total of RMB9.0 million
(US$1.4 million) in Beijing Ti Knight. As of December 31, 2021, Shanghai IT has invested RMB4.9 million (US$0.8 million) and has a remaining capital contribution
commitment amounting to RMB4.1 million (US$0.6 million). Shanghai IT’s purchase commitment amounting to RMB6.8 million (US$1.1 million) for the outsourcing
development agreement entered on October 9, 2016 with Beijing Ti Knight will be waived if Shanghai IT’s accumulated investment in Beijing Ti Knight is more than
RMB6.0 million (US$0.9 million). Hence, as of December 31, 2021, the Group has both a capital commitment and a purchase commitment amounting to RMB4.1
million (US$0.6 million) and RMB6.8 million (US$1.1 million), respectively, but the purchase commitment will be waived under the condition that accumulated
investment in Beijing Ti Knight by Shanghai IT is more than RMB6.0 million (US$0.9 million). As of December 31, 2021, the agreements have not been terminated but
the outsourcing development of the related game has been transferred to a third-party company.
In September 2020, the Group entered into a master cooperation and publishing agreement with Voodoo, a French game developer and publisher, to cooperate on the
publishing and operations of casual games in mainland China. Pursuant to the master cooperation and publishing agreement and amendment agreement entered in
December 2020, the Group obtained exclusive licenses of several games developed by Voodoo. Voodoo granted the Group an exclusive, sub-licensable license to test,
perform, market, promote, distribute, reproduce, modify, support and/or otherwise use or exploit such games directly or through authorized contractors in mainland China
for a maximum period of three years, commencing upon the upload and distribution of the underlying games on any platform. In consideration for the exclusive license
granted to the Group and as a minimum guarantee payment, the Group is to pay an aggregate amount of US$13.0 million in cash to Voodoo based on the agreed
timetable, subject to satisfaction of certain conditions related to delivery of games by Voodoo, including an upfront payment of US$3.0 million that the Group has paid in
September 2020. After the Group turned its business focus to blockchain business in 2021, such game development had been ceased.
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Shanghai Jiucheng Advertisement Co., Ltd. (“Jiucheng Advertisement”) was previously a subsidiary of the Company. In October 2016, the Group’s equity interest in
Jiucheng Advertisement was 44.5%. In December 2016, the Group entered into an agreement with third-party investors of Jiucheng Advertisement. According to the
agreement, the Group would repurchase an additional 19.11% equity interest in Jiucheng Advertisement for $2.6 million from those third-party investors if Jiucheng
Advertisement is not listed on the PRC’s National Equities Exchange and Quotations (“NEEQ”), commonly known as the New Third Board, before December 31, 2017.
In March 2017, Jiucheng Advertisement was renamed as Shanghai Big Data Cultures & Media Co., Ltd. (“Big Data”). In September 2017, Big Data listed its shares on
NEEQ. As Big Data has listed its shares on NEEQ and has fulfilled its obligation, the Group was relieved of its obligation to repurchase 19.11% equity interest in Big
Data from those third-party investors. After the listing, the Group holds a 44.46% equity interest in Big Data. In 2019, there was no change in the equity interest of Big
Data and the Group has recorded share of loss on Big Data amounting to US$0.4 million was recognized. In 2019, due to weaker than expected operating performance,
the investment in Big Data was fully impaired and an impairment loss of US$0.5 million was recorded for the year ended December 31, 2019. In October 2021, The9
wants to regain the control of Big Data since its NEEQ listing status may be useful in future. The9 paid $77K to acquire the additional ownership in Big Data from
44.46% to 51.80%. As of December 31,2021, the group has already paid RMB 1.3M, the Group plans to buy further shares from existing shareholders in the coming
mouths, according to the signed agreement, the Group still has purchase commitment amounting to RMB 1.0 million as of December 31,2021.
In March 2021, the Group’s wholly-owned subsidiary NBTC Limited signed a Bitcoin mining machine purchase agreement with Bitmain Technologies Limited. Pursuant
to the purchase agreement, the Company will purchase 24,000 Antminer S19j Bitcoin mining machines, which are scheduled to deliver starting from November 2021, for
a total consideration of US$82.8 million payable in installments according to the agreed time schedule. As of December 31,2021, the group has already paid US$53.8
million.
In August 2021, we formally stepped into the NFT business. NFTSTAR Singapore Pte. Ltd., our Singapore wholly owned subsidiary, launched a NFT trading and
community platform NFTSTAR. NFTSTAR is a NFT trading and community platform that provides users with purchase, trade, and interactive activities. NFTSTAR
features NFT collections created by global stars licensed IPs. In November 2021, we have entered into license agreements with international sports stars pursuant to
which they have, respectively, granted us license to use their likeness for production of NFTs. As of December 31,2021, the total sum paid under license agreements is
US$15.4 million, the Group still has payment commitment amounting to US$44.8 million as of December 31,2021.
25.2 Contingencies
In August 2014, Red 5 issued 27,438,952 Series B redeemable convertible preferred shares of Red 5 to a new investor, Oriental Pearl. Due to the stock exchange
transaction with L&A in 2016, a 37% share of the SBPS was owned by L&A as of December 31, 2019. Per Articles of Association of Red 5, major holders of SBPS, at
any time on or after April 1, 2017 (the “Redemption Election”), can require Red 5 to redeem all, but not less than all, of the outstanding shares of SBPS, as applicable, in
three equal annual installments. New Star, a wholly owned subsidiary of the Group, owns 39,766,589 Series A redeemable convertible preferred shares which have
similar terms with the Series B redeemable convertible preferred shares. The redemption value of SBPS was US$16.5 million for the first installment, US$18.1 million
for the second installment and US$19.9 million for the third installment. Since Red 5 is in a net liability position, the Group does not believe the preferred shareholders
will request such redemption. As of the issuance date of these consolidated financial statements, there was no such preferred shareholder requiring Red 5 to redeem the
preferred shares. In June 2021, the two directors of Red 5 assigned by New Star tendered their resignation as the directors of Red 5. Also, New Star submitted a letter of
renunciation to Red 5 to confirm that New Star will not assign new directors to Red 5 in the future and renounce its right of business control of Red 5. The Group
deconsolidated Red 5 from the Group in June 2021 accordingly.
Due to the Group’s failure to repay the convertible notes in a timely manner as stipulated in the previous deed of settlement and its amendments, in May 2020, Splendid
Days obtained an injunction order from the Court of First Instance of the Hong Kong Special Administrative Region prohibiting the Group from disposing its assets
worldwide up to the value of US$55.5 million and such injunction order was also registered in the High Court of the Republic of Singapore. In May 2020, Splendid Days
also commenced an arbitration proceeding in Hong Kong under the rules of the Hong Kong International Arbitration Centre against the Group. The Group entered into a
Settlement Deed with Splendid Days and other parties named therein to settle the Convertible Notes. The injunction order against the Group had been discharged. As of
December 31, 2021, the arbitration proceeding has not been terminated. In April 2022 the Group has negotiated and intends to sign another settlement deed pursuant to
which the Group agreed to pay Splendid Days and a third-party total of approximately USD 8.6 million in order to settle outstanding claims under the Convertible Notes.
