As filed with the Securities and Exchange
Commission on March 23, 2021
Registration No. 333-240331
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
POST-EFFECTIVE AMENDMENT NO. 3
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
The9 Limited
(Exact name of Registrant as specified
in its charter)
Not Applicable
(Translation of Registrant’s name
into English)
Cayman Islands
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7389
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Not Applicable
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(State or other jurisdiction of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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17 Floor, No. 130 Wu Song Road
Hong Kou District, Shanghai 200080
People’s Republic of China
Tel Number: +86 (21) 6108-6080
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(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
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Puglisi & Associates
850 Library Avenue, Suite 204
Newark, Delaware 19711
+1 302-738-6680
(Name, address, including zip code, and
telephone number, including area code, of agent for service)
Copies to:
Haiping Li., Esp.
Skadden, Arps, Slate, Meagher & Flom
LLP
46/F, Tower II, Jing An Kerry Centre
1539 Nanjing West Road
Shanghai, People’s Republic of
China
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Approximate date
of commencement of proposed sale to the public: From time to time on or after the effective date of this registration statement.
If any of the securities
being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. x
If this Form is filed
to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark
whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
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 7(a)(2)(B) of the Securities Act. ¨
† The term “new or revised
financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
The Registrant hereby
amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
This
post-effective amendment, or the Post-effective Amendment, of The9 Limited to the registration statement on Form F-1 (File No.
333-240331), or the Registration Statement, is being filed pursuant to our undertaking in the Registration Statement to update
and supplement information contained in the Registration Statement, as originally filed with the Securities and Exchange Commission
on August 4, 2020, as amended by pre-effective amendments filed on August 19, 2020, September 23, 2020 and September 25, 2020,
and declared effective on September 29, 2020, as further supplemented on October 20, 2020,
November 3, 2020, November 18, 2020, January 4, 2021 and
February 9, 2021.
The
Registration Statement originally covered (i) public offering of Class A ordinary shares and warrants to purchase ADSs, or the
Warrants, of a maximum aggregate offering price of US$10.0 million, including over-allotments, (ii) issuance of Class A ordinary
shares issuable upon the exercise of the Warrants of a maximum aggregate offering price of US$10.0 million, and (iii) the issuance
of the representative’s warrants, or the Representative’s Warrants, and the issuance of Class A ordinary shares issuable
upon the exercise of the representative’s Warrants of a maximum aggregate offering price of US$550,000. The Registration
Statement was declared effective on September 29, 2020 and the Registrant issued and sold 2,350,000 ADSs and 27,025,000 Warrants
to purchase 2,702,500 ADSs, including 3,525,000 Warrants to purchase an additional 352,500 ADSs pursuant to the option granted
to the underwriter to purchase additional Warrants to cover over-allotments, and also issued the Representative’s Warrants
to purchase 117,500 ADSs.
Each
Warrant will be immediately exercisable for 0.1 ADS at an exercise price of US$3.7 per ADS, each ADS representing thirty (30) Class
A ordinary shares, and will expire on the third anniversary of the issuance date. The Representative’s Warrants are exercisable
commencing six (6) months from the effective date of the Registration Statement and will be exercisable at an exercise price of
US$4.07 per ADS, each ADS representing thirty (30) Class A ordinary shares, and will expire on the third anniversary of the effective
date of the Registration Statement. Unless otherwise indicated, the numbers of 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.
This
Post-effective Amendment contains an updated prospectus, including restatement to the interim condensed financial statements, relating to the continuous offer and sale of the Registrant’s ADSs
issuable upon the exercise of the Warrants and the Representative’s Warrants up to the respective aggregate maximum offering
price of US$10.0 million and US$550,000, which have been registered under the Registration Statement. No additional securities
are being registered under this Post-effective Amendment. All filing fees payable in connection with the registration of the securities
registered by the Registration Statement were paid by the Registrant at the time of the initial filing of the Registration Statement.
The information
in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to
buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion
Preliminary
Prospectus dated , 2021
Up to
2,820,000 American Depositary Shares
The9
Limited
Representing
Up to 84,600,000 Class A Ordinary Shares
Issuable
Upon Exercise of Outstanding Warrants and Representative’s Warrants
This prospectus relates
to the issuance of up to 2,820,000 American depositary shares, or ADSs, representing up to 84,600,000 Class A ordinary shares of
The9 Limited, issuable upon the exercise of the Warrants and the Representative’s Warrants. The Warrants and the Representative’s
Warrants were issued in connection with the Registration Statement and the offering contemplated thereunder. As of the date of
this prospectus, each ADS represents thirty (30) Class A ordinary shares, par value US$0.01 per share.
Each
Warrant will be immediately exercisable for 0.1 ADS at an exercise price of US$3.7 per ADS, which have reflected the
adjustments to the Warrants as the result of the change in ADS-to-Class A ordinary shares ratio to each ADS representing
thirty Class A ordinary shares effected on October 19, 2020 and subject to further adjustment, if any, and expire three years
after the issuance date. The Representative’s Warrants will be exercisable at an exercise price of US$4.07 per ADS,
which have reflected the adjustments to the Representative’s Warrants as the result of the change in ADS-to-Class A
ordinary shares ratio to each ADS representing thirty Class A ordinary shares effected on October 19, 2020 and subject to
further adjustment, if any. The Representative’s Warrants are exercisable commencing six (6) months from the effective
date of the Registration Statement and will be exercisable for three years after the effective date of the Registration
Statement.
ADSs representing our
Class A ordinary shares are listed on the Nasdaq Capital Market, or the Nasdaq, under the symbol “NCTY.” On March 19, 2021, the closing trading price for our ADSs, as reported on the Nasdaq, was US$50.79 per ADS. There is no established public
trading market for the Warrants, and we do not expect one to develop. We do not intend to apply to list the Warrants on any security
exchange.
Investing in these
securities involves a high degree of risk. See “Risk Factors” beginning on page 14 for factors you should consider
before investing in our securities.
NEITHER THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE COMPANY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 2021.
TABLE OF CONTENTS
PROSPECTUS
SUMMARY
The following summary
is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements
appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially
the risks of investing in our securities discussed under “Risk Factors,” before deciding whether to invest in our securities.
Overview
We are an Internet
company based in China and we aim to become a diversified Internet company targeting on fast-growing technology sectors. We are
currently transforming our business focus to cryptocurrencies mining business.
Corporate History
and Structure
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 cryptocurrency operations through NBTC Limited, a direct wholly-owned subsidiary of our company, and its
subsidiaries in China.
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. Currently, we are developing our cryptocurrencies
mining business and began our cryptocurrencies mining activities in February 2021. See “Business—Cryptocurrency.”
Due to the current
restrictions on foreign ownership of Internet content provision, or ICP, and Internet culture operation in China, currently, we
primarily rely on Shanghai The9 Information Technology Co., Ltd., or Shanghai IT, our affiliated PRC 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 “Corporate History and Structure—Arrangements with Affiliated PRC Entity” for details
of the contractual arrangements with Shanghai IT and its shareholders. We do not hold any equity interest in Shanghai IT.
The following diagram
summarizes our corporate structure chart, including our significant subsidiaries, affiliated PRC entity and its subsidiary, as
of the date of this prospectus.
Recent Developments
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 are in the process of negotiating with Smilegate to re-gain the license for such game development. There can be no assurance
that we will be able to obtain such license from Smilegate or launch CrossFire New Mobile Game. See “Risk Factors—Risks
Related to our Business and Industry—If we or our joint ventures fail to renew or acquire new online game licenses on favorable
terms or at all, our future results of operations and profitability may be materially impacted” and “Risk Factors—Risks
Related to our Business and Industry—If we are unable to successfully re-gain license for CrossFire New Mobile Game, launch
or operate CrossFire New Mobile Game or other licensed games in China, our future results of operations may be materially and adversely
affected.”
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 November 2, 2020, we received a notification
letter from Nasdaq stating that we have regained compliance with the minimum bid price requirement.
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.
As of the date of this prospectus, 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 as of the date of this prospectus 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 as of the date of this prospectus 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 ADS as of the date of this prospectus
representing thirty Class A ordinary shares, to the underwriter of the offering. The numbers of ADSs have
reflected 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. We received net proceeds of US$8.1 million from
such offering.
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 as of the date of this prospectus
representing thirty Class A ordinary shares, effective at the closing of business on October 19, 2020.
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.
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. (formally 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 joint venture agreement and all amendments thereto with F&F were deemed to be terminated in accordance
with the provisions thereof. We may consider to cooperate with F&F to the extent possible in the future.
On January 25, 2021,
we entered into a share subscription and warrant purchase agreement, or the 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 prospectus. 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 prospectus,
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 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.
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. Other than
WhatsMiner bitcoin mining machines, we also plan to continue purchasing different types of cryptocurrency mining machines in
the near future.
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. For details of the SEDA, see “Corporate History
and Structure.”
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 have already been 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 closed. Pursuant to the share purchase agreements, as soon
as practicable following the filing of our annual report on Form 20-F for the year ended December 31, 2020, we should file a registration
statement on Form F-3 covering resale of the investors’ Class A ordinary shares.
In February 2021, we
entered into a legally binding memorandum of understanding on the acquisition of 70% equity interest in Hangzhou SuanLiTechnology
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.
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.
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 251PH/S. These Bitcoin mining machines have already been 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 will designate an independent valuation firm to conduct examination and assessment
of the Bitcoin mining machine fair market value, and will make adjustment to the number of Class A ordinary shares to be issued
if needed.
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.
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.
Summary of Risk
Factors
Investing in our ADSs
involves significant risks. You should carefully consider all of the information in this prospectus before making an investment
in our ADSs. Below please find a summary of the principal risk we face, organized under relevant headings. These risks are discussed
more fully in the section titled “Risk Factors.”
Risks Related to
Our Business and Our Industry
Risks and uncertainties
relating to our business and industry include, but are not limited to, the following:
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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 are transitioning our business focus and our results of operations may be materially and adversely affected;
|
|
|
|
|
·
|
New lines of business or new products and services may subject us to additional risks;
|
|
|
|
|
·
|
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.
|
|
|
|
|
·
|
Our results of operations may be negatively impacted by sharp
decreases in the price of cryptocurrencies.
|
|
|
|
|
·
|
If the market for cryptocurrency ceases to exist or diminishes
significantly, our business and results of operations would be materially harmed.
|
|
|
|
|
·
|
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.
|
|
|
|
|
·
|
Substantial increases in the supply of mining machines connected
to the cryptocurrency network would lead to an increase in network capacity, which in turn would increase mining difficulty. This
development would negatively affect the economic returns of cryptocurrency mining activities, which would affect our business prospects,
results of operations and financial condition.
|
|
|
|
|
·
|
Cryptocurrency exchanges and wallets, and to a lesser extent, the cryptocurrency network
itself, may suffer from hacking and fraud risks, which may adversely affect the economic return of our cryptocurrency mining
business.
|
|
|
|
|
·
|
Our gaming business is intensely competitive and “hit” driven. If we do not deliver
new “hit” products to the market, or if consumers prefer our competitors’ products or services over those we
provide, our operating results will suffer.
|
|
|
|
|
·
|
We currently depend on a limited number of games, and we may not be able to successfully implement
our growth strategies;
|
Risks Related to
Our Corporate Structure
Risks and uncertainties
relating to our corporate structure include, but are not limited to, the following:
|
·
|
Our current corporate structure and business operations may be affected by the Foreign Investment
Law;
|
|
·
|
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 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
|
|
·
|
The principal shareholders of our affiliated PRC entity have potential conflicts of interest with
us, which may adversely affect our business.
|
Risks Related to
Doing Business in China
We are also subject
to risks and uncertainties relating to doing business in China in general, including, but are not limited to, the following:
|
·
|
Our business may be adversely affected by public opinion and government policies in China;
|
|
·
|
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;
|
|
·
|
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; and
|
|
·
|
Our ADSs may be delisted under the Holding Foreign Companies
Accountable Act if the Public Company Accounting Oversight Board, or the PCAOB, is unable to inspect auditors who are located in
China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your
investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.
|
General Risks Related
to our ADSs, Warrants and this Offering
In addition to the
risks described above, we are subject to general risks relating to our ADSs, Warrants and this offering, including, but are not
limited to, the following:
|
·
|
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;
|
|
·
|
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 expect to be a passive foreign investment company for our current taxable year and the foreseeable
future, which could subject United States investors in the ADSs, Warrants or ordinary shares to significant adverse United States
income tax consequences;
|
|
·
|
Substantial future sales or the perception of sales of our ADSs or Class A ordinary shares could
adversely affect the price of our ADSs;
|
|
·
|
The market price for our ADSs may be volatile; and
|
|
·
|
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.
|
Corporate Information
Our principal executive
office is located at 17 Floor, No. 130 Wu Song Road, Hong Kou District, Shanghai 201203, People’s Republic of China, and
our telephone number is +86 (21) 6108-6080. 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.
Investors should submit
any inquiries to the address and telephone number of our principal executive offices. Our main website is www.the9.com.
The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States
is Puglisi & Associates located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
Conventions that
Apply to this Prospectus
Unless otherwise indicated
or the context otherwise requires in this prospectus:
|
·
|
“ADSs” refers to our American depositary shares, each of which currently represents thirty Class A ordinary shares. ADSs,
per ADS amount and other related amount in this prospectus have been retroactively adjusted to reflect the changes in ADS-to-Class A ordinary
share ratio from each ADS representing three Class A ordinary shares to each ADS representing thirty Class A ordinary shares for all periods
presented;
|
|
|
|
|
·
|
“affiliated entity” and “affiliated PRC entity” refer to our consolidated
affiliated PRC entity, 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 “Corporate History and Structure—Arrangements with Affiliated
PRC Entity;”
|
|
|
|
|
·
|
“China” and “PRC” refer to the People’s Republic of China, and solely
for the purpose of this prospectus, excluding Taiwan, Hong Kong and Macau;
|
|
|
|
|
·
|
“Class A ordinary shares” refers 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$0.01
per share;
|
|
|
|
|
·
|
“RMB” and “Renminbi” are to the legal currency of China;
|
|
|
|
|
·
|
“U.S. dollars,” “dollars,” “US$” and “$” are to
the legal currency of the United States; and
|
|
|
|
|
·
|
“we,” “us,” “our company,”
“our” and “The9” refer to The9 Limited and, as the context may require, its subsidiaries, the affiliated
PRC entity and its subsidiaries.
|
|
|
|
Unless the context
indicates otherwise, all information in this prospectus assumes no exercise of the Warrants, the Representative’s Warrants
or other outstanding warrants.
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. Unless otherwise indicated, ADSs
and per ADS amount in this prospectus have been retroactively adjusted to reflect the changes in ratio for all periods presented.
Our reporting
currency is the Renminbi. This prospectus also contains translations of certain foreign currency amounts into U.S. dollars
for the convenience of the reader. Unless otherwise stated, all translations from Renminbi to U.S. dollars were made at
RMB7.0651 to US$1.00, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board on June 30,
2020. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or
could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The PRC government
restricts or prohibits the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types
of transactions. On March 12, 2021, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve
Board was RMB6.5081 to US$1.00.
THE
OFFERING
Securities offered by us
|
Up to 2,820,000 ADSs, representing up to 84,600,000 Class A ordinary shares, consisting of (i) 2,702,500 ADSs, representing 81,075,000 Class A ordinary shares, issuable upon the exercise of the Warrants, and (ii) 117,500 ADSs, representing 3,525,000 Class A ordinary shares, issuable upon the exercise of the Representative’s Warrants.
|
Ordinary shares outstanding immediately after this offering
|
438,564,065 ordinary shares, comprised of 424,956,731
Class A ordinary shares and 13,607,334 Class B ordinary shares, assuming the Warrants and the Representative’s Warrants
are exercised in full.
|
The ADSs
|
Each ADS represents thirty Class A ordinary shares, par value US$0.01 per share.
|
|
The depositary will hold Class A ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.
|
|
We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our Class A ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.
|
|
You may surrender your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.
|
|
We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.
|
|
To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares and Warrants” section of this prospectus. You should also read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.
|
Ordinary Shares
|
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. In respect of all matters subject to a shareholder vote, each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to fifty votes, voting together as one class. Each Class B ordinary share is convertible into 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 transfer of Class B ordinary shares by a holder to any person or entity other than holders of Class B ordinary shares or their affiliates, such Class B ordinary shares shall be automatically and immediately converted into the equivalent number of Class A ordinary shares. See “Description of Share Capital” for more information.
|
Use of proceeds
|
We estimate that we will receive gross proceeds of approximately US$10.5 million if all of the Warrants and the Representative’s Warrants are exercised in full on a cash basis.
|
|
We intend to use the proceeds from such exercise for the development of our
cryptocurrency mining business. See “Use of Proceeds” for more information.
|
Risk factors
|
See “Risk Factors” and the other information included elsewhere in this prospectus for a discussion of factors you should carefully consider before investing in our securities.
|
Listing
|
Our ADSs representing our Class A ordinary shares are listed on the Nasdaq under the symbol “NCTY.”
|
Depositary
|
The Bank of New York Mellon
|
Warrant Agent
|
Computershare Inc. and Computershare Trust Company, N.A.
|
The number of ordinary
shares that will be outstanding immediately after this offering:
|
·
|
is based on 353,964,065 ordinary shares outstanding as of the date of this prospectus, consisting of (i) 340,356,731 Class A ordinary shares, and (ii) 13,607,334 Class B ordinary shares;
|
|
|
|
|
·
|
includes 84,600,000 Class A ordinary shares, issuable upon the exercise of the Warrants and the Representative’s Warrants in full;
|
|
|
|
|
·
|
excludes any Class A ordinary share that we may be obligated
to issue pursuant to the Tranche I Warrants, the Tranche II Warrants, the Tranche III Warrants, the Tranche IV Warrants or any
other outstanding convertible loan, warrants, options or memoranda of understanding; and
|
|
|
|
|
·
|
excludes 50,000 Class A ordinary shares issuable upon exercise
of outstanding options granted under our Eighth Amended and Restated 2004 Stock Option Plan as of the date of this prospectus.
|
Unless otherwise stated,
all information in this prospectus assumes (i) no exercise of the outstanding options or warrants into Class A ordinary shares
or ADSs as described above, and (ii) no exercise of the Warrants or the Representative’s Warrants, and treats all restricted
shares issued with outstanding restrictions to be vested as issued and outstanding shares.
SUMMARY
CONSOLIDATED FINANCIAL DATA
The
following summary consolidated statement of operation data for the years ended December 31, 2017, 2018 and 2019, summary consolidated
balance sheet data as of December 31, 2018 and 2019 and summary consolidated cash flow data for the years ended December 31, 2017,
2018 and 2019 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The following
summary consolidated balance sheet data as of December 31, 2017 are derived from our audited consolidated financial statements
not included in this prospectus. The following summary consolidated statements of operation data for the six months ended June
30, 2019 and 2020, summary consolidated balance sheet data as of June 30, 2020 and summary consolidated cash flow data for the
six months ended June 30, 2019 and 2020 are derived from our unaudited interim condensed consolidated financial statements included
elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements and include
all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair statement of our financial
position and results of operations for the periods presented. Our audited consolidated financial statements are prepared and presented
in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results
do not necessarily indicate results expected for any future periods. You should read this Summary Consolidated Financial Data
section together with our consolidated financial statements and the related notes and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
The
following table presents our summary consolidated statement of operation data for the year ended December 31, 2017, 2018 and 2019
and the six months ended June 30, 2019 and 2020.
|
|
For the Year Ended December 31,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
Summary Consolidated Statement of Operation Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online game services
|
|
|
71,564,023
|
|
|
|
16,552,080
|
|
|
|
303,577
|
|
|
|
263,579
|
|
|
|
465,726
|
|
|
|
65,919
|
|
Other revenues
|
|
|
1,644,143
|
|
|
|
941,335
|
|
|
|
39,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Sales taxes
|
|
|
(59,610
|
)
|
|
|
(60,557
|
)
|
|
|
(1,582
|
)
|
|
|
(12,252
|
)
|
|
|
—
|
|
|
|
—
|
|
Net revenues
|
|
|
73,148,556
|
|
|
|
17,431,858
|
|
|
|
341,495
|
|
|
|
251,327
|
|
|
|
465,726
|
|
|
|
65,919
|
|
Cost of revenue
|
|
|
(23,782,054
|
)
|
|
|
(16,435,590
|
)
|
|
|
(1,342,266
|
)
|
|
|
(115,060
|
)
|
|
|
(468,288
|
)
|
|
|
(66,282
|
)
|
Gross profit (loss)
|
|
|
49,366,502
|
|
|
|
996,268
|
|
|
|
(1,000,771
|
)
|
|
|
136,267
|
|
|
|
(2,562
|
)
|
|
|
(363
|
)
|
Operating (expenses)/income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
(45,112,396
|
)
|
|
|
(24,555,308
|
)
|
|
|
(13,090,530
|
)
|
|
|
(8,658,009
|
)
|
|
|
(892,739
|
)
|
|
|
(126,359
|
)
|
Sales and marketing
|
|
|
(9,089,969
|
)
|
|
|
(2,325,818
|
)
|
|
|
(2,114,519
|
)
|
|
|
(852,176
|
)
|
|
|
(297,853
|
)
|
|
|
(42,158
|
)
|
General and administrative
|
|
|
(108,824,680
|
)
|
|
|
(89,853,331
|
)
|
|
|
(113,867,000
|
)
|
|
|
(33,479,081
|
)
|
|
|
(57,359,337
|
)
|
|
|
(8,118,687
|
)
|
Impairment on other long-lived assets
|
|
|
—
|
|
|
|
—
|
|
|
|
(34,881,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gain on disposal of subsidiaries
|
|
|
—
|
|
|
|
10,473,159
|
|
|
|
1,206,925
|
|
|
|
1,235,847
|
|
|
|
391,848,588
|
|
|
|
55,462,568
|
|
Total operating (expenses) income
|
|
|
(163,027,045
|
)
|
|
|
(105,991,298
|
)
|
|
|
(162,746,124
|
)
|
|
|
(41,753,392
|
)
|
|
|
333,298,659
|
|
|
|
47,175,364
|
|
Other operating income, net
|
|
|
349,954
|
|
|
|
229,538
|
|
|
|
30,240
|
|
|
|
22,680
|
|
|
|
27,358
|
|
|
|
3,872
|
|
Loss from operations
|
|
|
(113,310,589
|
)
|
|
|
(104,765,492
|
)
|
|
|
(163,716,655
|
)
|
|
|
(41,594,445
|
)
|
|
|
333,323,455
|
|
|
|
47,178,873
|
|
Impairment on equity investments and available-for-sale investments
|
|
|
—
|
|
|
|
(1,386,174
|
)
|
|
|
(4,666,128
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impairment on other investments
|
|
|
(9,109,312
|
)
|
|
|
(7,776,157
|
)
|
|
|
(3,791,039
|
)
|
|
|
—
|
|
|
|
(10,000,000
|
)
|
|
|
(1,415,408
|
)
|
Impairment on other advances
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,980,788
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest income
|
|
|
30,525
|
|
|
|
193,928
|
|
|
|
18,576
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest expenses, net
|
|
|
(83,922,200
|
)
|
|
|
(104,776,674
|
)
|
|
|
(34,501,556
|
)
|
|
|
(17,193,207
|
)
|
|
|
(3,820,725
|
)
|
|
|
(540,789
|
)
|
Fair value change on warrants liability
|
|
|
12,615,466
|
|
|
|
2,251,427
|
|
|
|
1,292,244
|
|
|
|
(964,594
|
)
|
|
|
(123,056
|
)
|
|
|
(17,417
|
)
|
Gain on disposal of equity investee and available-for-sale investments
|
|
|
115,349
|
|
|
|
—
|
|
|
|
694,628
|
|
|
|
3,694,628
|
|
|
|
—
|
|
|
|
—
|
|
Gain on disposal of other investments
|
|
|
—
|
|
|
|
—
|
|
|
|
13,430,588
|
|
|
|
—
|
|
|
|
2,818,643
|
|
|
|
398,953
|
|
Foreign exchange gain (loss)
|
|
|
19,206,747
|
|
|
|
(20,331,430
|
)
|
|
|
(5,474,002
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other income (expenses), net
|
|
|
4,669,587
|
|
|
|
1,598,663
|
|
|
|
9,372,652
|
|
|
|
7,840,727
|
|
|
|
(11,863,491
|
)
|
|
|
(1,679,168
|
)
|
(Loss) gain before income tax expense and share of loss in equity method investments
|
|
|
(169,704,427
|
)
|
|
|
(234,991,909
|
)
|
|
|
(193,321,480
|
)
|
|
|
(48,216,891
|
)
|
|
|
310,334,826
|
|
|
|
43,925,044
|
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,165,097
|
)
|
|
|
(1,014,154
|
|
Recovery of equity investment in excess of cost
|
|
|
60,548,651
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gain on extinguishment of convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,755,902
|
|
|
|
8,033,277
|
|
Share of loss in equity investments
|
|
|
(2,937,131
|
)
|
|
|
(4,292,887
|
)
|
|
|
(2,847,260
|
)
|
|
|
(1,824,878
|
)
|
|
|
—
|
|
|
|
—
|
|
Net (loss) gain
|
|
|
(112,092,907
|
)
|
|
|
(239,284,796
|
)
|
|
|
(196,168,740
|
)
|
|
|
(50,041,769
|
)
|
|
|
359,925,631
|
|
|
|
50,944,167
|
|
Net gain (loss) attributable to noncontrolling interest
|
|
|
3,955,640
|
|
|
|
(16,332,968
|
)
|
|
|
(13,517,983
|
)
|
|
|
(7,030,290
|
)
|
|
|
(2,032,463
|
)
|
|
|
(287,676
|
)
|
Net gain (loss) attributable to redeemable noncontrolling interest
|
|
|
2,117,303
|
|
|
|
(5,858,902
|
)
|
|
|
(4,855,589
|
)
|
|
|
(2,525,192
|
)
|
|
|
(738,246
|
)
|
|
|
(104,492
|
)
|
Net (loss) gain attributable to The9 Limited
|
|
|
(118,165,850
|
)
|
|
|
(217,092,926
|
)
|
|
|
(177,795,168
|
)
|
|
|
(40,486,287
|
)
|
|
|
362,696,340
|
|
|
|
51,336,335
|
|
Change in redemption value of redeemable noncontrolling interest
|
|
|
(57,126,233
|
)
|
|
|
(40,918,773
|
)
|
|
|
(12,827,598
|
)
|
|
|
(10,497,201
|
)
|
|
|
(738,246
|
)
|
|
|
(104,492
|
)
|
Net (loss) gain attributable to holders of ordinary shares
|
|
|
(175,292,083
|
)
|
|
|
(258,011,699
|
)
|
|
|
(190,622,766
|
)
|
|
|
(50,983,488
|
)
|
|
|
361,958,094
|
|
|
|
51,231,843
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
(9,525,761
|
)
|
|
|
(1,314,265
|
)
|
|
|
(793,531
|
)
|
|
|
(2,642,951
|
)
|
|
|
(1,259,760
|
)
|
|
|
(178,307
|
)
|
Total comprehensive (loss) gain
|
|
|
(121,618,668
|
)
|
|
|
(240,599,061
|
)
|
|
|
(196,962,271
|
)
|
|
|
(52,684,720
|
)
|
|
|
358,665,871
|
|
|
|
50,765,860
|
|
Comprehensive gain (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
13,457,650
|
|
|
|
(24,888,425
|
)
|
|
|
(19,738,118
|
)
|
|
|
(9,063,344
|
)
|
|
|
(2,295,550
|
)
|
|
|
(324,914
|
)
|
Redeemable noncontrolling interest
|
|
|
2,117,303
|
|
|
|
(5,858,902
|
)
|
|
|
(4,855,589
|
)
|
|
|
(2,525,192
|
)
|
|
|
(738,246
|
)
|
|
|
(104,429
|
)
|
The9 Limited
|
|
|
(137,193,621
|
)
|
|
|
(209,851,734
|
)
|
|
|
(172,368,564
|
)
|
|
|
(41,096,184
|
)
|
|
|
361,699,667
|
|
|
|
51,195,266
|
|
Net loss attributable to holders of ordinary shares per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
(5.24
|
)
|
|
|
(4.15
|
)
|
|
|
(1.79
|
)
|
|
|
(0.60
|
)
|
|
|
3.12
|
|
|
|
0.44
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
33,426,448
|
|
|
|
62,114,760
|
|
|
|
106,407,008
|
|
|
|
84,283,464
|
|
|
|
115,876,017
|
|
|
|
115,876,017
|
|
Note:
|
(1)
|
Effective
from January 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers,
and have applied such accounting standards to the year ended December 31, 2018 and any
subsequent fiscal year. The financial data for the year ended December 31, 2017 have
not been recast and as such are not comparable with the financial data for the year ended
December 31, 2018 and December 31, 2019. The adoption of ASC 606 did not have material
impact on our financial results.
|
The following table
presents our summary consolidated balance sheet data as of December 31, 2017, 2018 and 2019 and June 30, 2020.
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019(1)
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Summary Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
142,624
|
|
|
|
4,256
|
|
|
|
10,113
|
|
|
|
57,943
|
|
|
|
8,201
|
|
Non-current assets
|
|
|
139,997
|
|
|
|
131,673
|
|
|
|
26,991
|
|
|
|
14,316
|
|
|
|
2,026
|
|
Total assets
|
|
|
323,109
|
|
|
|
164,687
|
|
|
|
181,459
|
|
|
|
94,897
|
|
|
|
13,432
|
|
Total current liabilities
|
|
|
819,445
|
|
|
|
908,424
|
|
|
|
1,058,083
|
|
|
|
523,708
|
|
|
|
74,126
|
|
Total equity (deficit)
|
|
|
(802,351
|
)
|
|
|
(1,084,811
|
)
|
|
|
(1,231,922
|
)
|
|
|
(782,071
|
)
|
|
|
(110,695
|
)
|
Redeemable noncontrolling interest
|
|
|
306,015
|
|
|
|
341,075
|
|
|
|
349,047
|
|
|
|
349,047
|
|
|
|
49,404
|
|
Total liabilities, redeemable noncontrolling interest and equity
|
|
|
323,109
|
|
|
|
164,687
|
|
|
|
181,459
|
|
|
|
94,897
|
|
|
|
13,432
|
|
Note:
|
(1)
|
Effective from January 1, 2019, we adopted ASC 842, Leases, a new accounting standard on
the recognition of right-of-use assets and lease liabilities, and have applied this accounting standard on a modified retrospective
basis and have elected not to restate comparative periods. See Note 13 to our audited consolidated financial statements included
elsewhere in this prospectus for further information.
|
The following table
presents our summary consolidated cash flow data for the year ended December 31, 2017, 2018 and 2019 and the six months ended June
30, 2019 and 2020.
|
|
For the Year Ended December 31,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Summary Consolidated Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(86,652
|
)
|
|
|
(101,201
|
)
|
|
|
(54,175
|
)
|
|
|
(17,720
|
)
|
|
|
(62,199
|
)
|
|
|
(8,804
|
)
|
Net cash provided by (used in) investing activities
|
|
|
161,923
|
|
|
|
(17,315
|
)
|
|
|
60,879
|
|
|
|
(33,297
|
)
|
|
|
443,983
|
|
|
|
62,842
|
|
Net cash provided by (used in) financing activities
|
|
|
44,073
|
|
|
|
(18,357
|
)
|
|
|
40,923
|
|
|
|
50,446
|
|
|
|
(331,529
|
)
|
|
|
(46,925
|
)
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
|
4,529
|
|
|
|
(1,495
|
)
|
|
|
1,257
|
|
|
|
(1,597
|
)
|
|
|
(2,425
|
)
|
|
|
(343
|
)
|
Cash reclassified as held for sale
|
|
|
(20,127
|
)
|
|
|
—
|
|
|
|
(43,027
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net change in cash and cash equivalents
|
|
|
103,746
|
|
|
|
(138,368
|
)
|
|
|
5,837
|
|
|
|
(2,168
|
)
|
|
|
47,830
|
|
|
|
6,770
|
|
Cash and cash equivalents, beginning of year/period
|
|
|
38,878
|
|
|
|
142,624
|
|
|
|
4,256
|
|
|
|
4,256
|
|
|
|
10,113
|
|
|
|
1,431
|
|
Cash and cash equivalents, end of the year/period
|
|
|
142,624
|
|
|
|
4,256
|
|
|
|
10,113
|
|
|
|
2,088
|
|
|
|
57,943
|
|
|
|
8,201
|
|
RISK
FACTORS
An investment in
our securities involves significant risks. You should consider carefully all of the information in this prospectus, including the
risks and uncertainties described below, before making an investment in our securities. Any of the following risks could have a
material and adverse effect on our business, financial condition and results of operations. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, prospects,
financial condition, results of operations, cash flows and ability to pay dividends, and you may lose all or part of your investment.
Risks Related to
Our Business 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 RMB112.1 million, RMB239.3 million and RMB196.2 million for the years ended December 31, 2017, 2018 and 2019, respectively,
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 RMB359.9 million (US$50.9 million) for the six months ended June 30, 2020, primarily due to gain on disposal
of subsidies, which was of one-off nature. 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.
We recorded negative
operating cash flows of RMB86.7 million, RMB101.2 million and RMB54.2 million and RMB62.2 million (US$8.8 million) for the years
ended December 31, 2017, 2018 and 2019, respectively. Furthermore, as of December 31, 2017, 2018 and 2019 and June 30, 2020, we
recorded net current liabilities of RMB636.3 million, RMB875.4 million, RMB903.6 million and RMB443.1 million (US$62.7 million),
respectively. Our net current liabilities positions as of December 31, 2017, 2018 and 2019 and June 30, 2020 were primarily due
to continuous cash outflow in connection with our product development and sales and marketing activities, partially offset in the
six months ended June 30, 2020 by gain on extinguishment of convertible notes and gain on disposal of subsidiaries. See “Management’s
Discussion and Analysis of Financial Condition and 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 RMB3,027.4 million (US$428.5 million) and total current liabilities exceeded total assets by approximately
RMB428.8 million (US$60.7 million) as of June 30, 2020. 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.”
Our consolidated financial
statements for each of the three years ended December 31, 2019 and interim condensed consolidated financial statements for the
six months ended June 30, 2019 and 2020 included in this prospectus beginning on page F-1 have been prepared based on the assumption
that we will continue on a going concern basis. The auditors of our consolidated financial statements for each of the three years
ended December 31, 2019 have included in their audit reports an explanatory paragraph relating to substantial doubt about our ability
to continue as a going concern. Our consolidated financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty.
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 RMB0.5 million (US$0.07 million) for the six months ended June 30, 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. Currently,
we primarily focus on developing our cryptocurrencies mining business while still operate our gaming business. As we have limited
experience in cryptocurrency mining business, our efforts in developing such business may not succeed and we may not be able to
generate sufficient revenue in order 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;
|
|
·
|
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 and our collaboration with Voodoo related to hyper-casual games, 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. In addition, as our previous efforts to enter into blockchain business, in February 2018,
we subscribed a total of 5,297,157 blockchain-related tokens to be issued by Telegram Inc., or Telegram, for a consideration of
US$2.0 million with a third-party company and the tokens were expected to be issued in 2019. Telegram did not launch its products
and terminated the project by refunding the investment to its investors. We received US$0.8 million refunds for the tokens.
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, 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, based on our current estimates and the market price of the Bitcoin mining
machines, we expect to further invest approximately US$250 million 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, we entered into a share purchase agreement in June 2017 with each of Ark
Pacific Special Opportunities Fund I, L.P. or AP Fund, and Incsight Limited, or Incsight, which is wholly owned by Mr. Jun Zhu,
our chairman and chief executive officer, to raise an aggregate of US$30.0 million through equity financing. Such transactions
did not succeed and were terminated in February 2019. In addition, 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 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—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.
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 prospectus, we had Warrants and Representative’s Warrants outstanding, which represent
right to purchase an aggregate number of up to 84,600,000 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 at an initial conversion price
of US$14 per ADS, each ADS representing thirty Class A ordinary shares, subject to adjustment. 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. For details of the SEDA, see “Corporate History and Structure.”
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Cash Flows and Working Capital” and “Description of Share Capital—History of Securities Issuance.”
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 closed. Pursuant to the share
purchase agreements, as soon as practicable following the filing of our annual report on Form 20-F for the year ended December
31, 2020, we should file a registration statement on Form F-3 covering resale of the investors’ Class A ordinary shares.
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 payments of the principal of, to pay interest on 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.
Our results of operations may be negatively impacted by
sharp decreases in the price of cryptocurrencies.
We began our cryptocurrency mining activities
in February 2021. Our cryptocurrency mining revenue is determined by the fair value of the cryptocurrency award we receive, as
determined by the quoted price of the related cryptocurrency at the time of receipt. The demand for, and pricing of, the cryptocurrencies
that we receive from our mining activities is subject to various factors and significant fluctuations. For example, the price of
Bitcoin has experienced significant fluctuations over its relatively short existence and may continue to fluctuate significantly
in the future. As we plan to hold all cryptocurrencies that we receive from our mining activities, we are subject to the risks
and negative impacts that may be caused by the fluctuations in the price of those cryptocurrencies. Our risk exposure to cryptocurrency
price fluctuation may increase in the future if we plan to further expand our cryptocurrency mining activities. We expect our results
of operations to be affected by the prices of the cryptocurrencies as we may generate increasing revenue from our mining activities.
Any significant reductions in the price of cryptocurrencies will likely have a material and adverse effect on our results of operations
and financial condition. We cannot assure you that the price of cryptocurrencies we receive will remain high enough or that it
will not decline significantly in the future. Furthermore, fluctuations in the price of cryptocurrencies may have an immediate
impact on the trading price of our ADSs even before our financial performance is affected, if at all.
Various factors, mostly beyond our control,
could impact the price of cryptocurrencies. For example, the usage of cryptocurrency in the retail and commercial marketplace is
relatively low in comparison with the usage for speculation, which contributes to cryptocurrency price volatility. If the price
of cryptocurrencies drops, the expected economic return of cryptocurrency mining activities will diminish, thereby resulting in
material and adverse impact to our results of operations.
If the market for cryptocurrency ceases to exist or diminishes
significantly, our business and results of operations would be materially harmed.
If the market for cryptocurrencies ceases
to exist or diminishes significantly, our efforts and investment in establishing and developing our cryptocurrency mining business
may become futile. Several adverse factors may affect the market for cryptocurrencies. As there is no wide consensus with respect
to the value and application of cryptocurrency, any future development may continue to affect the demand and the market for cryptocurrency.
In addition, any event or rumor that generates negative publicity of cryptocurrency in general, such as allegations that it is
used for money laundering or other illicit activities, could result in harm to our reputation, which in turn may negatively affect
our results of operations.
Decentralization, or the lack of control
by a central authority, is a key reason that cryptocurrencies like Bitcoin have attracted many committed users. However, the decentralized
nature of cryptocurrencies is subject to growing discussion and skepticism. Some claim that most of the actual services and businesses
built within the cryptocurrency ecosystem are in fact centralized since they are run by specific people, in specific locations,
with specific computer systems, and that they are susceptible to specific regulations. Individuals, companies or groups, as well
as cryptocurrency exchanges that own vast amounts of cryptocurrencies, can affect their market price. Furthermore, mining equipment
production and mining pool locations are becoming centralized. Some argue that the decentralized nature of cryptocurrencies is
a fundamental flaw rather than a strength. The skepticism about the decentralized nature of cryptocurrency may cause loss of confidence
in the prospect of the cryptocurrency industry, which in turn could adversely affect the market demand for cryptocurrencies and
our business.
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.
Changes in government policies, taxes, general
economic and fiscal conditions, as well as political, diplomatic or social events, expose us to financial and business risks. In
particular, changes in domestic or overseas policies and laws regarding holding, using and/or mining of cryptocurrencies could
result in an adverse effect on our business operations and results of operations. Moreover, if any jurisdiction where we operate
prohibits or restricts cryptocurrency mining activities, we may face legal and other liabilities and will experience a material
loss of revenue.
There are significant uncertainties regarding
future regulations pertaining to the holding, using or mining of cryptocurrencies, which may adversely affect our results of operations.
While cryptocurrencies have gradually gained more market acceptance and attention, it is anonymous and may be used for black market
transactions, money laundering, illegal activities or tax evasion. As a result, governments may seek to regulate, restrict, control
or ban the mining, use and holding of cryptocurrencies.
With advances in technology, cryptocurrencies
are likely to undergo significant changes in the future. It remains uncertain whether cryptocurrencies will be able to cope with,
or benefit from, those changes. In addition, as cryptocurrencies mining employs sophisticated and high computing power devices
that need to consume a lot of electricity to operate, future developments in the regulation of energy consumption, including possible
restrictions on energy usage in the jurisdictions where we operate, may also affect our business operations. There had been strong
criticism surrounding the environmental impacts of cryptocurrency mining, particularly the large consumption of electricity, and
governments of various jurisdictions have responded by taking actions to restrict cryptocurrency mining activities.
Substantial increases in the supply of mining machines
connected to the cryptocurrency network would lead to an increase in network capacity, which in turn would increase mining difficulty.