The Group recorded other payables for such estimated settlement amounts for RMB 54.7 million (US$ 8.6 million) for the year ended December 31, 2021. Upon the
satisfaction of certain conditions set forth in the foregoing settlement deed, the arbitration proceeding will be terminated.
Company: The9 LTD
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26. SEGMENT REPORTING
The Group operates in one segment whose business is Cryptocurrency mining revenue, 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 Greater China (including PRC, Taiwan, Hong Kong and Macau) and other areas for the years ended
December 31, 2019, 2020 and 2021.
The following geographic area information includes net revenues based on location of players for the years ended December 31, 2019, 2020 and 2021:
2019
2020
2021
2021
RMB
RMB
RMB
US$
(Note 3)
Greater China
182,107
625,488
1,278,918
200,690
Other areas
159,388
—
134,596,222
21,121,084
Total
341,495
625,488
135,875,140
21,321,774
The majority of the Group’s assets is located in other areas.
27. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange
Commission. Based on our evaluation, no other event has occurred requiring adjustment or disclosure in the notes to the consolidated financial statements.
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ADDITIONAL FINANCIAL INFORMATION OF PARENT COMPANY
FINANCIAL STATEMENTS SCHEDULE I
THE9 LIMITED
FINANCIAL INFORMATION OF PARENT COMPANY
F-56
PARENT COMPANY CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021
2019
2020
2021
2021
RMB
RMB
RMB
US$
Operating expenses:
General and administrative
(68,165,230)
(87,638,664)
(186,462,351)
(29,260,012)
Total operating expenses
(68,165,230)
(87,638,664)
(186,462,351)
(29,260,012)
Loss from operations
(68,165,230)
(87,638,664)
(186,462,351)
(29,260,012)
Impairment on equity investment
—
(1,172,755)
(7,599,505)
(1,192,528)
Gain on other investments
—
—
22,743,763
3,568,993
Interest expenses
(33,154,189)
(2,923,055)
(109,175,494)
(17,132,017)
Fair value change on warrants liability
1,292,243
37,851
-
-
Gain from change in fair value of convertible feature derivative liability
—
—
62,246,860
9,767,891
Gain on extinguishment of convertible notes
—
56,755,902
-
-
Gain on waiver of interest-free loan
—
35,397,500
-
-
Foreign exchange gain (loss)
(1,648,652)
29,578,454
(2,457,272)
(385,600)
Other expenses, net
(1,636,394)
(40,059,304)
(54,703,506)
(8,584,174)
Loss before income tax expense and share of loss in equity method investment
(103,312,222)
(10,024,071)
(275,407,505)
(43,217,447)
Share of loss in equity method investment
—
(2,165,935)
(1,725,152)
(270,714)
Equity in (loss) income of subsidiaries and VIEs
(74,482,946)
410,073,394
(134,102,098)
(21,043,546)
Net (loss) income
(177,795,168)
397,883,388
(411,234,755)
(64,531,707)
Other comprehensive income (loss), net of tax:
Currency translation adjustments
5,426,604
(12,900,251)
3,984,443
625,246
Total comprehensive (loss) income
(172,368,564)
384,983,137
(407,250,312)
(63,906,461)
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ADDITIONAL FINANCIAL INFORMATION OF PARENT COMPANY
FINANCIAL STATEMENTS SCHEDULE I
THE9 LIMITED
FINANCIAL INFORMATION OF PARENT COMPANY
F-57
PARENT COMPANY CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2020 AND 2021
December 31,
December 31,
December 31,
2020
2021
2021
RMB
RMB
US$
(Note 3)
ASSETS
Current assets:
Cash and cash equivalents
8,545,918
12,243,809
1,921,321
Prepayments and other current assets, net
4,090,219
56,226
8,823
Amounts due from intercompany
1,008,125,860
2,358,774,226
370,143,148
Total current assets
1,020,761,997
2,371,074,261
372,073,292
Investments
44,452,310
6,975,537
Investments in subsidiaries and VIEs
(1,295,612,695)
(1,420,365,177)
(222,886,291)
Total assets
(274,850,698)
995,161,394
156,162,538
LIABILITIES
Current liabilities:
Accrued expenses and other current liabilities
11,012,592
61,326,625
9,623,486
Amounts due to intercompany
—
12,689,811
1,991,308
Warrants
1,854,957
51,825,629
8,132,572
Bond payable
—
92,848,377
14,569,936
Total current liabilities
12,867,549
218,690,442
34,317,302
Total liabilities
12,867,549
218,690,442
34,317,302
SHAREHODERS’ EQUITY (DEFICIT)
Class A ordinary shares
17,197,060
45,233,784
7,098,168
Class B ordinary shares
900,741
943,789
148,101
Additional paid-in capital
2,695,763,016
4,139,122,755
649,518,682
Statutory reserves
7,326,560
7,326,560
1,149,697
Accumulated other comprehensive loss
(16,678,203)
(12,693,760)
(1,991,928)
Accumulated deficit
(2,992,227,421)
(3,403,462,176)
(534,077,484)
Total shareholders’ equity (deficit)
(287,718,247)
776,470,952
121,845,236
Total liabilities and shareholders’ equity (deficit)
(274,850,698)
995,161,394
156,162,538
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ADDITIONAL FINANCIAL INFORMATION OF PARENT COMPANY
FINANCIAL STATEMENTS SCHEDULE I
THE9 LIMITED
FINANCIAL INFORMATION OF PARENT COMPANY
F-58
PARENT COMPANY CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2019 2020 AND 2021
2019
2020
2021
2021
RMB
RMB
RMB
US$
(Note 3)
Cash flows from operating activities:
Net (loss) income
(177,795,168)
397,883,388
(411,234,755)
(64,531,707)
Adjustments for:
Share-based compensation expenses
21,705,240
55,056,426
—
—
Employee share-based compensation expense
—
—
150,166,481
23,564,398
Fair value change on warrants liability
(1,292,244)
(37,851)
—
—
Interest expenses
—
—
120,626,467
18,928,925
Amortization of discount and interest on convertible notes
33,154,191
2,923,316
—
—
Foreign exchange (gain) loss
1,648,652
(29,578,454)
4,465,094
700,671
Equity in loss (income) of subsidiaries and VIEs
74,482,946
(410,073,394)
108,608,497
17,043,043
Consulting fees paid by issuance of shares
35,091,686
6,781,815
—
—
Gain from change in fair value of conversion feature derivative liability
—
—
(62,246,860)
(9,767,891)
Gain on extinguishment of convertible notes
—
(56,755,902)
(2,296,722)
(360,406)
Gain on waiver of interest-free loan
—
(34,881,000)
—
—
Payment of issuance cost by issuance of shares
—
455,658
—
—
Changes in operating assets and liabilities:
Change in prepayments and other current assets
(1,894)
(4,026,346)
4,033,993
633,022
Change in amounts due from intercompany
(28,060,447)
349,361,587
(1,192,553,035)
(187,137,594)
Change in accrued expenses and other current liabilities
6,329,916
(566,162)
49,376,705
7,748,282
Increase/(Decrease) in interest payable
—
—
937,328
147,087
Net cash (used in) provided by operating activities
(34,737,122)
276,543,081
(1,230,116,807)
(193,032,170)
Cash flows from financing activities:
Proceeds from the issuance of ordinary shares and warrants
—
47,430,195
64,471,143
10,116,929
Proceeds from the issuance of convertible note
—
3,358,369
—
—
Proceeds from other loans
34,881,000
—
—
—
ADS issuance fee
—
—
(3,720,691)
(583,858)
New issued stock to investors
—
—
1,011,476,118
158,722,675
Proceeds from the issuance of convertible note
—
—
161,588,128
25,356,703
Repayments of convertible notes
—
(318,929,623)
—
—
Net cash provided by (used in) financing activities
34,881,000
(268,141,059)
1,233,814,698
193,612,449
Net change in cash and cash equivalents
143,878
8,402,022
3,697,891
580,279
Cash and cash equivalents, beginning of year
18
143,896
8,545,918
1,341,042
Cash and cash equivalents, end of year
143,896
8,545,918
12,243,809
1,921,321
Supplement disclosure of cash flow information:
Interest paid
—
36,310,455
—
—
Company: The9 LTD
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ADDITIONAL FINANCIAL INFORMATION OF PARENT COMPANY
FINANCIAL STATEMENTS SCHEDULE I
THE9 LIMITED
FINANCIAL INFORMATION OF PARENT COMPANY
F-59
NOTES TO SCHEDULE I
1)
Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and 5-04(c) of Regulation S-X, which require condensed financial information as to the
financial position, changes in financial position and results of operations of a parent company as of the same dates and for the same periods for which audited
consolidated financial statements have been presented when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of
the end of the most recently completed fiscal year.