This development would negatively affect the economic returns of cryptocurrency mining activities, which would affect our business
prospects, results of operations and financial condition.
The difficulty of cryptocurrency mining,
or the amount of computational resources required for a set amount of reward for recording a new block, directly affects the expected
economic returns for cryptocurrency miners. Cryptocurrency mining difficulty is a measure of how much computing power is required
to record a new block and it is affected by the total amount of computing power in the cryptocurrency network. The cryptocurrency
algorithm is designed so that one block is generated, on average, every ten minutes, no matter how much computing power is in the
network. Thus, as more computing power joins the network, and assuming the rate of block creation does not change (remaining at
one block generated every ten minutes), the amount of computing power required to generate each block and hence the mining difficulty
increases. In other words, based on the current design of the cryptocurrency network, cryptocurrency mining difficulty would increase
together with the total computing power available in the cryptocurrency network, which is in turn affected by the number of cryptocurrency
mining machines in operation. As a result, a strong growth in our cryptocurrency mining machines can contribute to further growth
in the total computing power in the network, thereby driving up the difficulty of cryptocurrency mining and coupled with the decrease
in cryptocurrency reward, result in downward pressure on the expected economic return of cryptocurrency mining.
Cryptocurrency exchanges and
wallets, and to a lesser extent, the cryptocurrency network itself, may suffer from hacking and fraud risks, which may
adversely affect the economic return of our cryptocurrency mining business.
Cryptocurrency transactions are entirely
digital and, as with any virtual system, are at risk from hackers, malware and operational glitches. Hackers can target cryptocurrency
exchanges and cryptocurrency transactions, to gain access to thousands of accounts and digital wallets where cryptocurrency are
stored. Cryptocurrency transactions and accounts are not insured by any type of government program and all cryptocurrency transactions
are permanent because there is no third party or payment processor. Cryptocurrency like Bitcoin has suffered from hacking and cyber-theft
as such incidents have been reported by several cryptocurrency exchanges and miners, highlighting concerns about the security of
Bitcoin and other cryptocurrencies and therefore affecting their demand and price. Also, the price and exchange of cryptocurrency
may be affected due to fraud risk. While cryptocurrency uses private key encryption to verify owners and register transactions,
fraudsters and scammers may attempt to sell false cryptocurrencies. All of the above may adversely affect our operation and the
economic return of our cryptocurrency mining business.
Currently, 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. Despite our efforts and measures to ensure the safety
of our cryptocurrencies and the transactions, there can be no assurance that such efforts or measures are effective. We may still
suffer from cryptocurrency hacking and fraud and the economic return of our cryptocurrency mining business may be materially and
adversely affected.
Our gaming
business is intensely competitive and “hit” driven. If we do not deliver new “hit” products to the market,
or if consumers prefer our competitors’ products or services over those we provide, our operating results will suffer.
The gaming industry
is a highly competitive and dynamic market, and, if we still commit to gaming business, our future success depends not only on
the popularity of our existing online games but also, in a large part, on our ability to develop and introduce new games that are
attractive to our customers. To achieve this, we need to anticipate and effectively adapt to rapidly changing consumer tastes and
preferences and technological advances. The development of new games and the procurement of licenses from third-party developers
can be very difficult and requires high levels of innovation and significant investments. We currently focus on and have made significant
investment in developing our own proprietary games, primarily mobile games. We are also working with Voodoo to cooperate on the
publishing and operations of casual games in China. However, we do not have a proven track record of developing, publishing or
operating such games or other online games. While new products are regularly introduced, only a small number of “hit”
titles account for a significant portion of total revenues in our industry. We may decide to cease to operate or develop any game
that is no longer profitable. For example, we ceased to operate Knight Forever and Q Jiang San Guo in 2019 and Pop Fashion in 2020.
There is no assurance that any new game, proprietary, licensed or otherwise, to be introduced by us from time to time, including
those named in “Business—Products and Services,” could become “hit” products and be widely accepted
by the customers and the market. We may continue to incur losses, and experience net cash outflow from operating activities, decrease
in cash and cash equivalents balance and net current liabilities if we fail to introduce “hit” games or products which
gain substantial market acceptance. In addition, “hit” products offered by our competitors may take a larger share
of the market than we anticipate, which could cause revenues generated by our products to fall below expectations. Our competitors
may develop more successful products, or offer similar products at lower price points or pursuant to payment models viewed as offering
a better value than we do. Any such negative development may materially and adversely affect our business, financial condition
and results of operations.
We currently
depend on a limited number of games, and we may not be able to successfully implement our growth strategies.
We currently focus
on cooperating with Voodoo to publish and operate its casual games in China and we 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 prospectus, such license has expired and we are in the process of negotiation with Smilegae to re-gain the
license for such game development. However, there is no assurance that we can successfully develop the games we invest in, that we
may successfully launch the games as expected on a timely basis, or at all, or any newly games to be launched would be widely accepted
by game players. In particular, the development and operation of a game usually involves significant investments and dedication
of time and resources, but the resulting game product may not yield the financial return that we anticipate. Our business strategies
may also involve the development and marketing of new products and services for which there are no established markets in China
or in which we lack experience and expertise. If any of our games encounters any adverse development or if we are unable to develop,
purchase or license additional games that are attractive to users, our business, financial condition and results of operations
may be materially and adversely affected. We cannot assure you that we will be able to launch new games or 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 competitors.
There are numerous
online game operators in China. Given the relatively low entry barriers, an increasing number of companies have entered the online
game industry in China and a wider range of online games have been introduced to the Chinese market, and we expect this trend to
continue. Our competitors vary in size and include large companies, many of which have significantly greater financial, marketing
and game development resources and name recognition than we have. As a result, 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. In addition, the increasing
competition we experience in the online game industry may also reduce the number of our users or the growth rate of our user base
or reduce the game points spending for in-game premiums. All of these competitive factors could materially and adversely affect
our business, financial condition and results of operations and prevent us from recovering market share and profitability.
If we or our
joint ventures fail to renew or acquire new online game licenses on favorable terms or at all, 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 seek to offer games licensed from game licensors. 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,
we are in the process of game development and localization of Voodoo’s games. 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 and our joint ventures
need to renew existing licenses and may need to obtain new online game licenses, and any failure to do so on favorable terms or
at all 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 Entertainment Inc., or 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 as of the date of this prospectus. We are in the process of negotiating with Smilegate
tore-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.
If we are unable to successfully
re-gain license for CrossFire New Mobile Game, launch or operate CrossFire New Mobile Game or other licensed games in China, 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 and we are in the process of negotiating with Smilegate to re-gain the license for such game development. There can
be no assurance that we will be able to obtain such license from Smilegate or launch CrossFire New Mobile Game. In the event that
we cannot re-gain such license, our investment into and devotion to the development of CrossFire New Mobile Game may be futile.
Even if we are able to re-gain license for such game, there is no assurance that CrossFire New Mobile Game can be successfully
developed, tested and launched, or that once CrossFire New Mobile Game is launched, we will be able to continue to operate the
game at a profit or at all. The relevant Chinese governmental authorities may delay or deny the granting of the approvals required
for the open beta test, commercial launch or operation of CrossFire New Mobile Game due to the content of the game or other factors.
Furthermore, there is no assurance that CrossFire New Mobile Game will attract sufficient users and be commercially successful.
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. There
can be no assurance how long it will take us to successfully launch or operate such licensed games. In the event such games are
launched, we may not be able to operate them 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 may not
be able to get approval for renewing our current foreign games, or for licensing new foreign games, if the PRC regulatory authorities
promote a policy of domestic online or mobile game development and tighten approval criteria for online or mobile game imports.
We licensed and operated
foreign games and may still do so in the near future, such as the games we cooperated with Voodoo. In the past, such foreign games
mainly included massively multiplayer online role-playing games (MMORPGs) or casual games. Since 2004, relevant government authorities
have promulgated several circulars, according to which the development of domestically developed online games, including mobile
games, will be strategically supported by the PRC government. For example, in July 2005, the Ministry of Industry and Information
Technology, or MIIT, and the Ministry of Culture issued the Opinion on Development and Management of Online Games, or the Opinion.
The Opinion provided that domestic software development companies, network service providers and content providers will be encouraged,
guided and supported to develop and promote self-developed and self-owned online games so that such games can take up a leading
position in the domestic market and expand into the international market.
The government will
also encourage the development of derivative products to domestic online games. In support of this policy, GAPPRFT may tighten
approval criteria for online game imports in an effort to protect the development of domestic online game enterprises, as well
as to limit the influence of foreign culture on Chinese youth. If GAPPRFT implements such rules and policies, we may not be able
to get approval for renewing our current foreign game licenses or for licensing new foreign games, and our business, financial
condition and results of operations may be materially and adversely affected.
Failure to
obtain or renew approvals or filings for online games and mobile games we operate may adversely affect our operations or subject
us to penalties.
The Ministry of Culture
has promulgated laws and regulations that require, among other things, (i) the review and prior approval of all new online games
licensed from foreign game developers and related license agreements, (ii) the review of patches and updates with substantial changes
of games which have already been approved, and (iii) the filing of domestically developed online games. Furthermore, online games,
regardless of whether imported or domestic, will be subject to content review and approval by GAPPRFT prior to the commencement
of games operations in China. Failure to obtain or renew approvals or complete filings for online games, 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.
We cannot assure you
that we are able 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. From time to time, we also rely on certain third-party
licensors of domestically developed online games to obtain approvals and complete filings with the PRC regulatory authorities.
If we or any such third-party licensors fail to obtain the required approvals or complete the filings, we may not be able to continue
the operation of such games. If any such negative event occurs, our business, financial condition and results of operations may
be materially and adversely affected.
Our business
may be adversely affected by the outbreak of COVID-19 in China.
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 as of the date of this prospectus, 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.
The quarantining requirements
and work-from-home situation may materially and adversely disrupt our game development capabilities and cause delay in the launch
time for licensed games. If we fail to timely complete the game development 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.
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. The growth rate of the Chinese economy had already been slowing since 2010, and the impact of COVID-19 on the Chinese
economy in 2020 is likely to be severe. 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 online game developers, operators or application platforms, or establish joint venture with business partners, to
seek business growth opportunities. For example, in August 2014, we formed a joint venture company, System Link Corporation
Limited, or System Link, with Qihoo 360, for publishing and operating Firefall, a massive multiplayer online first person
shooting game, or MMOFPS, in China. In the same month, System Link licensed Firefall from our subsidiary Red 5 Singapore Pte.
Ltd., or Red 5 Singapore, for a term of five years. In March 2019, we entered into a joint venture agreement with F&F.
The immediate objective of this joint venture is 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 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+.
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. For example, Red 5 and its affiliates previously had been in
dispute with Qihoo 360 and its affiliates regarding System Link and Firefall. Various legal proceedings have been initiated in
connection with such dispute, including a litigation proceeding in Shanghai and an arbitration proceeding in Hong Kong. In May
2019, we entered into a mediation agreement with Qihoo 360 to settle the disputes in principle and then withdrew all the litigation
claims against Qihoo 360 in Shanghai. As of the date of this prospectus, we and Qihoo 360 are implementing the mediation agreement
to settle the arbitration proceeding in Hong Kong.
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. For example, the license to publish and operate CrossFire 2 was terminated in 2017 due to the slowdown of massively
multiplayer online game market. 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.
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.
Our business
may be harmed if our technology becomes obsolete or if our system infrastructure fails to operate effectively.
The online game industry
is subject to rapid technological change. We need to anticipate the emergence of new technologies and games, assess their acceptance
and make appropriate investments. If we are unable to do so, new technologies in online game programming or operations could render
our games obsolete or unattractive. In addition, our business may be harmed if we are unable to upgrade our systems fast enough
to accommodate 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 times,
affecting data transmission and game play. These factors could, among other things, cause us to lose existing or potential customers
and existing or potential game development partners.
We have been
and may be subject to future intellectual property rights claims or other claims, which could result in substantial costs and diversion
of our financial and management resources away from our business.
There is no assurance
that our online games, including our mobile games, or other content posted on our websites, whether proprietary or licensed from
third parties, 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.
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 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 “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system
could adversely affect us.”
If we are unable
to attract, train and retain key individuals and highly skilled employees, our business may be adversely affected.
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.
The insurance industry
in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As
a result, we do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption,
litigation or natural disaster might result in our incurring substantial costs and the diversion of our resources.
Some of our
subsidiaries, affiliated entity 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,
affiliated entity 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.
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.
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 2020, we identified
one 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 (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. 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. The material weakness,
if not timely remedied, may have led to significant misstatements in our consolidated financial statements in the future. Due to
such material weakness, in connection with the presentation of our 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. 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.
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. 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 are located
in Shanghai, where most of our 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.
Risks Related to
Our Corporate Structure
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
replace 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 “Regulations—Regulations on Foreign Investment.”
Uncertainties still
exist in relation to interpretation and implementation of the FIL, especially in regard to, including, among other things, the
nature of variable interest entities 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 our affiliated PRC 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, repealing and replacing the Special Administrative
Measures on Access of Foreign Investment (Negative List) (Edition 2019). The 2020 Negative List stipulates the special administrative
measures on access of foreign investment. Industries not listed in the 2020 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 ICP, Internet culture operation and Internet publishing licenses. In light of such restrictions, we
primarily rely on Shanghai IT, our affiliated PRC 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.
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 our 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 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 affiliated PRC 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 our affiliated PRC 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 affiliated PRC 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:
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revoking the business and operating licenses of Shanghai IT;
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confiscating our income or the income of Shanghai IT;
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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
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requiring Shanghai IT or us to discontinue any portion or all of our operations related to online
games.
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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, 2017, 2018 and 2019, Shanghai IT contributed 25.8%, 92.2% and 53.5%, 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.
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 our affiliated PRC entity have potential conflicts of interest with us, which may adversely affect our business.
Zhimin Lin and Wei
Ji, two of our employees, are the principal shareholders of Shanghai IT, our affiliated entity. Thus, there may be conflicts of
interest between their respective duties to our company as employees and their respective shareholder interests in our affiliated
PRC 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 our affiliated 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 our affiliated entity, which could adversely affect us by: (i) increasing the
tax liability of our affiliated entity without reducing our other PRC subsidiaries’ tax liability, which could further result
in late payment fees and other penalties to our affiliated entity for underpaid taxes; or (ii) limiting the abilities of our affiliated
entity to maintain preferential tax treatments and other financial incentives.
Risks Related to
Doing Business in China
Our business
may be adversely affected by public opinion and government policies in China.
Currently, most of
our recurring users are young males, including students. Due to the recent population 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.
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.
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.
Our ADSs may be delisted under the
Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China. The delisting of
our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally,
the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.
The Holding Foreign
Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have
filed audit reports issued by a registered public accounting firm that has not been subject to inspection by 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 U.S.
Our auditor, the independent
registered public accounting firm that issues the audit report included elsewhere in this prospectus, as an auditor of companies
that are traded publicly in the United States and a firm registered with 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. Since our
auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the
Chinese authorities, our auditor is currently not inspected by the PCAOB.
The SEC has not yet
proposed rules relating to the implementation of the HFCAA. There could be additional regulatory or legislative requirements or
guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s
Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks
from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations
to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some
of the concepts of these recommendations were implemented with the enactment of the HFCAA. However, some of the recommendations
were more stringent than the HFCAA. For example, if a company was not subject to PCAOB inspection, the report recommended that
the transition period before a company would be delisted would end on January 1, 2022.
The SEC has announced
that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCAA and to address
the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become
effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition
the requirements of the HFCAA are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely
affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would
be required by the HFCAA. If our securities are unable to be listed on another securities exchange by then, such a delisting would
substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated
with a potential delisting would have a negative impact on the price of our ADSs.
The PCAOB’s inability
to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent
registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB
inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness
of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors
outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to
lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
In May 2013, the PCAOB
announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the PRC Ministry
of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant
to investigations undertaken by the PCAOB in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. The PCAOB
continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms
that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.
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, a significant
portion of our revenues 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 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 enterprises shall use its capital pursuant to the principle of authenticity and self-use within
its business scope. The capital of an 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.
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, consolidated affiliated entity and its subsidiaries incorporated 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 our
consolidated affiliated 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.
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 approval
of the China Securities Regulatory Commission may be required in connection with this offering, and, if required, we cannot predict
whether we will be able to obtain such approval.
The M&A Rules require
an overseas special purpose vehicles that are controlled by PRC companies or individuals formed for the purpose of seeking a public
listing on an overseas stock exchange through acquisitions of PRC domestic companies using shares of such special purpose vehicles
or held by its shareholders as considerations to obtain the approval of the China Securities Regulatory Commission, or the CSRC,
prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. However, the
application of the M&A Rules remains unclear. If CSRC approval is required, it is uncertain whether it would be possible for
us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to
sanctions imposed by the CSRC and other PRC regulatory agencies.
Our PRC counsel has
advised us based on their understanding of the current PRC laws, rules and regulations that the CSRC’s approval may not be
required for the listing and trading of our ADSs on Nasdaq in the context of this offering, given that: (i) our PRC subsidiary
was incorporated as wholly foreign-owned enterprises by means of direct investment rather than by merger or acquisition of equity
interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are
our beneficial owners using our shares as consideration, and (ii) we do not constitute a “special purpose vehicle,”
to which the relevant provisions of the M&A Rules are applicable.
However, our PRC counsel
has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the
context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed
implementations and interpretations in any form relating to the M&A Rules. There can be no assurance that relevant PRC government
agencies, including the CSRC, would reach the same conclusion as we do. If it is determined that CSRC approval is required for
this offering, we may face sanctions by the CSRC or other PRC regulatory agencies for failure to seek CSRC approval for this offering.
These sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC,
delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of
the payments or remittance of dividends by our subsidiaries in China, 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.
The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering
before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities
in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that
the settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or
explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements,
if and when procedures are established to obtain such a waiver.
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.
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 the prospectus based on foreign laws.
We are an exempted
company incorporated under the laws of the Cayman Islands, however, we conduct substantially all of our operations in China and
substantially all of our assets are located in China. In addition, 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 “—Risks Related to our ADSs,
Warrants and this Offering—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 “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 “—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.”
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
affiliated 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 affiliated entity in the PRC are generally subject to EIT at a statutory rate of 25%.
Shanghai IT, our affiliated entity which holds a High and New Technology Enterprise, or HNTE, qualification is entitled to enjoy
a 15% preferential EIT rate till November 23, 2020. However, we cannot assure you that Shanghai IT will meet these criteria and
continue to be qualified as an HNTE if we apply to the tax authorities in the future.
Moreover, unlike the
tax regulations effective before 2008, which specifically exempted withholding taxes on dividends payable to non-PRC investors
from foreign-invested enterprises in the PRC, the EIT Law and its implementation rules provide that a withholding income tax rate
of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or
reduced according to treaties or arrangements between the PRC central government and the governments of other countries or regions.
While the Tax Agreement between the PRC and Hong Kong provides dividends paid by a foreign-invested enterprise in the PRC to its
corporate shareholder, which is considered a Hong Kong tax resident, will be subject to withholding tax at the rate of 5% of total
dividends, this is limited to instances where the corporate shareholder directly holds at least 25% of the shares of the company
that is to pay dividends for at least twelve consecutive months immediately prior to receiving the dividends and meets certain
other criteria prescribed by the relevant regulations. 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.
According to the EIT
Law and its implementation rules, dividends are exempted from income tax if such dividends are received by a resident enterprise
on equity interests it directly owns in another resident enterprise. However, foreign corporate holders of our shares or ADSs may
be subject to taxation at a rate of 10% on any dividends received from us or any gains realized from the transfer of our shares
or ADSs if we are deemed to be a resident enterprise or if such income is otherwise regarded as income from “sources within
the PRC.” The EIT Law empowers the PRC State Council to enact appropriate implementing rules and measures and there is no
guarantee that we or our subsidiaries will be entitled to any of the preferential tax treatments. Nor can we assure you that the
tax authorities will not, in the future, discontinue any of our preferential tax treatments, potentially with retroactive effect.
Any significant increase in the EIT rate under the EIT Law applicable to our PRC subsidiaries and affiliated 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 affiliated
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 and Wuxi QuDong, as general VAT payers are subject to VAT at
the rate of 6%, and the services provided by our other PRC subsidiaries and affiliated PRC 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 affiliated PRC 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.
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.
General Risks Related
to our ADSs, Warrants and this Offering
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.
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 expect to
be a passive foreign investment company for our current taxable year and the foreseeable future, which could subject United States
investors in the ADSs, Warrants or ordinary shares to significant adverse United States 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, our PFIC status will depend in part on the market price of the ADSs, which may fluctuate significantly, and the composition
of our assets and liabilities.