2)
As disclosed in Note 1 to the consolidated financial statements, The9 Limited (the “Company”) was incorporated in December 22, 1999 in the Cayman Islands to be
the holding company of the Group targeting fast-growing technology businesses. The Group is transitioning from an online game operation to a cryptocurrencies
mining business.
3)
The condensed financial information has been prepared using the same accounting policies as set out in the consolidated financial statements except that the equity
method has been used to account for investments in its subsidiaries and VIEs. For the parent company, the Company records its investments in subsidiaries and VIE
under the equity method of accounting as prescribed in ASC 323, Investments-Equity Method and Joint Ventures. Such investments are presented on the Condensed
Balance Sheets as “Investment in subsidiaries and VIEs” and the subsidiaries and VIEs’ (loss) income as “Equity in (loss) income of subsidiaries and VIEs” on the
Condensed Statements of Comprehensive (Loss) Income. Ordinarily under the equity, an investor in an equity method investee would cease to recognize its share of
the losses of an investee once the carrying value of the investment has been reduced to nil absent an undertaking by the investor to provide continuing support and
fund losses. For the purpose of this Schedule I, the parent company has continued to reflect its share, based on its proportionate interest, of the losses of subsidiaries
and VIE regardless of the carrying value of the investment even though the parent company is not obligated to provide continuing support or fund losses.
4)
As of December 31, 2020 and 2021, there were no material contingencies, significant provisions of long-term obligations, mandatory dividend or redemption
requirements of redeemable stocks or guarantees of the Company. No dividend was paid by the Company’s subsidiaries to the Company in 2019, 2020 and 2021.
5)
Translations of balances in the additional financial information of The9 Limited (“Parent Company”) — Financial Statements Schedule I from RMB into US$ as of
December 31, 2021 and for the year ended December 31, 2021 are solely for the convenience of the readers and were calculated at the rate of US$1.00 =
RMB6.3726, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board on December 31, 2021. No representation is
made that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2021, or at any other rate.
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Exhibit 4.22
Shanghai Jiucheng Information Technology Co., Ltd. Equity
Transfer Agreement
This Agreement is entered into by the parties below in the meeting room on December 10, 2021.
Transferor: Lin Zhimin (hereinafter referred to as Party A) ID number: * * *
Transferee: Wang Qi (hereinafter referred to as Party B) ID number: * * *
Shanghai Jiucheng Information Technology Co., Ltd. (hereinafter referred to as the “Target Company”) has a registered capital of RMB23 million and Lin Zhimin
contributed RMB8,280,000, accounting for 36%. According to relevant laws and regulations, after friendly negotiation between the parties to this agreement, the
following terms have been reached:
Article 1 Equity Transfer and Price
1.
Party A transfers the 36% equity of the Target Company to Party B at a price of RMB0.00.
2.
Other rights attached to the equity are transferred with the transfer of the equity.
Article 2 Commitments and Guarantees
Party A guarantees that the equity transferred to Party B in Article 1 is legally owned by Party A, and Party A has full and effective disposal rights. Party A further
guarantees that the equity transferred does not have any pledge or other security rights and is not subject to recourse by any third party.
Article 3 Liability for Breach of Contract
Party A and Party B breach the contract, they will pay the non-breaching party a penalty of RMB10,000.00.
Article 4 Jurisdiction
This agreement is bound by the applicable laws of the People’s Republic of China.
Any disputes arising out of or in connection with this agreement shall be settled through friendly negotiation by both parties. If the negotiation fails, it shall be submitted
to the Shanghai Arbitration Commission for arbitration.
Article 5 Others
1.
This agreement is executed in four copies, each party shall hold one copy, and the Target Company shall hold two copies for registry with the authority.
2.
This agreement will take effect upon signatures of both parties.
( No text below )
(signature page is left blank intentionally)
Transferor Signature
/s/ LIN ZHIMIN
Transferee Signature
/s/ WANG QI
December 10, 2021
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Exhibit 4.23
December 10, 2021
Equity Pledge Agreement
between
Wang Qi
and
Huiling Computer Technology Consulting (Shanghai) Co.,
Ltd.
Regarding
Shanghai IT Technology Co., Ltd.
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1
Equity Pledge Agreement
This Equity Pledge Agreement (hereinafter this “Agreement”) is entered into in Shanghai, People’s Republic of China (hereinafter “PRC”) as of December 10, 2021
by and between the following Parties:
Wang Qi, a PRC citizen, with his identity card number of * * * and his domicile address at * * * (hereinafter “Pledgor”);
Huiling Computer Technology Consulting (Shanghai) Co., Ltd., a company with limited liability established upon registration in Shanghai of the PRC with its
registered address at Block 8, Chuansha Road 1098, Pudong New District, Shanghai, PRC (hereinafter “Pledgee”).
(Any single Party hereinafter referred to as the “Party” and all Parties collectively - the “Parties”)
Whereas：
(1) Pledgor is the enrolled shareholder of Shanghai Jiucheng Infomation Technology Co., Ltd. (a company with limited liability established and validly existing under
the PRC Law, hereinafter “The Company”), legally holding 64% equity of the Company (hereinafter “Company Equity”), all contributions to and equity
proportion in the registered capital of the Company as of the date of this Agreement are set out in Appendix I hereto.
(2) Parties to this Agreement entered into the Equity Transfer Option Agreement dated May 1st, 2019 (hereinafter the “Equity Transfer Option Agreement”), pursuant
to that agreement Pledgor shall, to the extent permitted by the PRC Law, transfer at the request of Pledgee all or part of his equity interests in Company to Pledgee
and/or any other entities or persons designated by Pledgee.
(3) Parties to this Agreement entered into Shareholders’ Proxy Agreement dated May 1st 2019 (hereinafter the “Proxy Agreement”), Pursuant to that agreement Pledgor
shall irrevocably entrust person appointed by the Pledgee in a due course with full power to exercise on this behalf all of his shareholders’ voting rights in the
Company.
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(4) Pursuant to the Loan Agreement dated May 1st, 2019 between Pledgee and Pledgors (hereinafter the “Loan Agreement”), Pledgee has already provided Pledgor
with a loan totaling in aggregate the amount of eight million two hundred and eighty thousand Renminbi (RMB8,280,000), which shall be repaid, at the sole
discretion of Pledgee, by Pledgor promptly at the written repayment request by Pledgee to Pledgor.
(5) As the guarantee by Pledgor for his performance of the Contract Obligations (as defined below) and repayment of the Guaranteed Liabilities (as defined below),
Pledgor agrees to pledge all of his Company Equity to Pledgee, and grant herewith to Pledgee the right of first priority in the pledging.
The Parties hereby 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:
“Contract Obligations” shall mean all contractual obligations of Pledgor under this Agreement, the Loan Agreement, Equity Transfer Option Agreement and Proxy
Agreement; all contractual obligations of the Company under the Proxy Agreement.
“Guaranteed Liabilities” shall mean all direct, indirect and derivative losses and loss of foreseeable profits suffered by Pledgee due to any Breaching Event (as defined
below) of Pledgor and/or the Company, the amount of which shall be determined by Pledgee in its absolute sole discretion, to which Pledgor shall be subject; and all fees
incurred by Pledgee for its enforcement of the Contractual Obligations of Pledgor and/or the Company.
“Transaction Agreements” shall mean the Loan Agreement, Equity Transfer Option Agreement and Proxy Agreement.
“Breaching Event” shall mean any breach by Pledgor of his Contractual Obligations under the Loan Agreement, Equity Transfer Option Agreement, Proxy Agreement
and/or this Agreement, and any breach by the Company of its Contractual Obligations under the Proxy Agreement.
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“Pledged Property” shall mean all of Pledgor’s Company Equity legally owned by Pledgor as of the effectiveness hereof, which Pledgor shall pledge to Pledgee
according to provisions hereof as his and the Company’s guarantee for the performance of their Contractual Obligations, with the particular pledged equity shares of
Pledgor to be seen in Appendix I hereto, and the increased contribution amounts and interests as according to 2.6 and 2.7 hereof.
“PRC Law” shall mean the then valid laws, administrative regulations, administrative rules, local regulations, judicial interpretations and other binding regulatory
documents of the People’s Republic of China.
1.2
The references to any PRC Law 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 or
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.
Article 2 – Equity Pledge
2.1
Pledgor hereby agrees to pledge the Pledged Property, which he legally own and have the right to dispose of, to Pledgee according to the provisions hereof as the
repayment guarantee for the Guaranteed Liabilities.
2.2
Pledgor hereby undertakes that he will be responsible for, on the date hereof, recording the arrangement of the equity pledge hereunder (hereinafter the “Equity
Pledge”) on the shareholder register of the Company. Both Parties shall make every effort to apply to the company’s industrial and commercial registration
authority for the registration of Equity Pledge under this Agreement as soon as possible after the signing of this Agreement.
2.3
During the valid term of this Agreement, except for the willful material negligence of Pledgee or such negligence is directly related as cause/result to the
consequence, Pledgee shall not be liable in any way to, nor shall Pledgor has any
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right to claim in any way or propose any demands on Pledgee, in respect of the reduction in value of the Pledged Property.
2.4
Subject to compliance with the provision of 2.3 above, in case of any possibility of obvious reduction in value of the Pledged Property which is sufficient to
jeopardize Pledgee’s rights, Pledgee may demand Pledgor to provide corresponding guarantee as supplements. Where Pledgor fails to do so, Pledgee may at any
time auction or sell off the Pledged Property on behalf of Pledgor, and discuss with 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 Pledgee is domiciled (any fees incurred in relation thereto shall
be borne by Pledgors).
2.5
In case of any Breaching Event, Pledgee shall have the right to dispose of the Pledged Property in the way set out in Article 4 hereof.
2.6
Only upon prior consent by Pledgee shall Pledgor be able to increase his capital contribution to the Company. Pledgor’s increased capital amount in the
Company due to increased capital contribution to the Company shall also be part of the Pledged Property.
2.7
Only upon prior consent by Pledgee shall Pledgor be able to receive dividends from the Pledged Property. The dividends received by Pledgor from the Pledged
Property shall be deposited into Pledgee’s bank account designated by Pledgee, to be under the supervision of Pledgee and used as the Pledged Property to repay
in priority the Guaranteed Liabilities.
2.8
Each of Pledgors agrees to bear joint and several liabilities to Pledgee for any Breaching Event caused by the other Pledgor. Pledgee shall have the right, upon
occurrence of the Breaching Event, dispose of any Pledged Property of any of Pledgors in accordance with the provisions hereof.
Article 3 – Release of Pledge
3.1
Upon full and complete performance by Pledgor and the Company of all Contractual Obligations and cleared all Guaranteed Liabilities, Pledgee shall, at the
request of Pledgor, release the pledge hereunder, and shall cooperate with
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Pledgor to handle the formalities to cancel the record of the Equity Pledge in the shareholder register of the Company, with the reasonable fees to be incurred in
connection with the release of the pledge to be borne by Pledgee.
Article 4 – Disposal of the Pledged Property
4.1
Pledgor and Pledgee agree hereby that, in case of any Breaching Event, Pledgee shall have the right to exercise, upon giving written notice to Pledgors, all of its
remedies and powers at breaching enjoyable by it under the PRC Law, 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. Pledgee shall not be liable for any loss as the result of its reasonable exercise of such
rights and powers.
4.2
Pledgee shall have the right to designate in writing its legal consultant or other agents to exercise on its behalf any and all rights and powers set out above, and
Pledgor shall not oppose thereto.
4.3
The reasonable costs incurred by Pledgee in connection with its exercise of any and all rights and powers set out above can be covered by Pledgee by its right to
deduct such actual costs from the proceeds it acquires from the exercise of the rights and powers.
4.4
The proceeds Pledgee acquires from the exercise of its rights and powers shall be used in the priority order as follows:
-
First, to pay any cost incurred in connection with the disposal of the Pledged Property and the exercise by Pledgee of its rights and powers (including
remuneration paid to its legal consultant and agents);
-
Second, to pay any taxes payable for the disposal of the Pledged Property; and
-
Third, to repay Pledgee for the Guaranteed Liabilities.
In case of any balance after payment of the above amounts, Pledgee shall return the same to Pledgor or other persons entitled thereto according to the relevant
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laws and rules, or submit the same to the local notary institution where Pledgee is domiciled (any fees incurred in relation thereto shall be borne by Pledgor).