Based on the market
price of our ADSs and the composition of income and assets, we expect to be a PFIC for United States federal income tax purposes
for our current taxable year and the foreseeable future unless the market price of our ADSs increases, the portion of our gross
income attributable to the passive types decreases, 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 year for U.S. federal income tax purposes.
If we were treated
as a PFIC for any taxable year during which a U.S. Holder (as defined in “Taxation—United States Federal Income Tax
Considerations”) holds our ADSs, Warrants 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, Warrants
or ordinary shares and on the receipt of distributions on the ADSs, Warrants 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 “Taxation—United
States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”
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, Warrants
and ordinary shares as well as the application of the PFIC rules.
Substantial
future sales or the perception of sales of our ADSs or Class A ordinary shares could adversely affect the price of our ADSs.
Sales of substantial
amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price
of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs to be sold
in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held
by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and
Rule 701 under the Securities Act and the applicable lock-up agreements. We cannot predict what effect, if any, market sales
of securities held by our significant shareholders or any other shareholder or the availability of these securities for future
sale will have on the market price of our ADSs.
In addition, 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 prospectus, the closing trade price of our ADSs
ranged from US$6.62 to US$82.89 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:
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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;
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price fluctuations of publicly traded securities of other China-based companies engaging in Internet-related
services or other similar businesses;
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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
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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. Specifically, as of the date of
this prospectus, 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.
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 the date of this prospectus,
Mr. Jun Zhu beneficially owned approximately 72.2% 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 share 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
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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.
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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 Second 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 “Description of Share Capital —
Differences in Corporate Law” in this prospectus 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 Second
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 Second 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 Second 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.
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 China and we conduct a substantial portion
of our operations through our wholly-owned subsidiaries and affiliated 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. See “Enforceability of Civil Liabilities.”
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 Second 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.
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.
You must rely
on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or
increase our ADS price.
Our management will
have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part
of your investment decision, to assess whether proceeds are being used appropriately. The net proceeds may be used for corporate
purposes that do not improve our efforts to achieve or maintain profitability or increase our ADS price. The net proceeds from
this offering may be placed in investments that do not produce income or that lose value.
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 Class A 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 Class A ordinary shares
or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the
number of Class A 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, Class A 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, Class A ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive
the distribution we make on our Class A 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.
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.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains
forward-looking statements that reflect our current expectations and views of future events. The forward looking statements are
contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Known and unknown risks,
uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance
or achievements to be materially different from those expressed or implied by the forward-looking statements.
You can identify some
of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,”
“aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely
to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements
largely on our current expectations and projections about future events that we believe may affect our financial condition, results
of operations, business strategy and financial needs. These forward-looking statements include statements relating to:
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our ability to return to profitability or raise sufficient capital to cover our capital needs;
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our ability to identify business development focus;
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our ability to develop our cryptocurrency mining business and
difficulty of cryptocurrency mining to generate sufficient economic return;
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the price fluctuation and market demand of cryptocurrencies;
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risks inherent in cryptocurrencies, such as hacking, fraud and
safety concerns;
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our ability to successfully launch and operate additional games in China and overseas;
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uncertainties in and the timeliness of obtaining necessary governmental approvals and licenses
for operating any new online game;
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risks inherent in the online game business;
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risks associated with our future acquisitions and investments;
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our ability to compete effectively against our competitors;
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risks associated with our corporate structure and the regulatory environment in China; and
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other risks outlined in our filings with the SEC including this registration statement on Form
F-1 and annual reports on Form 20-F.
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These forward-looking
statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking
statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different
from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations
are generally set forth in “Prospectus Summary—Our Challenges,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation”
and other sections in this prospectus. You should thoroughly read this prospectus and the documents that we refer to with the understanding
that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking
statements by these cautionary statements.
The forward-looking
statements made in this prospectus relate only to events or information as of the date on which the statements are made in this
prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect
the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and
have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding
that our actual future results may be materially different from what we expect.
USE
OF PROCEEDS
We estimate that
we will receive gross cash proceeds of approximately US$10.5 million if all of the Warrants and the Representative’s
Warrants are exercised in full on a cash basis. We intend to use the proceeds from such exercise for the development of our
cryptocurrency mining business.
Although we may use
a portion of the net proceeds to acquire businesses, products, services or technologies, we do not have agreements or commitments
for any material acquisitions as of the date of this prospectus. The amounts and timing of any expenditures will vary depending
on the amount of cash generated by our operations, and the rate of growth, if any, of our business.
The foregoing represents
our current intentions based upon our present plans and business conditions to use and allocate the proceeds of this offering.
Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen
event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.
See “Risk Factors—Risks Related to our ADSs, Warrants and this Offering—You must rely on the judgment of our
management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.”
In using the proceeds
of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our wholly
foreign-owned subsidiary in China only through loans or capital contributions and to our variable interest entity only through
loans, subject to the approval of government authorities and limit on the amount of capital contributions and loans, subject to
satisfaction of applicable government registration and approval requirements. We cannot assure you that we will be able to obtain
these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing
Business in China—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 this offering, to make additional
capital contributions or loans to our PRC subsidiary.”
DIVIDEND
POLICY
Our board of directors
has discretion on whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company
may only pay dividends out of profits or share premium, and provided always 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. 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 decides to pay dividends on our ordinary shares, the form, frequency and amount will
depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions
and other factors that our board of directors may deem relevant.
We do not have any
present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend
to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company
incorporated in the Cayman Islands. We may rely on dividends from our subsidiary in China for our cash requirements, including
any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to
us. See “Regulation—Regulations on Foreign Currency Exchange and Dividend Distribution” and “Taxation—People’s
Republic of China Taxation.”
If we pay any dividends,
we will pay those dividends which are payable in respect of the Class A ordinary shares underlying our ADSs to the depositary,
as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion
to the Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including
the fees and expenses payable thereunder. See “Description of American Depositary Shares and Warrants.” Cash dividends
on our Class A ordinary shares, if any, will be paid in U.S. dollars.
CAPITALIZATION
The following table
sets forth our capitalization as of June 30, 2020:
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on an actual basis;
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on a pro forma basis giving effect to (i) our issuance of an aggregate number of 15,600,000 restricted Class A ordinary shares to our directors, officers, employees and consultants, (ii) vesting of restrictions relating to 3,881,573 Class A ordinary shares and 2,540,323 Class B ordinary shares issued to directors, officers, employees, (iii) our issuance of 6,115,050 Class A ordinary shares to three unrelated consultants, (iv) our issuance and sale of 70,500,000 Class A ordinary shares in the form of ADSs, (v) our issuance of 1,277,610 Class A ordinary shares to Iliad to settle the convertible notes, and (vi) our issuance and sale of 48,010,530 Class A ordinary shares to fifteen unrelated parties, (vii) our issuance of 900,000 Class A ordinary shares to directors; and
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on a pro forma as adjusted basis, giving effect to (i) our issuance
of an aggregate number of 15,600,000 restricted Class A ordinary shares to our directors, officers, employees and consultants,
(ii) vesting of restrictions relating to 3,881,573 Class A ordinary shares and 2,540,323 Class B ordinary shares issued to directors,
officers, employees, (iii) our issuance of 6,115,050 Class A ordinary shares to three unrelated consultants, (iv) our issuance
and sale of 70,500,000 Class A ordinary shares in the form of ADSs, (v) our issuance of 1,277,610 Class A ordinary shares to Iliad
to settle the convertible notes, (vi) our issuance and sale of 48,010,530 Class A ordinary shares to fifteen unrelated parties,
(vii) out issuance of 900,000 Class A ordinary shares to directors, and (viii) the issuance of 84,600,000 Class A ordinary shares
issuable upon exercise of outstanding Warrants and Representative’s Warrants.
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You should read this
table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information
under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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As of June 30, 2020
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Actual
(Restated)
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Pro Forma
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Pro Forma As Adjusted(1)
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RMB
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US$
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RMB
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US$
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RMB
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US$
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(in thousands, except for share and per share data)
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Shareholders’ equity:
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Class A ordinary shares (US$0.01 par value; 4,300,000,000 shares authorized, 151,722,691 shares issued and outstanding as of June 30, 2020; 298,007,453 shares issued and outstanding on a pro forma basis; 382,607,453 shares issued and outstanding on a pro forma as adjusted basis)
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10,719
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1,517
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20,498
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2,901
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25,999
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3,680
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Class B ordinary shares (US$0.01 par value; 600,000,000 shares authorized, 11,067,011 shares issued and outstanding as of June 30, 2020; 13,607,334 shares issued and outstanding on a pro forma basis; 13,607,334 shares issued and outstanding on a pro forma as adjusted basis)
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782
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|
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|
111
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936
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|
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132
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936
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|
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132
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Additional paid-in capital
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2,573,788
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364,296
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2,829,840
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400,538
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2,892,190
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409,363
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Statutory reserves
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28,072
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3,973
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28,072
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3,973
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28,072
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3,973
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Accumulated other comprehensive loss
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(4,775
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)
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(676
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)
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(4,775
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)
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(676
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)
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(4,775
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)
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(676
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)
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Accumulated deficit
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(2,960,282
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)
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(419,000
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)
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|
(2,960,282
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)
|
|
|
(419,000
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)
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|
|
(2,960,282
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)
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(419,000
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)
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Noncontrolling interest
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(395,177
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)
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(55,934
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)
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|
(395,177
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)
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|
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(55,934
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)
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|
(395,177
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)
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(55,934
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Total shareholders’ equity
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(746,873
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)
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(105,713
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)
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(539,224
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)
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(76,323
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)
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(471,678
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)
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|
|
(66,762
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)
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Note:
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(1)
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The
pro forma as adjusted information discussed above is illustrative only.
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The above discussion and table are based on 151,722,691 Class
A ordinary shares and 11,067,011 Class B ordinary shares outstanding ordinary shares as of June 30, 2020 and exclude the following:
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30,848,750 restricted Class A ordinary shares issued bearing
restrictions to be vested;
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50,000 Class A ordinary shares issuable upon exercise of options outstanding under the Eighth Amended and Restated 2004 Option Plan as of June 30, 2020, at a weighted average exercise price of US$0.93 per share.
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ENFORCEABILITY
OF CIVIL LIABILITIES
We are incorporated
in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:
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political and economic stability;
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an effective judicial system;
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a favorable tax system;
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the absence of exchange control or currency restrictions; and
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the availability of professional and support services.
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However, certain disadvantages
accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to:
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the Cayman Islands has a less developed body of securities laws as compared to the United States
and these securities laws provide significantly less protection to investors as compared to the United States; and
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Cayman Islands companies may not have standing to sue before the federal courts of the United States.
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Our constituent documents
do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between
us, our officers, directors and shareholders, be arbitrated.
Substantially all of
our operations are conducted in China, and substantially all of our assets are located in China. Most of our directors and executive
officers are nationals or residents of jurisdictions other than the United States and most of their assets are located outside
the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon
these individuals, or 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 of the United States or any state in the United States.
We have appointed Puglisi
& Associates located at 850 Library Avenue, Suite 204, Newark, Delaware 19711 as our agent upon whom process may be served
in any action brought against us under the securities laws of the United States.
Maples and Calder (Hong
Kong) LLP, our legal counsel as to Cayman Islands law, and Grandall Law Firm, our legal counsel as to PRC law, have advised us,
respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:
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recognize or enforce judgments of United States courts obtained against us or our directors or
officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United
States; or
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entertain original actions brought in each respective jurisdiction against us or our directors
or officers predicated upon the securities laws of the United States or any state in the United States.
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We have been advised
by our Cayman Islands legal counsel, Maples and Calder (Hong Kong) LLP, that although there is no statutory enforcement in the
Cayman Islands of judgments obtained in the federal or state courts of the United States and that the Cayman Islands are not a
party to any treaties for the reciprocal enforcement or recognition of such judgments, the courts of the Cayman Islands will, at
common law, recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without re-examination
of the merits of the underlying disputes based on the principle that a judgment of a competent foreign court imposes upon the judgment
debtor an obligation to pay the liquidated sum for which judgment has been given provided certain conditions are met. For such
a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and
must not be in respect of taxes or a fine or penalty and not obtained in a manner and is not of a kind the enforcement of which
is, contrary to natural justice or the public policy of the Cayman Islands. A Cayman Islands court may stay enforcement proceedings
if concurrent proceedings are being brought elsewhere.
Grandall Law Firm
has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures
Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law
based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions.
China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the
reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in
the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates
the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and
on what basis a PRC court would enforce a judgment rendered by a court in the United States or the Cayman Islands. Under the PRC
Civil Procedures Law, foreign shareholders may originate actions based on PRC law against us in the PRC, if they can establish
sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others,
the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the
suit. However, it would be difficult for foreign shareholders to establish sufficient nexus to the PRC by virtue only of holding
our ADSs or Class A ordinary shares.
CORPORATE
HISTORY AND STRUCTURE
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, on January 17, 2000 in Hong Kong, as a wholly-owned subsidiary. We have
historically conducted our operations in large part through The9 Computer, previously a direct wholly-owned subsidiary of GameNow
in China that we disposed in February 2020. We now conduct our operations through Hui Ling Computer Technology Consulting (Shanghai)
Co., Ltd., a direct wholly-owned subsidiary of GameNow in China.
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.
In September 2018,
we completed a share exchange transaction with Leading Choice Holding Limited, or Leading Choice, a company incorporated in Hong
Kong, and the shareholder of Leading Choice for the issuance and sale of 21,000,000 ordinary shares of our company to Leading Choice
in exchange for 20% equity interest in Leading Choice at that time as consideration. In June 2020, we entered into a definitive
agreement with a third party to sell the shares we held in Leading Choice for consideration of US$25,000. The transaction was closed
in July 2020.
In September 2018,
we completed a share exchange transaction with Plutux Limited, or Plutux, a company incorporated in Gibraltar, and a shareholder
of Plutux for the issuance and sale of 21,000,000 ordinary shares of our company to the participating shareholder of Plutux in
exchange for 8% equity interest in Plutux at that time as consideration.
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. (formally 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 joint venture agreement and
all amendments thereto with F&F were deemed to be terminated in accordance with the provisions thereof. We may consider
to cooperate with F&F to the extent possible in the future.
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, 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 Technology Consulting (Shanghai) Co., Ltd. and Shanghai Kaie Information Technology Co., Ltd., that collectively
own Zhangjiang Micro-electronic Port Block #3 were sold to Kapler Pte. Ltd 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.
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.
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, a lithium battery
management system and power storage system supplier.
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 are in the process of negotiating with Smilegate to re-gain the license for such game development. There can be no assurance
that we will be able to obtain such license from Smilegate or launch CrossFire New Mobile Game. See “Risk Factors—Risks
Related to our Business and Industry—If we or our joint ventures fail to renew or acquire new online game licenses on favorable
terms or at all, our future results of operations and profitability may be materially impacted” and “Risk Factors—Risks
Related to our Business and Industry—If we are unable to successfully re-gain license for CrossFire New Mobile Game, launch
or operate CrossFire New Mobile Game or other licensed games in China, 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. 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 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.
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. Those Class A ordinary shares are subject to certain lock-up conditions and the number of Class A ordinary shares
held or to be held by Splendid Days may also be subject to quantitative adjustments based on the market value of our shares, as
set forth in the Settlement Deed. 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.
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.
As of the date of this prospectus, 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.
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.
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 prospectus. 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 prospectus, 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.
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. Other than
WhatsMiner bitcoin mining machines, we also plan to continue purchasing different types of cryptocurrency mining machines in
the near future.
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.
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 have already been 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 closed. Pursuant to the share purchase agreements, as soon
as practicable following the filing of our annual report on Form 20-F for the year ended December 31, 2020, we should file a registration
statement on Form F-3 covering resale of the investors’ Class A ordinary shares.
In February 2021, we
entered into a legally binding memorandum of understanding on the acquisition of 70% equity interest in Hangzhou SuanLiTechnology
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.
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.
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 251PH/S. These Bitcoin mining machines have already been 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 will designate an independent valuation firm to conduct examination and assessment
of the Bitcoin mining machine fair market value, and will make adjustment to the number of Class A ordinary shares to be issued
if needed.
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.
Due to the current
restrictions on foreign ownership of ICP and Internet culture operation in China, currently, we primarily rely on Shanghai The9
Information Technology Co., Ltd., or Shanghai IT, our affiliated PRC 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
“Corporate History and Structure—Arrangements with Affiliated PRC Entity” for details of the contractual arrangements
with Shanghai IT and its shareholders. We do not hold any equity interest in Shanghai IT.
The following diagram
summarizes our corporate structure chart, including our significant subsidiaries, variable interest entity and its subsidiaries,
as of the date of this prospectus.
Arrangements with
Affiliated PRC Entity
Current PRC laws and
regulations impose substantial restrictions on foreign ownership of entities involved in ICP, Internet culture operation and Internet
publishing businesses, including online game operations, in China. Therefore, we conduct part of our activities through a series
of agreements with Shanghai IT, our key affiliated PRC entity. Shanghai IT holds the requisite licenses and approvals for conducting
ICP, Internet culture operation and Internet publishing businesses in China. Shanghai IT is owned by our employee Wei Ji, who acquired
his equity interests in Shanghai IT from Jun Zhu in November 2011, and our employee Zhimin Lin, who acquired his equity interests
in Shanghai IT from Yong Wang in April 2014.
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 to us on a monthly basis. 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 agree 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.
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. 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, 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. Currently, Zhimin Lin and Wei Ji have pledged all of their
equity interests in Shanghai IT in favor of us under the equity pledge agreements. In the event of a breach of any term in the
loan agreement or any other agreements by either Shanghai IT or its shareholders, we will be entitled to enforce our rights as
a pledgee under the agreement.
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 and immediately after
giving effect to this offering, 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 and immediately after giving effect to this offering, 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 “Risk Factors—Risks
Related to Our Corporate Structure—Our current corporate structure and business operations may be affected by the Foreign
Investment Law.”