4.5
Pledgee shall have the option to exercise, simultaneously or in certain sequence, any of the remedies at breaching it is entitled to; Pledgee is not obliged to
exercise other remedies at breaching before its exercise of the right to the auctions or sale-offs of the Pledged Property hereunder.
Article 5 – Fees and Costs
5.1
All actual costs in connection with the establishment of the Equity Pledge hereunder, including but not limited to stamp duties, any other taxes, all legal fees,
etc. shall be borne by Pledgor and Pledgee respectively.
Article 6 – Continuity and No Waive
6.1
The Equity Pledge hereunder is a continuous guarantee, with its validity to continue until the full performance of the Contractual Obligations or the full
repayment of the Guaranteed Liabilities. Neither exemption or grace period granted by Pledgee to Pledgor in respect of the breach, nor delay by Pledgee in
exercising any of its rights under the Transaction Agreements and this Agreement shall affect the rights of Pledgee under this Agreement, relevant PRC Law and
the Transaction Agreements, the rights of Pledgee to demand at any time thereafter the strict performance of the Transaction Agreements and this Agreement by
Pledgors or the rights Pledgee may be entitled to due to subsequent breach by Pledgor of the Transaction Agreements and/or this Agreement.
Article 7 – Representations and Warranties
Each of Pledgors hereby jointly and severally represents and warrants to Pledgee as follows:
7.1
Pledgors are PRC citizens with full capacity, with legal right and capacity to execute this Agreement and to bear legal obligations hereunder.
7.2
All reports, documents and information provided by Pledgors to Pledgee prior to the effectiveness of this Agreement concerning Pledgors and all issues required
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by this Agreement are true and valid in all material aspects as of the execution hereof.
7.3
All reports, documents and information provided by Pledgors to Pledgee after the effectiveness of this Agreement concerning Pledgors and all issues required by
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, Pledgors are the sole legal owner of the Pledged Property, with no existing dispute whatever concerning the
ownership of the Pledged Property. Pledgors have the right to dispose of the Pledged Property or any part thereof.
7.5
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.
7.6
The Pledged Property is capable of being pledged or transferred according to the laws, and Pledgors have the full right and power to pledge the Pledged
Property to Pledgee according to this Agreement.
7.7
This Agreement constitutes the legal, valid and binding obligations on Pledgors when it is duly executed by Pledgors.
7.8
Any consent, permission, waive 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 provision 2.2 hereof), and will be fully effective during the valid term of this
Agreement.
7.9
The execution and performance by Pledgors of this Agreement are not in violation of or conflict with any laws applicable to them, or any agreement to which
they are a party or which has binding effect on their assets, any court judgment, any arbitration award, or any administration authority decision.
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7.10
The pledge hereunder constitutes the encumbrance of first order in priority on the Pledged Property.
7.11
All taxes and fees payable in connection with acquisition of the Pledged Property have already been paid in full amount by Pledgors.
7.12
There is no pending or, to the knowledge of Pledgors, threatened litigation, legal process or demand by any court or any arbitral tribunal against Pledgors, or
their property, or the Pledged Property, nor is there any pending or, to the knowledge of Pledgors, threatened litigation, legal process or demand by any
government authority or any administration authority against Pledgors, or their property, or the Pledged Property, which is of material or detrimental effect on
the economic status of Pledgors or their capability to perform the obligations hereunder and the Guaranteed Liabilities.
7.13
Pledgors hereby warrant to Pledgee that the above representations and warranties will remain true and correct at any time and under any circumstance before the
Contractual Obligations are fully performed or the Guaranteed Liabilities are fully repaid, and will be fully complied with.
Article 8 – Undertakings by Pledgors
Each of Pledgors hereby jointly and severally undertakes to Pledgee as follows:
8.1
In case that the value of the Pledged Property is detrimentally affected due to any cause not attributable to Pledgee, Pledgors shall at the request of Pledgee
provide Pledgee with further guarantee in the way and on the terms acceptable to Pledgee, as to supplement or replace the Pledged Property fully.
8.2
Without the prior written consent by Pledgee, Pledgors shall not establish or permit to establish any new pledge or any other encumbrance on the Pledged
Property; pledge or any other encumbrance on the whole or part of the Pledged Property established without the prior written consent by Pledgee shall be null
and void.
8.3
Without first giving written notice to Pledgee and having Pledgee’s prior written
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consent, Pledgors shall not transfer the Pledged Property, and any attempt by Pledgors to transfer the Pledged Property shall be null and void. The proceeds from
transfer of the Pledged Property by Pledgors shall be used to repay to Pledgee in advance the Guaranteed Liabilities or submit the same to the third party agreed
with Pledgee.
8.4
In case of any litigation, arbitration or other demand which may affect detrimentally the interest of Pledgors or Pledgee under the Transaction Agreements and
hereunder or the Pledged Property, Pledgors undertake to notify Pledgee thereof in writing as soon as possible and promptly and shall take, at the reasonable
request of Pledgee, all necessary measures to ensure the pledge interest of Pledgee in the Pledged Property.
8.5
Pledgors shall not carry on or permit any act or action which may affect detrimentally the interest of Pledgee under the Transaction Agreements and hereunder
or the Pledged Property.
8.6
Pledgors shall provide, during the first month of each calendar quarter, Pledgee with the financial statement of Shanghai IT for the preceding calendar quarter,
including but not limited to its balance sheet, profit statement and cash flow statement.
8.7
Upon signing this Agreement, Pledgors will do their utmost and take all necessary measures to register Equity Pledge under this Agreement within the relevant
administrative departments for Industry and Commerce as soon as possible, besides Pledgors guarantee that they shall, at the reasonable request of Pledgee, take
all necessary measures and execute all necessary documents (including but not limited to supplementary agreement hereof) as to ensure the pledge interest of
Pledgee in the Pledged Property and the exercise and realization of the rights thereof.
8.8
In case of assignment of any Pledged Property as the result of the exercise of the right to the pledge hereunder, Pledgors guarantee that they will take all
necessary measures to realize such assignment.
8.9
The Pledgors shall ensure that the convening procedures, voting methods and
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contents of the meetings of shareholders and board of directors convened for the purpose of approving this Agreement, pledge right grant and pledge right
exercise do not violate laws, administrative regulations or articles of association.
Article 9 – Change of Circumstances
9.1
As supplement and subject to compliance with other terms of the Transaction Agreements and this Agreement, in case that at any time the promulgation or
change of any PRC Law, regulations or rules, or change in interpretation or application of such laws, regulations and rules, or the change of the relevant
registration procedures enables 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, Pledgors shall, at the written direction of Pledgee and in accordance with the
reasonable request of Pledgee, promptly take actions and/or execute any agreement or other document, in order to:
(1)
keep this Agreement remain in effect;
(2)
facilitate the disposal of the Pledged Property in the way provided herein; and/or
(3)
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)
this Agreement is duly executed by each of the Parties; and
(2)
the Equity Pledge hereunder has been legally recorded in the shareholders’ register of the Company.
Pledgors shall provide the registration certification of the Equity Pledge being recorded in the shareholders’ register as mentioned above to Pledgee in a way
satisfactory to Pledgee.
10.2
This Agreement shall have its valid term until the full performance of the
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Contractual Obligations or the full repayment of the Guaranteed Liabilities.
Article 11 - Notice
11.1
Any notice, request, demand and other correspondences made as required by or in accordance with this Agreement shall be made in writing and delivered to the
relevant Party.
11.2
The abovementioned notice or other correspondences shall be deemed to have been delivered when it is transmitted if transmitted by facsimile or telex; it shall
be deemed to have been delivered when it is delivered if delivered in person; it shall be deemed to have been delivered five (5) days after posting the same if
posted by mail.
Article 12 - Miscellaneous
12.1
Pledgee may, upon notice to Pledgors but not necessarily with Pledgors’ consent, assign Pledgee’s rights and/or obligations hereunder to any third party;
provided that Pledgors may not, without Pledgee’s prior written consent, assign Pledgors’ rights, obligations and/or liabilities hereunder to any third party.
Successors or permitted assignees (if any) of Pledgors shall continue to perform the obligations of Pledgors under this Agreement.
12.2
The amount of the Guaranteed Liabilities decided by Pledgee at its sole discretion in its exercise of the right of pledge to the Pledged Property according to this
Agreement shall be the conclusive evidence of the Guaranteed Liabilities hereunder.
12.3
This Agreement shall be prepared in the Chinese language in four (4) original copies, with each involved Party holding one (1) copy hereof. One (1) original
copy shall be given out to administration for industry and commerce for Equity Pledge registration purpose.
12.4
The formation, validity, execution, amendment, interpretation and termination of this Agreement shall be subject to the PRC Laws.
12.5
Any disputes arising hereunder and in connection herewith shall be settled
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through consultations among the Parties, and 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 all Parties.
12.6
Any rights, powers and remedies empowered to any Party by any provisions herein shall not preclude any other rights, powers and remedies enjoyed by such
Party in accordance with laws and other provisions under this Agreement, and the exercise of its rights, powers and remedies by a Party shall not preclude its
exercise of its other rights, powers and remedies by such Party.
12.7
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 lead to a waiver of such rights, and the waiver of any single or partial exercise of the Party’s Rights shall not preclude such Party from exercising such
rights in any other way and exercising the remaining part of the Party’s Rights.
12.8
The titles of the Articles contained herein shall be for reference only, and in no circumstances shall such titles be used in 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 articles herein become
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 writing. Except for assignment by Pledgee of its rights hereunder according to Article 12.1
of this Agreement, the amendments or supplements to this Agreement shall take effect only when properly signed by the Parties to this Agreement.
12.11
This Agreement shall be binding on the legal successors of the Parties.
12.12
At the time of execution hereof, each of Pledgors shall sign respectively a power
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of attorney (hereinafter the “Power of Attorney”) to authorize any person designated by Pledgee to sign on their behalf according to this Agreement any and all
legal documents necessary for the exercise by Pledgee of its rights hereunder. Such Power of Attorney shall be delivered to Pledgee to keep in custody and,
when necessary, Pledgee may at any time submit the Power of Attorney to the relevant government authority.
[The following is intended to be blank]
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IN WITNESS HEREOF, the Parties have caused this Agreement to be executed as of the date and in the place first here above mentioned.
Wang Qi
Signature:
/s/ WANG QI
Huiling Computer Technology Consulting (Shanghai) Co., Ltd.
(Company chop)
Signature:
/s/ Huiling Computer Technology Consulting (Shanghai) Co., Ltd.
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Appendix I:
Basic Information of the Company
Company Name:
Shanghai Jiucheng Information Technology Co., Ltd.
Registered Address:
Building 3, Bibo Road 690, Zhangjiang High-Tech Park,
Shanghai, PRC
Registered Capital:
RMB 23,000,000
Legal Representative:
[Yang Hui]
Equity Structure:
Shareholder’s
Name
Contribution (RMB)
Equity Share
Ji Wei
RMB14,420,000
64%
Wang Qi
RMB8,280,000
36%
Total
RMB 23,000,000
100%
Financial Year
Calendar January 1st till December 31
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Appendix II:
Format of the Power of Attorney
I, Wang Qi, hereby irrevocably entrust , with his/her identity card number , to be my authorized trustee to sign on my behalf all legal documents
necessary or desirous for Huiling Computer Technology Consulting (Shanghai) Co., Ltd. to exercise its rights under the Equity Pledge Agreement Regarding Shanghai
Jiucheng Information Technology Co., Ltd. between it and myself.
Signature:
/s/ WANG QI
Date:
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Exhibit 4.24
Transfer Agreement of Contractual Interests
This Agreement is signed in Hongkou District, Shanghai on December 10, 2021 by the following parties:
Lin Zhimin, ID number: * * * , address: * * * (hereinafter referred to as the “Transferor”)
Wang Qi, ID number: * * * , address: * * * (hereinafter referred to as the “Transferee”)
Ji Wei, ID number: * * * , address: * * *
Huiling Computer Technology Consulting (Shanghai) Co., Ltd., registered address: Building No.8, 1098 Chuansha Road, Pudong New Area, Shanghai (hereinafter
referred to as “Huiling”).
Shanghai Jiucheng Information Technology Co., Ltd., registered address: Room 1201-Z16, Building A, Building 1, No. 3000 Longdong Avenue, China (Shanghai) Pilot
Free Trade Zone (hereinafter referred to as the “Company”)
RICITALS
WHEREAS, the Transferor and Huiling entered into a “Loan Agreement” (hereinafter referred to as the “Loan Agreement”) on May 1, 2019, according to which Huiling
has provided the Transferor a loan with total amount of RMB8.28 million.
WHEREAS, according to an Exclusive Equity Transfer Option Agreement (hereinafter referred to as the “Option Agreement”) entered into between the Transferor and
Huiling on May 1, 2019, the Transferor shall, in accordance with applicable Chinese law and upon request by Huiling, transfer all or part of his equity in the company to
Huiling and/or any other entity or individual designated by Huiling.
WHEREAS, according to a “Shareholders Proxy Agreement” (hereinafter referred to as the “Proxy Agreement”) entered into by the Transferor and Huiling on May 1,
2019, the Transferor irrevocably and solely entrusts Huiling with exercising all of his voting rights in the company.
WHEREAS, on May 1, 2019, the Transferor and Huiling signed an Equity Pledge Agreement (hereinafter referred to as the “Pledge Agreement”), according to which the
Transferor pledged 36% of the company’s equity to Huiling as a guaranty for his performance of contractual obligations under the “Loan Agreement”, “ Option
Agreement”, “Proxy Agreement” and other agreements, and gave Huiling the first repayment pledge right.
WHEREAS, on December 10,2021, the Transferor and the Transferee signed an “Equity Transfer Agreement” (hereinafter referred to as the “Transfer Agreement”,
according to which the Transferee received from the Transferor 36% equity of the company (hereinafter referred to as “Equity Transfer”).