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected
consolidated statement of operation data for the years ended December 31, 2017, 2018 and 2019, selected consolidated balance sheet
data as of December 31, 2018 and 2019 and selected consolidated cash flow data for the years ended December 31, 2017, 2018 and
2019 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The following selected
consolidated statement of operation data for the years ended December 31, 2015 and 2016, the selected consolidated balance sheet
data as of December 31, 2015, 2016 and 2017 and the selected consolidated cash flow data for the years ended December 31, 2015,
2016 and 2017 are derived from our audited consolidated financial statements not included in this prospectus. The following summary
consolidated statements of operation data for the six months ended June 30, 2019 and 2020, summary consolidated balance sheet data
as of June 30, 2020 and summary consolidated cash flow data for the six months ended June 30, 2019 and 2020 are derived from our
unaudited interim condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the
same basis as our audited consolidated financial statements and include all adjustments, consisting only of normal and recurring
adjustments, that we consider necessary for a fair statement of our financial position and results of operations for the periods
presented. Our audited consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical
results do not necessarily indicate results expected for any future periods. You should read this Selected Consolidated Financial
Data section together with our consolidated financial statements and the related notes and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
The following table
presents our selected consolidated statement of operation data for the year ended December 31, 2017, 2018 and 2019 and the six
months ended June 30, 2019 and 2020.
|
|
For the Year Ended
December 31,
|
|
|
For the Six Months
Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for per share and per
ADS data)
|
|
Selected Consolidated Statement of Operation Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1)
|
|
|
46,610
|
|
|
|
56,286
|
|
|
|
73,208
|
|
|
|
17,492
|
|
|
|
343
|
|
|
|
263
|
|
|
|
466
|
|
|
|
66
|
|
Sales taxes
|
|
|
(199
|
|
|
|
(86
|
)
|
|
|
(59
|
)
|
|
|
(61
|
)
|
|
|
(2
|
)
|
|
|
(12
|
)
|
|
|
—
|
|
|
|
—
|
|
Net revenues
|
|
|
46,411
|
|
|
|
56,200
|
|
|
|
73,149
|
|
|
|
17,431
|
|
|
|
341
|
|
|
|
251
|
|
|
|
466
|
|
|
|
66
|
|
Cost of revenue
|
|
|
(67,744
|
)
|
|
|
(48,519
|
)
|
|
|
(23,782
|
)
|
|
|
(16,436
|
)
|
|
|
(1,342
|
)
|
|
|
(115
|
)
|
|
|
(468
|
)
|
|
|
(66
|
)
|
Gross (loss) profit
|
|
|
(21,333
|
)
|
|
|
7,681
|
|
|
|
49,367
|
|
|
|
995
|
|
|
|
(1,001
|
)
|
|
|
136
|
|
|
|
(7
|
)
|
|
|
—
|
)
|
Total Operating (expenses) income
|
|
|
(303,604
|
)
|
|
|
(306,892
|
)
|
|
|
(163,027
|
)
|
|
|
(105,991
|
)
|
|
|
(162,746
|
)
|
|
|
(41,753
|
)
|
|
|
333,299
|
|
|
|
47,175
|
|
Other operating (expenses) income
|
|
|
(1,563
|
)
|
|
|
3,605
|
|
|
|
350
|
|
|
|
230
|
|
|
|
30
|
|
|
|
23
|
|
|
|
27
|
|
|
|
4
|
|
(Loss) gain from operations
|
|
|
(326,500
|
)
|
|
|
(295,606
|
)
|
|
|
(113,310
|
)
|
|
|
(104,766
|
)
|
|
|
(163,717
|
)
|
|
|
(41,594
|
)
|
|
|
333,324
|
|
|
|
47,179
|
|
Impairment on equity investments and available-for-sale
investments
|
|
|
—
|
|
|
|
(244,798
|
)
|
|
|
—
|
|
|
|
(1,386
|
)
|
|
|
(4,666
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impairment on other investments
|
|
|
—
|
|
|
|
(2,807
|
)
|
|
|
(9,109
|
)
|
|
|
(7,776
|
)
|
|
|
(3,791
|
)
|
|
|
—
|
|
|
|
(10,000
|
)
|
|
|
(1,415
|
)
|
Impairment on other advances
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,981
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest income
|
|
|
775
|
|
|
|
161
|
|
|
|
31
|
|
|
|
194
|
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest expenses, net
|
|
|
(6,397
|
)
|
|
|
(56,472
|
)
|
|
|
(83,922
|
)
|
|
|
(104,777
|
)
|
|
|
(34,502
|
)
|
|
|
(17,193
|
)
|
|
|
(3,821
|
)
|
|
|
(541
|
)
|
Fair value change on warrants liability
|
|
|
(7,129
|
)
|
|
|
48,057
|
|
|
|
12,615
|
|
|
|
2,251
|
|
|
|
1,292
|
|
|
|
(964
|
)
|
|
|
(123
|
)
|
|
|
(17
|
)
|
(Loss) gain on disposal of equity investees
and available-for-sale investment
|
|
|
—
|
|
|
|
(1,217
|
)
|
|
|
115
|
|
|
|
—
|
|
|
|
695
|
|
|
|
3,695
|
|
|
|
—
|
|
|
|
—
|
|
Gain on disposal of other investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,431
|
|
|
|
—
|
|
|
|
2,819
|
|
|
|
399
|
|
Foreign exchange (loss)/gain
|
|
|
(7,313
|
)
|
|
|
(13,131
|
)
|
|
|
19,206
|
|
|
|
(20,331
|
)
|
|
|
(5,474
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other income (expenses), net
|
|
|
5,396
|
|
|
|
3,179
|
|
|
|
4,670
|
|
|
|
1,599
|
|
|
|
9,373
|
|
|
|
7,841
|
|
|
|
(11,863
|
)
|
|
|
(1,679
|
)
|
(Loss) gain before income tax expense and share
of loss in equity method investments
|
|
|
(341,168
|
)
|
|
|
(562,634
|
)
|
|
|
(169,704
|
)
|
|
|
(234,992
|
)
|
|
|
(193,321
|
)
|
|
|
(48,217
|
)
|
|
|
310,336
|
|
|
|
43,9
|
26
|
Income tax benefit
|
|
|
—
|
|
|
|
6,079
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
For the Year Ended December 31,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands, except for per share and per ADS data)
|
|
Selected Consolidated Statement of Operation Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery of equity investment in excess of cost
|
|
|
—
|
|
|
|
—
|
|
|
|
60,549
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,165
|
)
|
|
|
(1,014
|
|
Gain on extinguishment of convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,756
|
|
|
|
8,033
|
|
Share of loss in equity investments
|
|
|
(13,014
|
)
|
|
|
(110,535
|
)
|
|
|
(2,938
|
)
|
|
|
(4,293
|
)
|
|
|
(2,847
|
)
|
|
|
(1,825
|
)
|
|
|
—
|
|
|
|
—
|
|
Net (loss) gain
|
|
|
(354,182
|
)
|
|
|
(667,090
|
)
|
|
|
(112,093
|
)
|
|
|
(239,285
|
)
|
|
|
(196,168
|
)
|
|
|
(50,042
|
)
|
|
|
359,927
|
|
|
|
50,945
|
|
Net (loss) gain attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
(16,656
|
)
|
|
|
(58,584
|
)
|
|
|
3,956
|
|
|
|
(16,333
|
)
|
|
|
(13,518
|
)
|
|
|
(7,030
|
)
|
|
|
(2,032
|
)
|
|
|
(288
|
)
|
Redeemable noncontrolling interest
|
|
|
(32,698
|
)
|
|
|
(14,724
|
)
|
|
|
2,117
|
|
|
|
(5,859
|
)
|
|
|
(4,856
|
)
|
|
|
(2,525
|
)
|
|
|
(738
|
)
|
|
|
(104
|
)
|
The9 Limited
|
|
|
(304,828
|
)
|
|
|
(593,782
|
)
|
|
|
(118,166
|
)
|
|
|
(217,093
|
)
|
|
|
(177,794
|
)
|
|
|
(40,487
|
)
|
|
|
362,697
|
|
|
|
51,337
|
|
Change in redemption value of redeemable noncontrolling interest
|
|
|
79,806
|
|
|
|
82,890
|
|
|
|
57,126
|
|
|
|
40,919
|
|
|
|
12,828
|
|
|
|
(10,497
|
)
|
|
|
(738
|
)
|
|
|
(104
|
)
|
Net (loss) gain attributable to holders of ordinary shares
|
|
|
(384,634
|
)
|
|
|
(676,672
|
)
|
|
|
(175,292
|
)
|
|
|
(258,012
|
)
|
|
|
(190,622
|
)
|
|
|
(50,984
|
)
|
|
|
361,959
|
|
|
|
51.233
|
|
Other comprehensive income (loss); net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
5,009
|
|
|
|
(1,755
|
)
|
|
|
(9,526
|
)
|
|
|
(1,314
|
)
|
|
|
(794
|
)
|
|
|
(2,643
|
)
|
|
|
(1,260
|
)
|
|
|
(178
|
)
|
Total comprehensive (loss) gain
|
|
|
(349,173
|
)
|
|
|
(668,845
|
)
|
|
|
(121,619
|
)
|
|
|
(240,599
|
)
|
|
|
(196,962
|
)
|
|
|
(52,685
|
)
|
|
|
358,667
|
|
|
|
50,767
|
|
Comprehensive (loss) gain attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
(16,913
|
)
|
|
|
(58,584
|
)
|
|
|
13,458
|
|
|
|
(24,888
|
)
|
|
|
(19,738
|
)
|
|
|
(9,063
|
)
|
|
|
(2,296
|
)
|
|
|
(325
|
)
|
Redeemable noncontrolling interest
|
|
|
(32,698
|
)
|
|
|
(14,724
|
)
|
|
|
2,117
|
|
|
|
(5,859
|
)
|
|
|
(4,856
|
)
|
|
|
(2,525
|
)
|
|
|
(738
|
)
|
|
|
(104
|
)
|
The9 Limited
|
|
|
(299,562
|
)
|
|
|
(595,537
|
)
|
|
|
(137,194
|
)
|
|
|
(209,852
|
)
|
|
|
(172,368
|
)
|
|
|
(41,096
|
)
|
|
|
361,700
|
|
|
|
51,195
|
|
Change in redemption value of redeemable non-controlling interest
|
|
|
(79,806
|
)
|
|
|
(82,890
|
)
|
|
|
(57,126
|
)
|
|
|
(40,919
|
)
|
|
|
(12,828
|
)
|
|
|
(10,497
|
)
|
|
|
(738
|
)
|
|
|
(104
|
)
|
Comprehensive loss attributable to holders of ordinary shares
|
|
|
(379,368
|
)
|
|
|
(678,427
|
)
|
|
|
(194,320
|
)
|
|
|
(250,771
|
)
|
|
|
(185,196
|
)
|
|
|
(51,593
|
)
|
|
|
360,962
|
|
|
|
51,091
|
|
Net loss attributable to holders of ordinary shares per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(16.55
|
)
|
|
|
(28.34
|
)
|
|
|
(5.24
|
)
|
|
|
(4.15
|
)
|
|
|
(1.79
|
)
|
|
|
(0.60
|
)
|
|
|
3.12
|
|
|
|
0.44
|
|
Diluted
|
|
|
(16.55
|
)
|
|
|
(28.34
|
)
|
|
|
(5.24
|
)
|
|
|
(4.15
|
)
|
|
|
(1.79
|
)
|
|
|
(0.60
|
)
|
|
|
3.12
|
|
|
|
0.44
|
|
Net loss attributable to holders of ordinary shares per ADS(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(496.50
|
)
|
|
|
(850.20
|
)
|
|
|
(157.20
|
)
|
|
|
(124.50
|
)
|
|
|
(53.70
|
)
|
|
|
(18.00
|
)
|
|
|
93.60
|
|
|
|
13.20
|
|
Diluted
|
|
|
(496.50
|
)
|
|
|
(850.20
|
)
|
|
|
(157.20
|
)
|
|
|
(124.50
|
)
|
|
|
(53.70
|
)
|
|
|
(18.00
|
)
|
|
|
93.60
|
|
|
|
13.20
|
|
Notes:
|
|
|
|
(1)
|
Effective
from January 1, 2018, we adopted ASC topic 606 Revenue from Contracts with Customers,
a new accounting standard on the recognition of revenue, and have applied such accounting
standards to the year ended December 31, 2018. The financial data for the year ended
December 31, 2014, 2015, 2016 and 2017 have not been recast and as such are not comparable
with the financial data for the year ended December 31, 2018. The adoption of ASC 606
did not have material impact on our financial results.
|
|
(2)
|
For the
years and periods presented, net loss attributable to holders of ordinary shares per
ADS data was retrospectively adjusted to reflect the current ADS-to-Class A ordinary
share ratio of one ADS representing thirty Class A ordinary shares.
|
The following table
presents our selected consolidated balance sheet data as of December 31, 2017, 2018 and 2019 and June 30, 2020.
|
|
As of December 31,
|
|
|
As of June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019(1)
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Selected Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
49,011
|
|
|
|
38,878
|
|
|
|
142,624
|
|
|
|
4,256
|
|
|
|
10,113
|
|
|
|
57,943
|
|
|
|
8,201
|
|
Non-current assets
|
|
|
460,837
|
|
|
|
262,854
|
|
|
|
139,997
|
|
|
|
131,673
|
|
|
|
26,991
|
|
|
|
14,316
|
|
|
|
2,026
|
|
Total assets
|
|
|
538,095
|
|
|
|
350,892
|
|
|
|
323,109
|
|
|
|
164,687
|
|
|
|
181,459
|
|
|
|
94,897
|
|
|
|
13,432
|
|
Total current liabilities
|
|
|
427,966
|
|
|
|
573,749
|
|
|
|
819,445
|
|
|
|
908,424
|
|
|
|
1,058,083
|
|
|
|
523,708
|
|
|
|
74,126
|
|
Total equity (deficit)
|
|
|
(241,076
|
)
|
|
|
(702,054
|
)
|
|
|
(802,351
|
)
|
|
|
(1,084,811
|
)
|
|
|
(1,231,922
|
)
|
|
|
(782,071
|
)
|
|
|
(110,695
|
)
|
Redeemable noncontrolling interest
|
|
|
178,605
|
|
|
|
246,771
|
|
|
|
306,015
|
|
|
|
341,075
|
|
|
|
349,047
|
|
|
|
349,047
|
|
|
|
49,404
|
|
Total liabilities, redeemable noncontrolling interest and equity
|
|
|
538,095
|
|
|
|
350,892
|
|
|
|
323,109
|
|
|
|
164,687
|
|
|
|
181,459
|
|
|
|
94,897
|
|
|
|
13,432
|
|
Note:
|
|
|
|
(1)
|
Effective from January 1, 2019, we adopted ASC 842, Leases, a new accounting standard on
the recognition of right-of-use assets and lease liabilities, and have applied this accounting standard on a modified retrospective
basis and have elected not to restate comparative periods. See Note 12 to our audited consolidated financial statements included
elsewhere in this prospectus for further information.
|
The following table
presents our selected consolidated cash flow data for the year ended December 31, 2017, 2018 and 2019 and the six months ended
June 30, 2019 and 2020.
|
|
For
the Year Ended December 31,
|
|
|
For
the Six Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in
thousands)
|
|
Selected
Consolidated Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(175,587
|
)
|
|
|
(179,768
|
)
|
|
|
(86,652
|
)
|
|
|
(101,201
|
)
|
|
|
(54,175
|
)
|
|
|
(17,720
|
)
|
|
|
(62,199
|
)
|
|
|
(8,804
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(208,996
|
)
|
|
|
(9,985
|
)
|
|
|
161,923
|
|
|
|
(17,315
|
)
|
|
|
60,879
|
|
|
|
(33,297
|
)
|
|
|
443,983
|
|
|
|
62,842
|
|
Net
cash provided by (used in) financing activities
|
|
|
257,937
|
|
|
|
190,092
|
|
|
|
44,073
|
|
|
|
(18,357
|
)
|
|
|
40,923
|
|
|
|
50,446
|
|
|
|
(331,529
|
)
|
|
|
(46,925
|
)
|
Effect
of foreign exchange rate changes on cash
|
|
|
(5,826
|
)
|
|
|
(10,472
|
)
|
|
|
4,529
|
|
|
|
(1,495
|
)
|
|
|
1,257
|
|
|
|
(1,597
|
)
|
|
|
(2,425
|
)
|
|
|
(343
|
)
|
Cash
reclassified as held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,127
|
)
|
|
|
—
|
|
|
|
(43,027
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
change in cash and cash equivalents
|
|
|
(132,472
|
)
|
|
|
(10,133
|
)
|
|
|
103,746
|
|
|
|
(138,368
|
)
|
|
|
5,857
|
|
|
|
(2,168
|
)
|
|
|
47,830
|
|
|
|
6,770
|
|
Cash
and cash equivalents, beginning of year
|
|
|
181,482
|
|
|
|
49,011
|
|
|
|
38,878
|
|
|
|
142,624
|
|
|
|
4,256
|
|
|
|
4,256
|
|
|
|
10,113
|
|
|
|
1,431
|
|
Cash
and cash equivalents, end of the year
|
|
|
49,011
|
|
|
|
38,878
|
|
|
|
142,624
|
|
|
|
4,256
|
|
|
|
10,113
|
|
|
|
2,088
|
|
|
|
57,943
|
|
|
|
8,201
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read
the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled
“Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere
in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results
and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result
of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Overview
We are an Internet
company based in China and we aim to become a diversified Internet company targeting on fast-growing technology sectors. We are
currently transforming our business focus to cryptocurrencies mining business.
General Factors
Affecting Our Results of Operations
The major factors affecting
our results of operations and financial conditions include:
|
·
|
our revenues’ composition and sources of revenues;
|
|
·
|
our cost of revenue; and
|
|
·
|
our operating expenses.
|
Key Components of
Results of Operations
Revenue Composition
and Sources of Revenue. In 2017, 2018 and 2019 and the six months ended June 30, 2020, we generated substantially all of
our revenues from online game services, and the remaining portion of our revenues from other services. The following table sets
forth our revenues generated from providing online game services and other services, both in absolute amounts and as percentages
of total revenues for the periods indicated.
|
|
For the Year Ended December 31,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2020
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
|
|
(in thousands, except percentages)
|
|
|
|
|
Revenue(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online game services
|
|
|
71,564
|
|
|
|
97.8
|
|
|
|
16,551
|
|
|
|
94.6
|
|
|
|
304
|
|
|
|
88.5
|
|
|
|
263
|
|
|
|
100.0
|
|
|
|
466
|
|
|
|
66
|
|
|
|
100.0
|
|
Other revenues
|
|
|
1,644
|
|
|
|
2.2
|
|
|
|
941
|
|
|
|
5.4
|
|
|
|
39
|
|
|
|
11.5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total revenues
|
|
|
73,208
|
|
|
|
100.0
|
|
|
|
17,492
|
|
|
|
100.0
|
|
|
|
343
|
|
|
|
100.0
|
|
|
|
263
|
|
|
|
100.0
|
|
|
|
466
|
|
|
|
66
|
|
|
|
100.0
|
|
|
(1)
|
Effective
from January 1, 2018, we adopted ASC topic 606, and have applied such accounting standards
to the year ended December 31, 2018. The financial data for the year ended December 31,
2017 has not been recast and as such are not comparable with the financial data for the
year ended December 31, 2018 and 2019. The adoption of ASC topic 606 did not have material
impact on our financial results.
|
Online Game Services.
In 2017, 2018 and 2019 and the six months ended June 30, 2020, revenues from our online game services amounted to RMB71.6 million,
RMB16.6 million, RMB0.3 million and RMB0.5 million (US$0.07 million), respectively. 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. Future usage patterns
may differ from the historical usage patterns on which the virtual items and services consumption model is based. We will continue
to monitor the operational statistics and usage patterns affecting our recognition of these revenues.
Before August 1, 2018,
we recorded our IPTV revenue on a gross basis. As we became an agent in the operation of IPTV games since August 1, 2018, we started
to record our IPTV revenues net of amounts we paid to third-party operators.
Other Revenues.
Other revenues mainly included revenues from the provision of technical services to customers.
Cost of Revenue.
Our cost of revenue 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.
Before August 1, 2018,
we recorded our IPTV revenue on a gross basis. As we became an agent in the operation of IPTV games since August 1, 2018, we started
to record our IPTV revenues net of amounts we paid to third-party operators, and such amounts were no longer included in the cost
of revenue.
Operating Expenses.
Our operating expenses consist primarily of product development expenses, sales and marketing expenses, general and administrative
expenses and gain on disposal of subsidiaries.
Product Development
Expenses. 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 RMB45.1 million,
RMB24.6 million, RMB13.1 million and RMB0.9 million (US$0.1 million) for the year ended December 31, 2017, 2018 and 2019 and the
six months ended June 30, 2020, respectively. Most of our proprietary online games have entered into their final stages of development
and we have the ability to control the level of discretionary spending on product development in the near future.
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 RMB9.1 million, RMB2.3
million, RMB2.1 million and RMB0.3 million (US$0.01 million) for the year ended December 31, 2017, 2018 and 2019 and the six months
ended June 30, 2020, respectively.
General and Administrative
Expenses. Our general and administrative expenses consist primarily of compensation and travel expenses for our employees,
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 RMB108.8 million, RMB89.6 million, RMB113.9 million and RMB57.4 million (US$8.1 million)
for the year ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, respectively.
Gain on Disposal
of Subsidiaries. We had gain on disposal of subsidiaries of RMB391.8 million (US$55.5 million) for the six months ended
June 30, 2020 as a result of disposal of subsidiaries that have been classified as held-for-sale as of December 31, 2020. We had
gain on disposal of subsidiaries of RMB1.2 million for the year ended December 31, 2019. We had gain on disposal of subsidiaries
of RMB10.5 million for the year ended December 31, 2018, including gain on disposal of The9 Education of RMB10.0 million. We had
no gain on disposal of subsidiaries for the year ended December 31, 2017.
Holding Company
Structure
We are a holding company
incorporated in the Cayman Islands and rely primarily on dividends and other distributions from our subsidiaries and our affiliated
entity in China for our cash requirements. Current PRC regulations restrict our affiliated entity and subsidiaries from paying
dividends in the following two principal aspects: (i) our affiliated 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. In addition, failure to comply with relevant SAFE regulations may restrict the
ability of our subsidiaries to make dividend payments to us. See “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
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 affiliated entity in the PRC are generally subject to EIT at a statutory
rate of 25%. Our subsidiaries and affiliated entity in the PRC that hold a HNTE qualification are entitled to enjoy a 15% preferential
EIT rate.
In addition, under
the EIT Law, enterprises organized under the laws of their respective jurisdictions outside the PRC may be classified as either
“non-resident enterprises” or “resident enterprises.” Non-resident enterprises are subject to withholding
tax at the rate of 20% with respect to their PRC-sourced dividend income if they have no establishment or place of business in
the PRC or if such income is not related to their establishment or place of business in the PRC, unless otherwise exempted or reduced
according to treaties or arrangements between the PRC central government and the governments of other countries or regions. The
State Council has reduced the withholding tax rate to 10% in the newly promulgated implementation rules of the EIT Law. As we are
incorporated in the Cayman Islands, we may be regarded as a “non-resident enterprise.” We hold equity interests in
certain PRC subsidiaries through subsidiaries in Hong Kong. According to the Tax Agreement between the PRC and Hong Kong, dividends
paid by a foreign-invested enterprise in the PRC to its corporate shareholder in Hong Kong holding 25% or more of its equity interest
may be subject to withholding tax at the maximum rate of 5% if certain criteria are met. Entitlement to such lower tax rate on
dividends according to tax treaties or arrangements between the PRC central government and governments of other countries or regions
is further subject to approval 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 “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.”
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 and Wuxi QuDong, as general VAT payers will be
subject to VAT at the rate of 6%, and the services provided by our other PRC subsidiaries or affiliated PRC entity as small-scale
VAT payers will be subject to VAT at the rate of 3%.
Our subsidiaries in
the United States are registered in California and are subject to U.S. federal corporate marginal income tax at a rate of 21% for
the taxable year ending December 31, 2019 and subsequent taxable years and state income tax at a rate of 8.84%, respectively.
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 2018, 2019 and 2020 increases of 1.9%, 4.5% and 0.2%,
respectively. Although we have not been materially affected by inflation, we may be affected if China experiences higher rates
of inflation in the future.
Critical Accounting
Policies
We prepare financial
statements in conformity with U.S. Generally Accepted Accounting Principles, or U.S. GAAP, which requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities on
the date of the financial statements, and the reported amounts of revenue and expenses during the financial reporting period. We
continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience
and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the
use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.
Some of our accounting policies require higher degrees of judgment than others in their application. We consider the policies discussed
below to be critical to an understanding of our financial statements as their application assists management in making their business
decisions.
Consolidation
of Variable Interest Entities, or VIEs
PRC laws and regulations,
including the GAPP Circular and the Network Publication Measures, currently prohibit or restrict foreign ownership of Internet-related
businesses. We believe, consistent with the view of our PRC legal counsel, that our current structure complies with these foreign
ownership restrictions, subject to the interpretation and implementation of the GAPP Circular and the Network Publication Measures.
Specifically, we operate our business through Shanghai IT and have entered into a series of contractual arrangements with Shanghai
IT and its equity owners. See the contractual arrangements set forth in “Corporate History and Structure—Arrangements
with Affiliated PRC Entity.” As a result of these contractual arrangements, we are entitled to receive service fees for services
provided to Shanghai IT for an amount determined at our discretion, up to 90% of PRC entities’ profits. In addition, the
equity owners of record for these entities have pledged all their equity interests in the VIEs to us as collateral for all of their
payments due to the wholly-owned foreign enterprise, or WOFE, and to secure performance of all obligations of the VIEs and their
shareholders under various agreements. In addition, the agreements provide that any dividend distributions made by the VIEs, if
any, are required to be deposited in an escrow account over which we have exclusive control. Moreover, through the Call Option
Agreements and Shareholder Voting Proxy Agreements, each shareholder of the VIEs granted WOFE or any third parties designated by
the WOFE an irrevocable power of attorney to act on all matters pertaining to the VIEs. We believe that the terms of the Call Option
Agreements are currently exercisable and legally enforceable under the PRC laws and regulations. We also believe that the minimum
amount of consideration permitted by the applicable PRC law to exercise the options does not represent a financial barrier or disincentive
for us to exercise our rights under the Call Option Agreements. A simple majority vote of our board of directors is required to
pass a resolution to exercise our rights under the Call Option Agreements, for which consent of the shareholder of the VIEs is
not required. As a result of the totality of these arrangements, we have both the power to direct activities that most significantly
impact the VIEs economic performance and the obligation to absorb losses of or right to receive benefits from the VIEs that are
significant to Shanghai IT. As a result, we concluded we are the primary beneficiary of Shanghai IT and as such Shanghai IT is
consolidated VIE of our company.
The GAPP Circular reiterates
and reinforces the long-standing prohibition of foreign ownership of Internet-related publication businesses via direct, indirect
or disguised methods, and the Network Publication Measures provides that the manner of project cooperation shall be subject to
prior examination and approval by the GAPPRFT. However, 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. In addition, the GAPP Circular
and the Network Publication Measures do not specifically invalidate VIE agreements, and we are not aware of any online game companies
adopting similar contractual arrangements as ours having been penalized or ordered to terminate such arrangements since the GAPP
Circular first became effective. Therefore, we believe that our ability to direct the activities of Shanghai IT that most significantly
impact our economic performance is not affected by the GAPP Circular. Any changes in PRC laws and regulations that affect our ability
to control Shanghai IT might preclude us from consolidating Shanghai IT in the future. See “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.”
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.
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.
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.
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, 2017, 2018 and 2019, 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, 2017, 2018 and
2019, we did not have any material interest and penalties associated with tax positions.
Share-Based
Compensation
We measure the cost
of employee services received in exchange for stock-based compensation measured at the grant date fair value of the award. For
the awards that are modified, we determine the incremental cost as the excess of the fair value of the modified award over the
fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent
factors at that date. We recognize the compensation costs, net of the estimated forfeiture, on a straight-line basis over the vesting
period of the award, which generally ranges from one to four years. Forfeiture rates are estimated based on historical forfeiture
patterns and adjusted to reflect future changes in circumstances and facts, if any. If actual forfeitures differ from those estimates,
the estimates may be revised in subsequent periods. We use historical data to estimate pre-vesting option forfeitures and record
stock-based compensation expense only for those awards that are expected to vest.
Determining the fair
value of stock options requires significant judgment. We measure the fair value of the stock options using the Black-Scholes option-pricing
model with assumptions made regarding expected term, volatility, risk-free interest rate, and dividend yield. The expected term
represents the period of time that the awards granted are expected to be outstanding. The expected term is determined based on
historical data on employee exercise and post-vesting employment termination behavior, or the “simplified” method for
stock option awards with the characteristics of “plain vanilla” options for 2010 and 2011. Expected volatilities are
based on historical volatilities of our ordinary shares. Risk-free interest rate is based on U.S. government bonds issued with
maturity terms similar to the expected term of the stock-based awards. While we paid a discretionary cash dividend in January 2009,
we do not anticipate paying any recurring cash dividends in the foreseeable future.
In addition, on December
8, 2010, we granted 1,500,000 ordinary shares to Jun Zhu, 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.
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.
Share-based compensation
expenses of RMB38.0 million, RMB3.9 million, RMB21.3 million and RMB34.4 million (US$4.9 million) were recognized for the year
ended December 31, 2017, 2018 and 2019 and the six months ended June 30, 2020, 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.
Allowance for
doubtful accounts
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. If the financial condition of our customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required. We provided an allowance for doubtful accounts of RMB0.05
million, RMB21.2 million, RMB0.2 million and nil for the year ended December 2017, 2018 and 2019 and the six months ended June
30, 2020, 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 RMB9.1 million, RMB9.2 million,
RMB8.5 million and RMB10.0 million (US$1.4 million) was recognized in 2017, 2018 and 2019 and the six months ended June 30, 2020,
respectively.
Impairment
of Long-lived Assets
We review long-lived
assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset or asset group may not be recoverable. We assess the recoverability of long-lived assets and intangible assets (other than
goodwill) by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. We
recognize impairment of long-lived assets and intangible assets in the event that the net book value of such assets exceeds the
estimated future undiscounted cash flow attributable to such assets. We use estimates and judgment in our impairment tests, and
if different estimates or judgments had been utilized, the timing or the amount of the impairment charges could be different. Impairment
charges relating to intangible assets and other assets amounting to nil, nil, RMB34.9 million and nil were recognized in 2017,
2018 and 2019 and the six months ended June 30, 2020, respectively.
Refund of WoW
Game Points
As a result of non-renewal
of WoW license on June 7, 2009, we announced a refund plan in connection with 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$24.1 million) as of June 30, 2020.
Convertible
Notes and Beneficial Conversion Feature, or 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.
Warrants
We account for the
detachable warrants issued in connection with convertible notes under the authoritative guidance on accounting for derivative financial
instruments indexed to, and potentially settled in, a company’s own stock. We classify warrants in our consolidated balance
sheet as a liability which is revalued at each balance sheet date subsequent to the initial issuance. We use the Black-Scholes
pricing model to value the warrants. Determining the appropriate fair-value model and calculating the fair value of warrants requires
considerable judgment. A small change in the estimates used may cause a relatively large change in the estimated valuation. The
estimated volatility of our common stock at the date of issuance, and at each subsequent reporting period, is based on historic
fluctuations in our stock price. The risk-free interest rate is based on U.S. government bonds with a maturity similar to the expected
remaining life of the warrants at the valuation date. The expected life of the warrants is based on the historical pattern of exercises
of warrants.
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.
Recent Accounting
Pronouncements
A list of recent accounting
pronouncements that are relevant to us is included in note 2<32> to our audited consolidated financial statements and note
2<28> to our unaudited interim condensed consolidated financial statements, which are included in this prospectus.
Results of Operations
The following table
sets forth a summary of our consolidated statements of operations for the periods indicated, both in absolute amounts and as percentages
of our total net revenue:
|
|
For the Year Ended December 31,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
%
|
|
|
RMB
|
|
|
US$
|
|
|
%
|
|
Consolidated Statement of Operation Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online game services
|
|
|
71,564,023
|
|
|
|
97.8
|
|
|
|
16,551,080
|
|
|
|
94.9
|
|
|
|
303,577
|
|
|
|
88.9
|
|
|
|
263,579
|
|
|
|
104.9
|
|
|
|
465,726
|
|
|
|
65,919
|
|
|
|
100.0
|
|
Other revenues
|
|
|
1,644,143
|
|
|
|
2.3
|
|
|
|
941,335
|
|
|
|
5.4
|
|
|
|
39,500
|
|
|
|
11.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Sales taxes
|
|
|
(59,610
|
)
|
|
|
(0.1
|
)
|
|
|
(60,557
|
)
|
|
|
(0.3
|
)
|
|
|
(1,582
|
)
|
|
|
(0.5
|
)
|
|
|
(12,252
|
)
|
|
|
(4.9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net revenues
|
|
|
73,148,556
|
|
|
|
100.0
|
|
|
|
17,431,858
|
|
|
|
100.0
|
|
|
|
341,495
|
|
|
|
100.0
|
|
|
|
251,327
|
|
|
|
100.0
|
|
|
|
465,726
|
|
|
|
65,919
|
|
|
|
100.0
|
|
Cost of revenue
|
|
|
(23,782,054
|
)
|
|
|
(32.5
|
)
|
|
|
(16,435,590
|
)
|
|
|
(94.3
|
)
|
|
|
(1,342,266
|
)
|
|
|
(393.1
|
)
|
|
|
(115,060
|
)
|
|
|
(45.8
|
)
|
|
|
(468,288
|
)
|
|
|
(66,282
|
)
|
|
|
(100.6
|
)
|
Gross profit
|
|
|
49,366,502
|
|
|
|
67.5
|
|
|
|
996,268
|
|
|
|
5.7
|
|
|
|
(1,000,771
|
)
|
|
|
(293.1
|
)
|
|
|
136,267
|
|
|
|
54.2
|
|
|
|
(2,562
|
)
|
|
|
(363
|
)
|
|
|
(0.6
|
)
|
Operating (expenses) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
(45,112,396
|
)
|
|
|
(61.7
|
)
|
|
|
(24,555,308
|
)
|
|
|
(140.9
|
)
|
|
|
(13,090,530
|
)
|
|
|
(3,833.3
|
)
|
|
|
(8,658,009
|
)
|
|
|
(3,444.9
|
)
|
|
|
(892,739
|
)
|
|
|
(126,359
|
)
|
|
|
(191.7
|
)
|
Sales and marketing
|
|
|
(9,089,969
|
)
|
|
|
(12.4
|
)
|
|
|
(2,325,818
|
)
|
|
|
(13.3
|
)
|
|
|
(2,114,519
|
)
|
|
|
(619.2
|
)
|
|
|
(852,176
|
)
|
|
|
(339.1
|
)
|
|
|
(297,853
|
)
|
|
|
(42,158
|
)
|
|
|
(64.0
|
)
|
General and administrative
|
|
|
(108,824,680
|
)
|
|
|
(148.8
|
)
|
|
|
(89,583,331
|
)
|
|
|
(513.9
|
)
|
|
|
(113,867,000
|
)
|
|
|
(33,343.7
|
)
|
|
|
(33,479,081
|
)
|
|
|
(13,320.9
|
)
|
|
|
(57,359,337
|
)
|
|
|
(8,118,687
|
)
|
|
|
(12,316.2
|
)
|
Impairment on other long-lived assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(34,881,000
|
)
|
|
|
(10,214.2
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gain on disposal of
subsidiaries
|
|
|
—
|
|
|
|
—
|
|
|
|
10,473,159
|
|
|
|
60.1
|
|
|
|
1,206,925
|
|
|
|
353.4
|
|
|
|
1,235,847
|
|
|
|
491.7
|
|
|
|
391,848,588
|
|
|
|
55,462,568
|
|
|
|
84,137.5
|
|
Total operating expenses (income)
|
|
|
(163,027,045
|
)
|
|
|
(222.9
|
)
|
|
|
(105,991,298
|
)
|
|
|
(608.0
|
)
|
|
|
(162,746,124
|
)
|
|
|
(47,657.0
|
)
|
|
|
(41,594,445
|
)
|
|
|
(16,549.9
|
)
|
|
|
333,298,659
|
|
|
|
41,175,364
|
|
|
|
71,565.7
|
|
Other operating income
|
|
|
349,954
|
|
|
|
0.5
|
|
|
|
229,538
|
|
|
|
1.3
|
|
|
|
30,240
|
|
|
|
8.9
|
|
|
|
22,680
|
|
|
|
9.0
|
|
|
|
27,358
|
|
|
|
3,872
|
|
|
|
5.9
|
|
Loss from operations
|
|
|
(113,310,589
|
)
|
|
|
(154.9
|
)
|
|
|
(104,765,492
|
)
|
|
|
(601.0
|
)
|
|
|
(163,716,655
|
)
|
|
|
(47,941.2
|
)
|
|
|
(41,594,445
|
)
|
|
|
(16,549.9
|
)
|
|
|
333,323,455
|
|
|
|
47,178,873
|
|
|
|
71,571.0
|
|
Impairment on equity investment and available-for-sale investment
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,386,174
|
)
|
|
|
(8.0
|
)
|
|
|
(4,666,128
|
)
|
|
|
(1,366.4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impairment on other investments
|
|
|
(9,109,312
|
)
|
|
|
(12.5
|
)
|
|
|
(7,776,157
|
)
|
|
|
(44.6
|
)
|
|
|
(3,791,039
|
)
|
|
|
(1,110.1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,000,000
|
)
|
|
|
(1,415,408
|
)
|
|
|
(2,147.2
|
)
|
Impairment on other advances
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,980,788
|
)
|
|
|
(1,751.4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest income
|
|
|
30,525
|
|
|
|
0.0
|
|
|
|
193,928
|
|
|
|
1.1
|
|
|
|
18,576
|
|
|
|
5.4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest expenses, net
|
|
|
(83,922,200
|
)
|
|
|
(114.7
|
)
|
|
|
(104,776,674
|
)
|
|
|
(601.1
|
)
|
|
|
(34,501,556
|
)
|
|
|
(10,103.1
|
)
|
|
|
(17,193,207
|
)
|
|
|
(6,841.0
|
)
|
|
|
(3,820,725
|
)
|
|
|
(540,789
|
)
|
|
|
(820.4
|
)
|
Fair value change on warrants
|
|
|
12,615,466
|
|
|
|
17.2
|
|
|
|
2,251,427
|
|
|
|
12.9
|
|
|
|
1,292,244
|
|
|
|
378.4
|
|
|
|
(964,594
|
)
|
|
|
(383.8
|
)
|
|
|
(123,056
|
)
|
|
|
(17,417
|
)
|
|
|
(26.4
|
)
|
Gain on disposal of equity investee and available-for-sale investment
|
|
|
115,349
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
694,628
|
|
|
|
203.4
|
|
|
|
3,694,628
|
|
|
|
1,470.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gain on disposal of other investments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,430,588
|
|
|
|
3,932.9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,818,643
|
|
|
|
398,953
|
|
|
|
605.2
|
|
Foreign exchange (loss)/gain
|
|
|
19,206,747
|
|
|
|
26.3
|
|
|
|
(20,331,430
|
)
|
|
|
(116.6
|
)
|
|
|
(5,474,002
|
)
|
|
|
(1,603.0
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other income (expenses), net
|
|
|
4,669,587
|
|
|
|
6.4
|
|
|
|
1,598,663
|
|
|
|
9.2
|
|
|
|
9,372,652
|
|
|
|
2,744.6
|
|
|
|
7,840,727
|
|
|
|
3,119.7
|
|
|
|
(11,863,491
|
)
|
|
|
(1,679,168
|
)
|
|
|
(2,547.3
|
)
|
(Loss) gain before income tax expense and share of loss in equity method investments
|
|
|
(169,704,427
|
)
|
|
|
(232.0
|
)
|
|
|
(234,991,909
|
)
|
|
|
(1,348.1
|
)
|
|
|
(193,321,480
|
)
|
|
|
(56,610.5
|
)
|
|
|
(48,216,891
|
)
|
|
|
(19,184.9
|
)
|
|
|
310,334,826
|
|
|
|
43,925,044
|
|
|
|
66,634.9
|
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Recovery of equity investment in excess of cost
|
|
|
60,548,651
|
|
|
|
82.8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,165,097
|
)
|
|
|
(1,014,154
|
)
|
|
|
(1,538.6
|
|
Gain on extinguishment of convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,755,902
|
|
|
|
8,033,277
|
|
|
|
12,186.6
|
|
Share of loss in equity investments
|
|
|
(2,937,131
|
)
|
|
|
(4.0
|
)
|
|
|
(4,292,887
|
)
|
|
|
(24.6
|
)
|
|
|
(2,847,260
|
)
|
|
|
(833.8
|
)
|
|
|
(1,824,878
|
)
|
|
|
(726.1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net (loss) gain
|
|
|
(112,092,907
|
)
|
|
|
(153.2
|
)
|
|
|
(239,284,796
|
)
|
|
|
(1,372.7
|
)
|
|
|
(196,168,740
|
)
|
|
|
(57,444.3
|
)
|
|
|
(50,041,769
|
)
|
|
|
(19,911.0
|
)
|
|
|
359,925,631
|
|
|
|
50,944,167
|
|
|
|
77,283.0
|
|
Net (loss) gain attributable to noncontrolling interest
|
|
|
3,955,640
|
|
|
|
5.4
|
|
|
|
(16,332,968
|
)
|
|
|
(93.7
|
)
|
|
|
(13,517,983
|
)
|
|
|
(3,958.5
|
)
|
|
|
(7,030,290
|
)
|
|
|
(2,797.3
|
)
|
|
|
(2,032,463
|
)
|
|
|
(287,676
|
)
|
|
|
(436.4
|
)
|
Net (loss) gain attributable to redeemable noncontrolling interest
|
|
|
2,117,303
|
|
|
|
2.9
|
|
|
|
(5,858,902
|
)
|
|
|
(33.6
|
)
|
|
|
(4,855,589
|
)
|
|
|
(1,421.9
|
)
|
|
|
(2,525,192
|
)
|
|
|
(1,004.7
|
)
|
|
|
(738,246
|
)
|
|
|
(104,492
|
)
|
|
|
(158.5
|
)
|
Net (loss) gain attributable to The9 Limited
|
|
|
(118,165,850
|
)
|
|
|
(161.5
|
)
|
|
|
(217,092,926
|
)
|
|
|
(1,245.4
|
)
|
|
|
(177,795,168
|
)
|
|
|
(52,063.9
|
)
|
|
|
(40,486,287
|
)
|
|
|
(16,109.0
|
)
|
|
|
362,696,340
|
|
|
|
51,366,335
|
|
|
|
77877.9
|
|
Accretion on redeemable noncontrolling interest
|
|
|
(57,126,233
|
)
|
|
|
(78.1
|
)
|
|
|
(40,918,773
|
)
|
|
|
(234.7
|
)
|
|
|
(12,827,598
|
)
|
|
|
(3,756.3
|
)
|
|
|
(10,497,201
|
)
|
|
|
(4,176.7
|
)
|
|
|
(738,246
|
)
|
|
|
(104,492
|
)
|
|
|
158.5
|
)
|
Net loss attributable to holders of ordinary shares
|
|
|
(175,292,083
|
)
|
|
|
(239.6
|
)
|
|
|
(258,011,699
|
)
|
|
|
(1,480.1
|
)
|
|
|
(190,622,766
|
)
|
|
|
(55,820.2
|
)
|
|
|
(50,983,488
|
)
|
|
|
(20,285.7
|
)
|
|
|
361,958,094
|
|
|
|
51,231,843
|
|
|
|
77,719.4
|
|
Note:
|
|
|
|
(1)
|
Effective
from January 1, 2018, we adopted ASC topic 606, a new accounting standard on the recognition
of revenue, and have applied such accounting standards to the year ended December 31,
2018. The financial data for the year ended December 31, 2016 and 2017 have not been
recast and as such are not comparable with the financial data for the year ended December
31, 2018. The adoption of ASC topic 606 did not have material impact on our financial
results.
|
Six Months Ended
June 30, 2020 Compared to Six Months Ended June 30, 2019
Revenues. Our
revenues increased by 76.7%, from RMB0.3 million for the six months ended June 30, 2019 to RMB0.5 million (US$0.07 million) for
the six months ended June 30, 2020, primarily due to the sharing of revenue from the launch of new games in 2020, namely The Word
of Kings and Legend of Immortals.