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WHEREAS, after the Equity Transfer, the Transferee holds 36% of the company’s equity (the rest 64% is held by Ji Wei), and the Transferor no longer holds any equity
in the company. The Transferor is in the process of transferring the company’s equity to the Transferee. At the same time, all rights and obligations (hereinafter referred
to as the “Original Agreements”) in the “Loan Agreement”, “Option Agreement”, “Proxy Agreement” and “Pledge Agreement” (hereinafter collectively referred to as the
“Original Agreementss”) were transferred to the Transferee. Huiling, as the counterparty under the Original Agreements, agrees to the transfer of such rights and
interests, Ji Wei and the Company, as the parties to the Original Agreements, recognizes the transfer of such rights and interests (when applicable).
Therefore, based on the mutual agreement, representation, warranty and agreement contained in this agreement, the parties agree as follows:
1.
Transfer of contractual rights under the Original Agreements:
1.1 According to the terms and conditions of this agreement, the Transferor transfers all its rights and obligations under the Loan Agreement to the Transferee.
Therefore, the Transferor shall transfer shares on the effective date of the equity transfer as stipulated in the Equity Transfer Agreement (“Effective Share Conversion”).
RMB8.28 million shall be remitted to the bank account designated by the Transferee within five days after the Transferee’s date”). The Transferor and the Transferee
agree that this amount and the share purchase price that the Transferee should pay to the Transferor under the “Transfer Agreement” collide with each other. From the
effective date of the transfer of shares, the Transferee shall inherit all the rights and obligations of the Transferor under the Loan Agreement. Huiling agrees to the
transfer of rights and obligations under the above-mentioned “Loan Agreement” and the paid amount are deemed to be paid by the Transferee under the “Loan
Agreement” on the effective date of the transfer of shares.
1.2 According to this agreement, the Transferor transfers all its rights and obligations under the “Option Agreement” to the Transferee, and the Transferee shall inherit
the Transferor’s “ Option Agreement” from the effective date of the transfer.
1.3 According to the terms and conditions of this agreement, the Transferor transfers all its rights and obligations under the Proxy Agreement to the Transferee, and the
Transferee shall inherit the Transferor’s rights and obligations under the Proxy Agreement from the effective date of the transfer.
1.4 According to the terms and conditions of this agreement, the Transferor transfers all its rights and obligations under the Pledge Agreement to the Transferee, and the
Transferee shall inherit all the rights of the Transferor under the Pledge Agreement from the effective date of the transfer. At the same time, in order to handle the
registration of the Transferee’s equity pledge, the Transferee and Huiling signed a new “Equity Pledge Agreement” on the effective date of the transfer of shares,
pledging 36% of the company’s equity held by the Transferee to Huiling, as Guarantee for its performance of contractual obligations under the newly signed Loan
Agreement, Option Agreement, and Proxy Agreement. The company agrees to record such equity pledge in the company’s register of shareholders in accordance with the
law immediately on the effective date of the transfer of shares.
2.
On the premise that the Transferee fully assumes the obligations and responsibilities of the Transferor under the Original Agreements, as the parties to the Original
Agreements,
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Huiling, Jiwei and the company agree and recognize the transfer of contractual rights and interests.
3.
The Transferee agrees that from the effective date of the transfer of shares, the Transferee will replace the Transferor as a party to each Original Agreements, enjoy
all the rights of the Transferor under the Original Agreements, perform all the obligations of the Transferor under the Original Agreements.
4.
If the Transferor violates the obligations or terms of the Original Agreements before the effective date of the transfer of shares (regardless of whether the violation is
discovered or investigated when this agreement is signed), the Transferor shall be liable for the violation caused by the violation. or other consequences shall still be
borne by the Transferor, and such responsibilities shall not be transferred to the Transferee due to the signing of this agreement.
5.
If the Transferee has any breach of the obligations or terms of this agreement or the items mentioned in this agreement from the effective date of the transfer of
shares, the liability or any other consequences arising from such breach shall be borne by the Transferee. The Transferor shall assume the responsibility in
accordance with the relevant agreements, and such responsibilities or consequences have nothing to do with the Transferor.
6.
The Transferor agrees that it will not require Huiling or the company or the Transferee to pay any fees due to the obligations it has performed to the company or the
company under the Original Agreements, and from the date of signing this agreement the Transferor shall not claim any rights or interests against Huiling or other
parties to the Original Agreements based on the Original Agreements. The assigning party hereby irrevocably waives any and all claims, defenses, claims, rights
and/or interests it has against other parties to the agreement under the Original Agreements and warrants that no third party will be liable to any other agreement due
to its performance of the Original Agreements. Party and/or the Transferee to make any demands, claims, demands, claims, defenses, lawsuits, administrative
penalties or other legal proceedings, otherwise the Transferor shall pay the other parties to the other agreements and/or the losses suffered by the Transferee. and/or
the Transferee shall be liable for compensation.
7.
The Transferor and Transferee undertake to Huiling that they shall not sign and perform this agreement due to the transfer of the Original Agreements or the signing
and performance of this agreement. (i.e. transfer of contractual rights) to create or increase any new obligations (including but not limited to any increase in fees) for
Huiling or other interested parties in the Original Agreements, or reduce any existing rights of Huiling or other interested parties in the Original Agreements, or give
rise to any original rights against Huiling or other interested parties in the Original Agreements, or cause any demands, claims, lawsuits, administrative penalties or
other legal proceedings against Huiling or other interested parties in the Original Agreements, otherwise Huiling or Other interested parties in the Original
Agreements may require the Transferor and/or the Transferee to assume corresponding responsibilities. The Transferor and/or the Transferee shall fully compensate
Huiling or other interested parties of the Original Agreements for any losses or expenses that may be caused by such transfer.
8.
Except for changes to the subject matter of the Original Agreements in accordance with the terms of this agreement, the Original Agreements will continue to remain
fully effective and enforceable.
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9.
Any disputes arising under or in connection with this Agreement shall be resolved through negotiation between the parties. If the parties cannot reach an agreement
within thirty (30) days after the dispute arises, the dispute shall be submitted to the Shanghai International Arbitration Center, based on the arbitration rules of the
arbitration center are conducted in Shanghai, and the results of the arbitration are final and binding on all parties.
10. Each provision of this Agreement is severable and independent of every other provision, and if at any time any one or more provisions of this Agreement becomes
invalid, illegal or unenforceable, the validity, legality and Enforceability is not affected by this.
11. Once this agreement is signed by all parties, it will be retroactive to the effective date of the transfer of shares.
12. This agreement is made in Chinese, and the original is in six (6) copies, each of which has the same legal effect. All copies shall be deemed to be originals and each
shall constitute one and the same document
[No text below]
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It is hereby certified that the parties to this Agreement have signed this Agreement for their respective interests on the date stated on the first page of this Agreement.
Lin Zhimin
Signature:
/s/ LIN ZHIMIN
Wang Qi
Signature:
/s/ WANG QI
Ji Wei
Signature:
/s/ JI WEI
Huiling Computer Technology Consulting (Shanghai) Co., Ltd. (seal)
Signature:
/s/ Huiling Computer Technology Consulting (Shanghai) Co., Ltd.