Cost of Revenue.
Cost of revenue increased by 307.1% from RMB0.1 million for the six months ended June 30, 2019 to RMB0.5 million (US$0.07 million)
for the six months ended June 30, 2020, primarily due to the increase in payroll expenses in relation to the new games launched
in 2020, namely The Word of Kings and Legend of Immortals.
Operating (Expenses)
Income. We recorded operating income of RMB333.3 million (US$41.2 million) for the six months ended June 30, 2020, as compared
to operating expenses of RMB41.6 million for the six months ended June 30, 2019, primarily due to significant increase in gain
on disposal of subsidiaries.
Product Development
Expenses. Product development expenses decreased by 89.7% from RMB8.6 million for the six months ended June 30, 2019 to
RMB0.9 million (US$0.1 million) for the six months ended June 30, 2020. The decrease was primarily due to the decrease in payroll
expenses for development team as a result of the decrease in product development personnel headcount.
Sales and Marketing
Expenses. Sales and marketing expenses decreased by 65.0% from RMB0.9 million for the six months ended June 30, 2019 to
RMB0.3 million (US$0.01 million) for the six months ended June 30, 2020. The decrease in sales and marketing expenses was primarily
due to the decrease in payroll expenses for marketing team as a result of the decrease in sales and marketing personnel headcount.
General and Administrative
Expenses. General and administrative expenses increased by 71.3% from RMB33.5 million for the six months ended June 30,
2019 to RMB57.4 million (US$8.1 million) for the six months ended June 30, 2020. The increase was primarily due to the increase
in share-based compensation to senior management and consulting expenses incurred for the development of operations.
Gain on Disposal
of Subsidiaries. We had gain on disposal of subsidiaries of RMB391.8 million (US$55.5 million) for the six months ended
June 30, 2020, including gain on disposal of subsidiaries that have been classified as held-for-sale as of December 31, 2019. We
had gain on disposal of subsidiaries of RMB1.2 million for the six months ended June 30, 2019.
Impairment on
Other Investment. We recorded an impairment of other investment amounting of RMB10.0 million (US$1.4 million) for the six
months ended June 30, 2020, primarily due to the impairment assessment performed after considering the recoverable amount of Shanghai
Institute of Visual Art of Fudan University. We did not record any impairment of other investment for the six months ended June
30, 2019.
Interest Expenses.
Interest expenses decreased from RMB17.2 million for the six months ended June 30, 2019 to RMB3.8 million (US$0.5 million) for
the six months ended June 30, 2020, primarily due to the settlement of Convertible Notes in May 2020 and the decrease of interest
rate applied.
Fair Value Change
on Warrants Liability. We had a fair value change on convertible bonds and warrants liability of RMB0.1 million (US$0.02
million) for the six months ended June 30, 2020, as compared to fair value change on convertible bonds and warrants liability of
RMB1.0 million, primarily due to the fluctuation of our share price during the period.
Gain on Disposal
of Equity Investee and Available-for-sale Investment. We had no gain on disposal of equity investee and available-for-sale
investment for the six months ended June 30, 2020. We had gain on disposal of equity investee and available-for-sale investment
of RMB3.7 million for the six months ended June 30, 2019.
Gain on Disposal
of Other Investment. We had gain on disposal of other investment of RMB2.8 million (US$0.3 million) for the six months
ended June 30, 2020. We had no gain on disposal of other investment for the six months ended June 30, 2019.
Other Income
(Expenses), Net. We recorded other expenses, net, of RMB11.9 million (US$1.7 million) in for the six months ended June
30, 2020, as compared to other net income of RMB7.8 million for the six months ended June 30, 2019, primarily due to the fluctuation
of foreign exchange rate of Renminbi against U.S. dollar.
(Loss) gain before
Income Tax Expense and Share of Loss in Equity Method Investments. We recorded a gain before income tax expense and share
of loss in equity method investments of RMB310.3 million (US$43.9 million) for the six months ended June 30, 2020, primarily due
to the gain on disposal of subsidiaries. We recorded a loss before income tax expense and share of loss in equity method investments
of RMB48.2 million for the six months ended June 30, 2019, primarily due to adverse operating performance where the revenue generated
was not sufficient to cover the expenses.
Gain on Extinguishment
of Convertible Notes. We recorded a gain on extinguishment of convertible notes of RMB56.8 million (US$8.0 million) for
the six months ended June 30, 2020. We had no gain on extinguishment of convertible notes for the six months ended June 30, 2019.
Share of Loss
in Equity Method Investments. We had no share of loss in equity method investments for the six months ended June 30, 2020,
because the carrying amount of the equity method investments has been fully absorbed the share of loss. We had share of loss in
equity method investments of RMB1.8 million for the six months ended June 30, 2019, primarily due to loss from loss absorbed for
the investment in Big Data.
Net (Loss) Gain
Attributable to Holders of Ordinary Shares. Primarily as a result of the cumulative effect of the above factors, we recorded
net gain attributable to our holders of ordinary shares of RMB362.7 million (US$51.4 million) for the six months ended June 30,
2020, as compared net loss attributable to holders of ordinary shares of RMB40.5 million for the six months ended June 30, 2019.
Year 2019 Compared
to Year 2018
Revenues. Our
revenues decreased by 98.0%, from RMB17.5 million in 2018 to RMB0.3 million in 2019, primarily due to the decrease in (i) IPTV
revenue by RMB11.9 million, as the change of revenue recognition according to the renewed agreement since August 2018, and (ii)
licensing revenue of Shanghai IT and GameNow Hong Kong by RMB2.6 million because all authorized licensing contracts of Shanghai
IT either expired or were terminated in 2018. There was only one licensing contract of GameNow Hong Kong, which generated revenue
of RMB0.16 million in 2019 until it expired in April 2019.
Online Game Services.
Our revenues from our online game services decreased by 98.2%, from RMB16.6 million in 2018 to RMB0.3 million in 2019. The decrease
was primarily attributable to the decrease in (i) IPTV revenue by RMB11.9 million, and (ii) revenue generated from Song of Knight
by RMB2.6 million as Song of Knight ceased operations in 2018.
Our revenues from TV
games decreased by 99.7% from RMB11.9 million in 2018 to RMB0.04 million in 2019. The decrease was mainly attributable to the loss
of revenue from TV games in 2019, which was attributable to the change of our role from principal to agent for TV games since August
1, 2018, which resulted in change of revenue recognition policy.
Other Revenues.
Revenues generated from other products and services decreased from RMB0.9 million in 2018 to RMB0.04 million in 2019, primarily
due to a decrease in revenue generated by technical service.
Cost of Revenue.
Cost of revenue decreased by 91.8% from RMB16.4 million in 2018 to RMB1.3 million in 2019, primarily due to (i) the decrease in
payroll as a result of the optimization of our organizational structure in 2019, and (ii) the change of revenue recognition policy
of IPTV revenues since August 2018.
Operating Expenses.
Operating expenses increased by 53.5% from RMB106.0 million in 2018 to RMB162.7 million in 2019 primarily due to increase in general
and administrative expenses and impairment on other long-lived assets.
Product Development
Expenses. Product development expenses decreased by 46.7% from RMB24.6 million in 2018 to RMB13.1 million in 2019. The
decrease was primarily due to a decrease in salaries for the product development personnel as the headcount of product development
personnel decreased in 2019.
Sales and Marketing
Expenses. Sales and marketing expenses decreased by 9.1% from RMB2.3 million in 2018 to RMB2.1 million in 2019. The decrease
in sales and marketing expenses was primarily due to a decrease in the salaries for the sales and marketing personnel and a decrease
of marketing expenses.
General and Administrative
Expenses. General and administrative expenses increased by 27.1% from RMB89.6 million in 2018 to RMB113.9 million in 2019.
The increase was primarily due to an increase in share-based compensation expenses and consulting expenses.
Impairment of
Other Long-lived Assets. We recorded impairment of other long-lived assets of RMB34.9 million in 2019, which was mainly
due to impairment on the prepaid initial deposit in the joint venture in 2019. We did not record any impairment of other long-lived
assets in 2018.
Gain on Disposal
of Subsidiaries. We had gain on disposal of subsidiaries of RMB1.2 million in 2019, including gain on disposal of two immaterial
subsidiaries that did not have significant business operations. We did not record any impairment of other long-lived assets in
2018.
Other Operating
Income. We had an other operating income of RMB0.03 million in 2019, including primarily office rental income. We had an
other operating income of RMB0.2 million in 2018, including primarily office rental income.
Impairment on
Equity Investments and Available-for-sale Investments. We recorded an impairment on equity investments and available-for-sale
investments of RMB4.7 million in 2019, primarily due to the decrease in the market value of our investments in Shanghai Big Data
Cultures & Media Co., Ltd, or Big Data, and Maxline. We recorded an impairment on equity investments and available-for-sale
investments of RMB1.4 million in 2018, primarily due to the decrease in the market value of our investments in Leading Choice.
Impairment on
Other Advances. We recorded an impairment of other advances of RMB6.0 million in 2019, primarily due to delay in the issuance
of certain blockchain-related tokens to us and possible termination of such tokens subscription. We did not record any impairment
of other advances in 2018.
Impairment on
Other Investment. We recorded an impairment of other investment amounting of RMB3.8 million in 2019, primarily due to the
decrease in the market value of our investments in Zhenjiang Kexin and Smartposting. We recorded an impairment of other investment
amounting of RMB7.8 million in 2018, primarily due to the decrease in the market value of our investments in Shanghai Ronglei,
Plutux, Smartposting and Beijing Ti Knight.
Interest Income.
Interest income decreased from RMB0.2 million in 2018 to RMB0.02 million in 2019.
Interest Expenses.
Interest expenses decreased from RMB104.8 million in 2018 to RMB34.5 million in 2019, primarily due to different accounting treatment
for the calculation of interest expenses before and after the due date on December 20, 2018. The interest expenses were recognized
under effective interest rate with net carrying amount of Convertible Notes within contract term. While after Convertible Notes
were due, interest expenses were recognized using nominal interest rate with principal amount.
Fair Value Change
on Warrants Liability. We had a fair value change on convertible bonds and warrants liability of RMB1.3 million in 2019,
primarily due to a decrease in our share price as of December 31, 2019 compared to December 31, 2018.
Gain on Disposal
of Equity Investee and Available-for-sale Investment. We had gain on disposal of equity investee and available-for-sale
investment of RMB0.7 million in 2019. We had no gain or loss on disposal of equity investee and available-for-sale investment in
2018.
Foreign Exchange
Loss. We recorded foreign exchange loss of RMB5.5 million in 2019, as compared to foreign exchange loss of RMB20.3 million
in 2018, primarily due to the appreciation of U.S. dollar against Renminbi in 2019.
Other Income,
Net. We recorded other income, net, of RMB9.4 million in 2019, as compared to other net income of RMB1.6 million in 2018,
primarily due to the receipt of litigation fee refund by the court for prepaid litigation fee originally paid in 2016 related to
the litigation with Qihoo 360.
Share of Loss
in Equity Method Investments. We recorded a share of loss in equity method investments of RMB2.8 million in 2019, primarily
due to the loss absorbed for the investment in Big Data. We recorded a share of loss in equity method investments of RMB4.3 million
in 2018, primarily due to the loss absorbed for the investments in Big Data and Maxline.
Net Loss Attributable
to Holders of Ordinary Shares. Primarily as a result of the cumulative effect of the above factors, net loss attributable
to our holders of ordinary shares increased from RMB258.0 million in 2018 to RMB190.6 million in 2019.
Year 2018 Compared
to Year 2017
Revenues.
Our revenues decreased by 76.1%, from RMB73.2 million in 2017 to RMB17.5 million in 2018, primarily due to the decreases in (i)
Firefall license revenue from System Link by RMB37.9 million as Firefall ceased operations and all revenue had been recognized
in 2017, (ii) IPTV revenue by RMB5.3 million in 2018 as we started to record revenues net of amounts we paid to third-party operators
of IPTV games since August 1, 2018, and (iii) revenue from Song of Knight by RMB1.3 million as Song of Knight ceased operations
in 2018.
Online Game Services.
Our revenues from our online game services decreased by 76.8%, from RMB71.6 million in 2017 to RMB16.6 million in 2018. The decrease
was primarily attributable to the decreases in (i) Firefall license revenue from System Link by RMB37.9 million as Firefall ceased
operations and all revenue had been recognized in 2017, (ii) IPTV revenue by RMB5.3 million in 2018 as described below, and (iii)
revenue generated from Song of Knight by RMB1.3 million as Song of Knight ceased operations in 2018.
Our revenues from TV
games decreased by 30.8% from RMB17.2 million in 2017 to RMB11.9 million in 2018. The decrease was partly attributable to the change
of the revenue recognition policy of the revenue from TV games. Previously, we recorded our IPTV revenue on a gross basis. As we
became an agent in the operation of IPTV games since August 1, 2018, we started to record revenues net of amounts we paid to third-party
operators, and such amount of fees were no longer included in our cost of revenue. As a result, we did not record any revenues
from TV games after August 1, 2018.
Other Revenues.
Revenues generated from other products and services decreased from RMB1.6 million in 2017 to RMB0.9 million in 2018, primarily
due to a decrease in revenue generated by our education business conducted by The9 Education as we disposed The9 Education in January
2018.
Cost of Revenue.
Cost of revenue decreased by 31.1% from RMB23.8 million in 2017 to RMB16.4 million in 2018, primarily due to (i) the decrease in
payroll as a result of the optimization of our organizational structure in 2018, and (ii) the change of revenue recognition policy
of IPTV revenues.
Operating Expenses.
Operating expenses decreased by 35.0% from RMB163.0 million in 2017 to RMB106.0 million in 2018.
Product Development
Expenses. Product development expenses decreased by 45.5% from RMB45.1 million in 2017 to RMB24.6 million in 2018. The
decrease was primarily due to a decrease in salaries for the product development personnel as the headcount of product development
personnel decreased.
Sales and Marketing
Expenses. Sales and marketing expenses decreased by 74.6% from RMB9.1 million in 2017 to RMB2.3 million in 2018. The decrease
in sales and marketing expenses was primarily due to a decrease in the salaries for the sales and marketing personnel and a decrease
of marketing expenses.
General and Administrative
Expenses. General and administrative expenses decreased by 17.6% from RMB108.8 million in 2017 to RMB89.6 million in 2018.
The decrease was primarily due to a decrease in payroll-related expenses as a result of our cost control measures and a decrease
in share-based compensation expenses.
Gain on Disposal
of Subsidiaries. We recorded gain on disposal of subsidiaries of RMB10.5 million in 2018. The increase is mainly due to
a gain from disposal of The9 Education completed in January 2018.
Other Operating
Income. We had an other operating income of RMB0.2 million in 2018, including primarily office rental income. We had an
other operating income of RMB0.3 million in 2017, including primarily office rental income.
Impairment on
Other Investment. We recorded an impairment of other investment amounting of RMB7.8 million in 2018, primarily due to the
decrease in the market value of our investments in Shanghai Ronglei, Plutux, Smartposting and Beijing Ti Knight. We recorded an
impairment of other investment amounting to RMB9.1 million in 2017, primarily due to the decrease in the market value of our investment
in Smartposting and Beijing Ti Knight.
Interest Income.
Interest income increased from RMB0.03 million in 2017 to RMB0.2 million in 2018.
Interest Expenses.
Interest expenses increased from RMB83.9 million in 2017 to RMB104.8 million in 2018, primarily due to the increase in accrued
interest expenses on the Convertible Notes. The interest expenses of the Convertible Notes were calculated by using effective interest
rate method.
Fair Value of
Change on Warrants. We had a fair value of change on convertible bonds and warrants of RMB2.3 million in 2018, primarily
due to a decrease in our share price as of December 31, 2018 compared to December 31, 2017.
Gain (loss) on
disposal of equity investee and available-for-sale investment. We had no gain or loss on disposal of equity investee and
available-for-sale investment in 2018. We recorded a gain on disposal of equity investee and available-for-sale investment of RMB0.1
million in 2017 in connection with the disposal our partial shareholding in L&A.
Foreign exchange
gain (loss). We recorded foreign exchange loss of RMB20.3 million in 2018, as compared to foreign exchange gain of RMB19.2
million in 2017, primarily due to the appreciation of U.S. dollar against Renminbi in 2018.
Other Income,
Net. We recorded other net income of RMB1.6 million in 2018, as compared to other net income of RMB4.7 million in 2017,
primarily due to a decrease in government subsidies received in 2018.
Recovery of equity
investment in excess of cost. We did not record any recovery of equity investment in excess of cost in 2018, while we recorded
recovery of equity investment in excess of cost of RMB60.5 million in 2017, which was non-recurring in nature.
Net Loss Attributable
to Holders of Ordinary Shares. Primarily as a result of the cumulative effect of the above factors, net loss attributable
to our holders of ordinary shares increased from RMB175.3 million in 2017 to RMB258.0 million in 2018.
Taxation
We generated the majority
of our operating income (loss) from our PRC operations. The following summarize our applicable tax rate in the Cayman Islands,
Hong Kong, and the PRC.
Cayman Islands
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.
Maples and Calder (Hong
Kong) LLP, our legal counsel as to Cayman Islands law, has advised us that there are no other taxes likely to be material to us
levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought
within the jurisdiction of the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.
Hong Kong
Our subsidiaries incorporated
in Hong Kong, is subject to 16.5% Hong Kong profit tax on its taxable income generated from operations in Hong Kong. Under Hong
Kong tax laws, we are exempted from the Hong Kong income tax on our foreign-derived income. In addition, payments of dividends
from our Hong Kong subsidiary to us are not subject to any Hong Kong withholding tax.
PRC
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.
Liquidity and Capital
Resources
We are a holding company
and conduct our operations primarily through our subsidiaries and affiliated PRC 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 our affiliated PRC 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 “Risk Factors—Risks Related to Doing Business in China— Restrictions
on currency exchange in China limit our ability to utilize our revenues effectively, make dividend payments and meet our foreign
currency denominated obligations.”
Current PRC regulations
restrict our affiliated entity and subsidiaries from paying dividends in the following two principal aspects: (i) our affiliated
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 June 30, 2020, such restricted portion was RMB7.7 million (US$1.1 million). We have not directed our
PRC subsidiaries or affiliated entity to distribute any dividends to-date.
The aggregate net assets
as of December 31, 2017, 2018 and 2019 and June 30, 2020, as reflected on our statutory accounts, including registered capital
and statutory reserves, were approximately RMB52.0 million, RMB42.4 million, RMB40.2 million and RMB39.0 million (US$5.5 million)
higher than the amounts determined under U.S. GAAP, respectively.
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, 2017, 2018 and 2019 and June 30, 2020, we had RMB142.6 million, RMB4.3 million, RMB10.1 million and RMB57.9
million (US$8.2 million), respectively, in cash and cash equivalents. The increase in cash and cash equivalents from December 31,
2019 to June 30, 2020 was primarily due to the proceeds received from the disposal of subsidiaries. The increase in cash and cash
equivalents from December 31, 2018 to December 31, 2019 was primarily due to the cash flows from the disposal of other investment
and proceeds from transfer of tokens. The decrease in cash and cash equivalents from December 31, 2017 to December 31, 2018 was
primarily due to the cash outflows from operating activities associated with our product development and sales and marketing efforts
for our new games.
We have an accumulated
deficit of approximately RMB3,027.4 million (US$428.5 million) and total current liabilities exceeded total assets by approximately
RMB428.8 million (US$60.7 million) as of June 30, 2020. We also have not generated significant revenues or positive cash flows
from operations since 2009.
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
to initiate mining activities of other cryptocurrencies.
To meet our working
capital needs, we are also considering multiple alternatives, including but not limited to additional equity 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 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 a net proceeds of US$8.1 million.
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.
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 is 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.
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$3,360,000 per calendar month.
Payment of the redemption amount could be in cash or our ADSs, provided that any redemptions made in cash which exceed half of
the original principal amount will be subject to a ten percent (10%) premium. We have the right to prepay all or any portion of
the outstanding balance, at any time, subject to fifteen percent (15%) premium on the prepaid amount.