Name:
Title: Authorized Representative
Shanghai Jiucheng Information Technology Co., Ltd. (seal)
Signature:
/s/ Shanghai Jiucheng Information Technology Co., Ltd.
Name:
Title: Authorized Representative
Company: The9 LTD
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EXHIBIT 8.1
List of Significant and Other Principal Subsidiaries and Variable Interest Entity of the Registrant
Subsidiaries
Name of Subsidiary
Jurisdiction of Incorporation
GameNow.net (Hong Kong) Limited
Hong Kong
China The9 Interactive Limited
Hong Kong
New Star International Development Limited
Hong Kong
9City Asia Limited
Hong Kong
Red 5 Studios, Inc.
Delaware, USA
China Crown Technology Limited
Hong Kong
Hui Ling Computer Technology Consulting (Shanghai) Co., Ltd
China
Jiu Tuo (Shanghai) Information Technology Ltd.
China
Shanghai Jiugang Electronic Technology Co., Ltd.
China
NBTC Limited
Hong Kong
Hangzhou Niuxin Technology Co., Ltd.
China
NFTStar Singapore Pte. Ltd.
Singapore
NFTSTAR Hong Kong Ltd.
Hong Kong
NFTSTAR US Inc.
Delaware, USA
Variable interest entity and its subsidiaries
Name of Variable Interest Entity and its Subsidiary
Jurisdiction of Incorporation
Shanghai The9 Information Technology Co., Ltd.
China
Company: The9 LTD
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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 functions):
(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: May 2, 2022
By:
/s/ Jun Zhu
Name: Jun Zhu
Title: Chief Executive Officer
Company: The9 LTD
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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: May 2, 2022
By:
/s/ George Lai
Name: George Lai
Title: Chief Financial Officer
Company: The9 LTD
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EXHIBIT 13.1
Certification by the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of The9 Limited (the “Company”) on Form 20-F for the year ended December 31, 2021 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: May 2, 2022
By:
/s/ Jun Zhu
Name: Jun Zhu
Title: Chief Executive Officer
Company: The9 LTD
ID: 22-8046-1
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EXHIBIT 13.2
Certification by the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of The9 Limited (the “Company”) on Form 20-F for the year ended December 31, 2021 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: May 2, 2022
By:
/s/ George Lai
Name: George Lai
Title: Chief Financial Office
Company: The9 LTD
ID: 22-8046-1
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Exhibit 15.1
Our ref
RDS/604835-000001/23270083v1
Direct
+852 2971 3046
Email
richard.spooner@maples.com
The9 Limited
17 Floor, No. 130 Wu Song Road
Hong Kou District, Shanghai 201203
People’s Republic of China
2 May 2022
Dear Sir or Madam
The9 Limited (the “Company”)
We consent to the reference to our firm under the heading “Item 10. Additional Information — E. Taxation — Cayman Islands Taxation” in the Company’s Annual
Report on Form 20-F for the year ended December 31, 2021 (the “Annual Report”), which will be filed with the Securities and Exchange Commission (the “SEC”) in
the month of May 2022, and further consent to the incorporation by reference of our opinions under these headings into the Registration Statements on Form F-3 (No.
333-254878) and Form S-8 (No. 333-127700, No. 333-156306, No. 333-168780, No. 333-210693, No. 333-217190, No. 231105 and No. 333-259135) of the Company.
We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report. In giving such consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended,
or the regulations promulgated thereunder.
Yours faithfully
/s/ Maples and Calder (Hong Kong) LLP
Maples and Calder (Hong Kong) LLP
Company: The9 LTD
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EXHIBIT 15.2
中国上海市北京西路968号嘉地中心27层 邮编：200041
27/F, Garden Square, 968 West Beijing Road, Shanghai 200041, China
电话/Tel: +86 21 52341668 传真/Fax: +86 21 52341670
网址/Website:http://www.grandall.com.cn
May 2, 2022
The9 Limited
17 Floor, No. 130 Wu Song Road
Hong Kou District
Shanghai 200080
People’s Republic of China
Dear Sir or Madam,
Re: The Annual Report of The9 Limited
We hereby consent to the use of our name under the Chapters entitled “Risk Factors”, “Government Regulations”, “Related Party Transactions” included in the Annual
Report on Form 20-F (“the Annual Report”), originally filed by The9 Limited in May, 2022, with the Securities and Exchange Commission under the Securities Act of
1933, as amended, and the filing of this consent as an exhibit to the Annual Report. In addition, we further consent to the incorporation by reference of our opinions
under these sections into the Registration Statements on Form F-3 (333-254878) and Form S-8 (No. 333-127700, No. 333-156306, No. 333-168780, No. 333-210693,
No. 333-217190, No. 231105 and No. 333-259135) of The9 Limited. In giving this consent, we do not hereby admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended, or the regulations promulgated thereunder.
[Signature Page Follows]
北京
上海
深圳
杭州
广州
昆明
天津
成都
宁波
福州
西安
南京
南宁
济南
香港
巴黎
马德里
硅谷
BEIJING
SHANGHAI
SHENZHEN
HANGZHOU
GUANGZHOU
KUNMING
TIANJIN
CHENGDU
NINGBO
FUZHOU
XI’AN
NANJING
NANNING
JINAN
HONG KONG
PARIS
MADRID
SILICON
VALLEY
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[Signature Page of Consent Letter to the Annual Report on Form 20-F by The9 Limited]
Yours faithfully,
/s/ Grandall Law Firm (Shanghai)
Grandall Law Firm (Shanghai)
Company: The9 LTD
ID: 22-8046-1
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Exhibit 15.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form F-3 (File No. 333-254878), and on Form S-8 (File No. 333-127700, File No.
333-156306, File No. 333-168780, File No. 333-210693, File No. 333-217190, File No. 333-231105, and File No. 333-259135) of our reports dated May 2, 2022, with
respect to the consolidated financial statements of The9 Limited (the “Group”) (with report expressed an unqualified opinion), and the effectiveness of internal control
over financial reporting of the Group (which report expressed an adverse opinion) appearing in this Annual Report on Form 20-F of the Group for the year ended
December 31, 2021.
/s/ RBSM LLP
New York, NY
May 2, 2022
Company: The9 LTD
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EXHIBIT 15.4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 29, 2021, with respect to the consolidated financial statements included in the Annual Report of The9 Limited on Form 20-F for
the year ended December 31, 2021. We consent to the incorporation by reference of the said report in the Registration Statements of The9 Limited on Form F-3 (File No.
333-254878) and Forms S-8 (File Nos. 333-127700, 333-156306, 333-168780, 333-210693, 333-217190, 333-231105 and 333-259135).
/s/ GRANT THORNTON
Grant Thornton
Shanghai, the People’s Republic of China
May 2, 2022
Company: The9 LTD
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EXHIBIT 16.1
May 2, 2022
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
We have read Item 16F of The9 Limited on its Form 20-F dated May 2, 2022, and we agree with the statements concerning us in the first through fourth paragraphs
contained therein. We have no basis to agree or disagree with other statements of the Company contained therein.
Very truly yours,
/s/ GRANT THORNTON
Grant Thornton
Company: The9 LTD
ID: 22-8046-1
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