We may continue
to do similar equity financing in the future.
If we are unable to
obtain the necessary capital, we will need to license or sell our assets, seek to be acquired by another entity and/or cease operations.
See “Risk Factors—Risks Related to Our Company and Our Industry—We may not be able to obtain additional financing
to support our business and operations, and our equity or debt financings may have an adverse effect on our business operations
and share price.”
We believe that, upon
the successful implementation of the foregoing potential sources of cash flow, we may have
sufficient financial resources to meet our anticipated operating cash flow requirements, to meet our obligations and to pay off
liabilities as and when they fall due for the 12 months following the date of this prospectus.
The following table
sets forth the summary of our cash flows for the periods indicated:
|
|
For the Year Ended December 31,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2020
(Restate)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
(in thousands)
|
|
Net cash used in operating activities
|
|
|
(86,652
|
)
|
|
|
(101,201
|
)
|
|
|
(54,175
|
)
|
|
|
(17,720
|
)
|
|
|
(62,199
|
)
|
|
|
(8,804
|
)
|
Net cash provided by (used in) investing activities
|
|
|
161,923
|
|
|
|
(17,315
|
)
|
|
|
60,879
|
|
|
|
(33,297
|
)
|
|
|
443,983
|
|
|
|
62,842
|
|
Net cash provided by (used in) financing activities
|
|
|
44,073
|
|
|
|
(18,357
|
)
|
|
|
40,923
|
|
|
|
50,446
|
|
|
|
(331,529
|
)
|
|
|
(46,925
|
)
|
Effect of foreign exchange rate changes on cash
|
|
|
4,529
|
|
|
|
(1,495
|
)
|
|
|
1,257
|
|
|
|
(1,597
|
)
|
|
|
(2,425
|
)
|
|
|
(343
|
)
|
Cash reclassified as held for sale
|
|
|
(20,127
|
)
|
|
|
—
|
|
|
|
(43,027
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net increase/ (decrease) in cash and cash equivalents
|
|
|
103,746
|
|
|
|
(138,368
|
)
|
|
|
5,857
|
|
|
|
(2,168
|
)
|
|
|
47,830
|
|
|
|
6,770
|
|
Cash and cash equivalents at beginning of year/period
|
|
|
38,878
|
|
|
|
142,624
|
|
|
|
4,256
|
|
|
|
4,256
|
|
|
|
10,113
|
|
|
|
1,431
|
|
Cash and cash equivalents at end of year/period
|
|
|
142,624
|
|
|
|
4,256
|
|
|
|
10,113
|
|
|
|
2,088
|
|
|
|
57,943
|
|
|
|
8,201
|
|
Operating
Activities
The net cash used in
operating activities in the six months ended June 30, 2020 reflected a net gain of RMB359.9 million (US$50.9 million), primarily
due to the (i) gain on disposal of subsidiaries of RMB391.8 million, (ii) gain on extinguishment of convertible notes of RMB56.8
million, partially offset by (iii) share-based compensation expense of RMB34.4 million, (iv) impairment on other investments and
available-for-sale investments of RMB10.0 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.
The net cash used in
operating activities in 2018 primarily reflected a net loss of RMB239.3 million, partially offset by the interest expense on Convertible
Notes of RMB98.3 million, provision for doubtful other receivables of RMB21.0 million, impairment on equity and other investment
of RMB9.2 million, depreciation and amortization of property, equipment and software and land use right of RMB5.6 million and adjustments
for share-based compensation expense of RMB3.9 million.
The net cash used in
operating activities in 2017 primarily reflected a net loss of RMB112.1 million, partially offset by the interest expense on convertible
note of RMB77.0 million, recovery of equity investment in excess of cost of RMB60.5 million, adjustments for share-based compensation
expense of RMB38.0 million, consulting fee paid by equity of RMB13.5 million, and depreciation and amortization of property, equipment
and software and land use right of RMB7.2 million.
Investing
Activities
Net cash provided by
investing activities was RMB444.0 million (US$62.8 million) in the six months ended June 30, 2020, which primarily included proceeds
from disposal of assets and liabilities classified as held-for-sale of RMB443.9 million (US$62.8 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.
Net cash used in investing
activities was RMB17.3 million in 2018, which primarily included (i) advance payment of US$2.0 million to subscribe tokens of a
third party, (ii) purchase of other investments of RMB5.3 million, and (iii) proceeds from disposal of assets and liabilities held
for sale of RMB2.8 million.
Net cash provided by
investing activities was RMB161.9 million in 2017, which primarily included (i) the settlement payment of US$25.0 million from
our investee in 2017, (ii) purchase of investment in Ti Knight Inc. of RMB4.0 million, (iii) loan receivable due from Zhongxing
The9 Network Technology Co., Ltd., or ZTE9, one of our equity investees, of RMB4.0 million, and (iv) proceeds from disposal of
other investment in Tandem Fund of RMB1.2 million.
Financing
Activities
Net cash used in financing
activities in the six months ended June 30, 2020 was RMB331.5 million (US$46.9 million), primarily attributable to repayment of
convertible notes of RMB315.9 million (US$44.7 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.
Net cash used in financing
activities in 2018 was RMB18.4 million, primarily attributable to the repayment of RMB29.1 million of a loan from a related party,
partially offset by a loan from a related party of RMB11.0 million.
Net cash provided by
financing activities in 2017 was RMB44.1 million, primarily attributable to loans of RMB73.9 million, borrowed from related parties,
contributions from noncontrolling interest of RMB20.0 million, partially offset by repayments on the bank loan of RMB25.5 million
provided by Bank of Shanghai.
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$24.1 million) as of June 30, 2020.
Capital
Expenditures
We incurred capital
expenditures of RMB0.5 million, RMB0.2 million, RMB0.8 million and nil in 2017, 2018 and 2019 and the six months ended June 30,
2020, respectively. The capital expenditures principally consisted of purchases of computers and other items related to our network
infrastructure. If we license new games or enter into strategic joint ventures or acquisitions, we may require additional funds
for necessary capital expenditures.
Internal Control Over Financial Reporting
In the course of preparing and auditing
our consolidated financial statements for the year ended December 31, 2020, we and our independent registered public accounting
firm respectively identified one 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.
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.
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.”
Contractual Obligation
The following table
sets forth our contractual obligations and other commitments under as of June 30, 2020:
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than
5 years
|
|
|
|
(in thousands of RMB)
|
|
Short-term borrowings(1)
|
|
|
84,273
|
|
|
|
84,273
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Convertible notes payable(2)
|
|
|
3,543
|
|
|
|
3,543
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interest expense on short-term borrowings
|
|
|
6,320
|
|
|
|
6,320
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Service arrangement(3)
|
|
|
11,728
|
|
|
|
11,728
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating lease obligations(4)
|
|
|
7,761
|
|
|
|
3,426
|
|
|
|
3,977
|
|
|
|
358
|
|
|
|
—
|
|
|
(1)
|
Short-term borrowings include (i) a pledged loan of RMB84.3 million (US$11.9 million) from a financial
services company.
|
|
(2)
|
Represents the one-year convertible note in a principal amount of US$500,000 issued to Iliad Research
and Trading, L.P.
|
|
(3)
|
Includes minimum guaranteed payments under service arrangement with Thurgau Limited related to
the agency fee on the disposal of three subsidiaries that collectively held the Previously Mortgaged Properties.
|
|
(4)
|
Operating lease obligations related to the lease of office space, parking lots and warehouse.
|
Off-balance Sheet
Commitments and Arrangements
We have not entered
into any financial guarantees or other commitments to guarantee the payment obligations of any third-parties. We have not entered
into any off-balance sheet derivative instruments. Furthermore, we do not have any retained or contingent interest in assets transferred
to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable
interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing,
hedging or research and development services with us.
Quantitative and
Qualitative Disclosures about Market Risk
Interest Rate Risk
Our exposure to interest
rate risk for changes in interest rates relates primarily to the interest income generated by excess cash invested in bank deposits.
We have not used any derivative financial instruments in our investment portfolio or for cash management purposes. Interest-earning
instruments carry a degree of interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks
due to changes in interest rates. However, our future interest income may fall short of expectations due to changes in interest
rates.
Foreign Exchange
Risk
We are exposed to foreign
exchange risk arising from various currency exposures. Our payments to overseas developers, 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 “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.”
We estimate that we
will receive gross proceeds of approximately US$10.5 million from this offering, assuming all of the Warrants and the Representative’s
Warrants are exercised in full on a cash basis. Assuming that we convert the full amount of the gross proceeds from this offering
into RMB, a 10% appreciation of the U.S. dollar against RMB, from a rate of RMB7.0651 to US$1.00, the noon buying rate set forth
in the H.10 statistical release of the Federal Reserve Board on June 30, 2020, will result in an increase of RMB7.4 million in
our gross proceeds from this offering. Conversely, a 10% depreciation of the U.S. dollar against the RMB, from a rate of RMB7.0651
to US$1.00, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board on June 30, 2020, will
result in a decrease of RMB7.4 million in our gross proceeds from this offering.
BUSINESS
Overview
We are an Internet
company based in China and we aim to become a diversified Internet company targeting on fast-growing technology sectors. We are
currently transforming our business focus to cryptocurrencies mining business.
Online Games
We operate and develop
proprietary or licensed online games, primarily mobile games, and TV games. As of the date of this prospectus, we are operating the following online game in China:
Game
|
|
Developer
|
|
Description
|
|
Status
|
Legend of Immortals
|
|
The9
|
|
Mobile game
|
|
Launched in 2020
|
The World of Kings
|
|
The9
|
|
Mobile game
|
|
Launched in 2020
|
|
·
|
Legend of Immortals. Legend of Immortals is our proprietary MMORPG game that we have been
developing since 2019. We launched it in 2020.
|
|
·
|
The World of Kings. The World of Kings is a licensed MMORPG game, which we launched in 2020.
|
We previously also
operated “Knight Forever” mobile game, “Q Jiang San Guo” mobile game and “Pop Fashion” mobile
game. Knight Forever and Q Jiang San Guo ceased operations in 2019 and Pop Fashion ceased operations in 2020. 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 are in the process of negotiating with Smilegate to re-gain the license for such game development.
There can be no assurance that we will be able to obtain such license from Smilegate or launch CrossFire New Mobile Game. See “Risk
Factors—Risks Related to our Business and Industry—If we or our joint ventures fail to renew or acquire new online
game licenses on favorable terms or at all, our future results of operations and profitability may be materially impacted”
and “Risk Factors—Risks Related to our Business and Industry—If we are unable to successfully re-gain license
for CrossFire New Mobile Game, launch or operate CrossFire New Mobile Game or other licensed games in China, our future results
of operations may be materially and adversely affected.”
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,
we are in the process of game development and localization of Voodoo’s games. Due to uncertainty in the game development, the upfront payment
has been fully impaired in the second half of 2020.
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.
Cryptocurrency
On January 25, 2021,
we signed 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. The transaction was closed in February 2021. The Investors are expected to devote
cryptocurrencies mining industry resources to us for our development of cryptocurrencies mining business. We may explore to develop
our cryptocurrencies mining business in the future.
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. Other than
WhatsMiner bitcoin mining machines, we also plan to continue purchasing different types of cryptocurrency mining machines in
the near future.
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 have already been 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 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 251PH/S. These Bitcoin mining machines have already been 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$23.35 per ADS).
In March 2021, our
wholly-owned subsidiary NBTC Limited signed a Bitcoin mining machine purchase agreement with Bitmain Technologies Limited. Pursuant
to the purchase agreement, we will purchase 24,000 Antminer S19j Bitcoin mining machines, which are scheduled to deliver starting
from November 2021, for a total consideration of US$ 82.8 million payable in installments according to the agreed time schedule.
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 March 22, 2021, we owned approximately
107 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.
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.
Game Development
and Licensing
We believe that the
online game industry in China will continue its pattern of developing increasingly sophisticated online games tailored to the local
market. In order to remain competitive, we focus on continuing to develop new proprietary online games, primarily mobile games.
Our product development team is responsible for game design, technical development and art design. We also plan to further enhance
our game development capability and diversify our game portfolio and pipeline.
Our game licensing
process begins with a preliminary screening, review and testing of a game, followed by a cost analysis, negotiations and ultimate
licensing of a game, including all regulatory and approval processes. A team is then designated to conduct “closed beta testing”
of the game to resolve operational matters, followed by “open beta testing” during which our registered users may play
the game without removing their in-game data to ensure performance consistency and stability of our operation systems. Testing
generally takes three to six months, during which time we commence other marketing activities.
Technology
We aim to build a reliable
and secure technology infrastructure to fully support our operations, and we maintain separate technology networks for each of
our games. Our current technology infrastructure consists of the following:
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proprietary software, including game monitor tools, that are integrated with our websites and customer
service center operations; and
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hardware platform and server sites primarily consisting of IBM storage systems, HP, H3C and Cisco
network equipment.
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We have a network operation
team responsible for the stability and security of our network. The team monitors our server and works to detect, record, analyze
and solve problems that arise from out network. In addition, we frequently upgrade our game server software to ensure the stability
of our operations and to reduce the risks of hacking.
Competition
Our major
competitors include, but are not limited to, online game operators in China. As we step into cryptocurrency mining business,
we are also subject to competition of cryptocurrency mining business.
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.
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, our affiliated PRC entity. We conduct our business under the “The9 Limited” brand name and “The9” logo.
Employees
As of December
31, 2020, we had 47 employees, all of them were based in China, including 35 in management and administration, one in our
customer service center, seven in game operations, sales and marketing, and four in product development, including supplier
management personnel and technical support personnel. We had 105 and 61 employees as of December 31, 2018 and
2019, respectively. The decrease in the number of employees was primarily due to our business restructuring. We consider our
relations with our employees to be good.
Properties
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 Pte. Ltd., 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.
Legal Proceedings
Red 5 and its affiliates
previously had been in dispute with Qihoo 360 and its affiliates regarding System Link and Firefall. Various legal proceedings
have been initiated in connection with such dispute, including a litigation proceeding in Shanghai and an arbitration proceeding
in Hong Kong. In May 2019, we entered into a mediation agreement with Qihoo 360 to settle the disputes in principals and then withdrew
all the litigation claims against Qihoo 360 in Shanghai. As of the date of this prospectus, we and Qihoo 360 are implementing the
mediation agreement to settle the arbitration proceeding in Hong Kong. See “Risk Factors—Risks Related to Our Company
and Our Industry—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.”
Shanghai Oh Yeah Information
Technology Co., Ltd. filed several related civil claims in April 2019 against joint defendants including Shanghai IT, ZTE9 and
a third-party defendant, regarding copyright infringements of their intellectual property to the Intellectual Property Court of
Shanghai with a total aggregated claim amount of RMB3.0 million. We have assessed the likelihood of the outcome and have accrued
an amount for the contingency. On July 28, 2020, the Intellectual Property Court of Shanghai granted the claims withdrawal request
from Shanghai Oh Yeah Information Technology Co., Ltd. and underlying legal proceeding was dismissed.
In April 2020, Inner
Mongolia Culture Assets and Equity Exchange filed a civil claim against Wuxi Qudong and Shanghai IT to recover RMB57.5 million
of principal and interest that we previously raised to finance the early phase development of CrossFire New Mobile Game. We 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 Wuxi Qudong and Shanghai IT.
As of the date of this prospectus, we have not received any appeal claim.
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 affiliated PRC 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 affiliated PRC entity. We entered into a Settlement Deed with Splendid Days and other parties
named therein to settle the Convertible Notes. As of the date of this prospectus, the injunction order against us has been discharged.
Upon the satisfaction of the conditions set forth in the 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.
REGULATION
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.
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.
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 June 23, 2020 and became effective
on July 23, 2020.
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.
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 entities, 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 “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. As
a result, we conduct our online gaming and ICP businesses in China through contractual arrangements with Shanghai IT, our affiliated
PRC entity. Shanghai IT is owned by Zhimin Lin 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 our affiliated PRC 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 “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:
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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 Foreign Investment Industrial Guidance Catalogue (2019);
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The Special Administrative Measures on Access of Foreign Investment (Negative List) (Edition 2020),
which took effect on July 23, 2020; and
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Provisions on the Ecological Governance of Network Information Contents (2020).
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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 “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.
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 “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 “Risk Factors—Risks Related
to Doing Business in China—The laws and regulations governing the online game industry in China are developing and subject
to future changes. If we fail to obtain or maintain all applicable permits and approvals, our business and operations could be
materially and adversely affected.” If an ICP license holder violates these measures, the PRC government may revoke its ICP
license and shut down its websites.
In April 2007, various
governmental authorities, including GAPP, MIIT, the Ministry of Education, the Ministry of Public Security, and other relevant
authorities jointly issued a circular concerning the mandatory implementation of an “anti-fatigue system” in online
games, which was aimed at protecting the physical and psychological health of minors. This circular required all online games to
incorporate an “anti-fatigue system” and an identity verification system, both of which have limited the amount of
time that a minor or other user may continuously spend playing an online game. We have implemented such “anti-fatigue”
and identification systems on all of our online games as required. Since March 2011, various governmental authorities, including
the Ministry of Culture, MIIT, the Ministry of Education, the Ministry of Public Security, and other relevant authorities have
jointly launched the “Online Game Parents Guardianship Project for Minors,” which allows parents to require online
game operators to take relevant measures to limit the time spent by the minors on playing online games and the minors’ access
to their online game accounts. On February 5, 2013, the Ministry of Culture, MIIT, GAPP and various other governmental authorities,
jointly issued the Working Plan on the Comprehensive Prevention Scheme on Online Game Addiction of Minors, which further strengthened
the administration of the Internet cafés, reinstated the importance of the “anti-fatigue system” and “Online
Game Parents Guardianship Project for Minors” as prevention measures against the online game addiction of minors and ordered
all relevant governmental authorities to take all necessary actions in implementing such measures. Additional requirements for
anti-fatigue and identification systems in our games, as well as the implementation of any other measures required by any new regulations
the PRC government may enact to further tighten its administration of the Internet and online games, and its supervision of Internet
cafés, may limit or slow down our prospects for growth, or may materially and adversely affect our business results. See
“Risk Factors—Risks Related to Doing Business in China—Our business may be adversely affected by public opinion
and government policies in China.”
Internet content in
China is also regulated and restricted from a state security standpoint. The National People’s Congress, China’s national
legislative body, has enacted a law that may subject to criminal punishment in China any effort to: (1) gain improper entry into
a computer or system of strategic importance; (2) disseminate politically disruptive information; (3) leak state secrets; (4) spread
false commercial information; or (5) infringe intellectual property rights.
The Ministry of Public
Security has promulgated measures that prohibit the use of the Internet in ways which, among other things, results in a leakage
of state secrets or a spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection
rights in this regard, and we may be subject to the jurisdiction of the local security bureaus. See “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.
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.
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.
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:
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·
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Foreign Exchange Administration Rules (1996), as amended in 1997 and 2008; and
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·
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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.
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:
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The Company Law of People’s Republic of China;
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Foreign Investment Law (2019); and
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·
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Implementation Regulations for the Foreign Investment Law (2019).
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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.
MANAGEMENT
Directors and Executive
Officers
The following table
sets forth information regarding our directors and executive officers as of the date of this prospectus.
Directors and Executive Officers
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Age
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Position/Title
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Jun Zhu
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53
|
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Director, Chairman of the Board and Chief Executive Officer
|
Davin A. Mackenzie(1)(2)
|
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59
|
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Independent Director
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Kwok Keung Chau(1)(2)
|
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43
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Independent Director
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Ka Keung Yeung(1)(2)
|
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61
|
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Independent Director
|
George Lai (Lai Kwok Ho)
|
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43
|
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Director and Chief Finance Officer
|
Chris Shen
|
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51
|
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President
|
(1)
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Member of Audit Committee.
|
(2)
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Member of Compensation Committee.
|
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 as the authorized representative and the company
secretary of Comtec Solar Systems Group Limited (SEHK: 00712), an independent non-executive director and the chairman of the audit
committee of China Xinhua Education Group Limited (SEHK: 02779), an independent director of China Tobacco International (HK) Company
Limited (SEHK: 06055) and an independent non-executive director and the chairman of the audit committee of Forward Fashion (International)
Holdings Company Ltd. (SEHK: 02528) and an independent non-executive director of Bank of Zhangjiakou Co., Ltd. since April 2020.
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. 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 fellow member of the Association of Chartered Certified Accountants
since June 2002, a member of the Hong Kong Institute of Certified Public Accountants since July 2005 and a Chartered Financial
Analyst of the CFA Institute since September 2003. 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 offcer,
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.
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 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.
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:
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selecting the independent auditors and pre-approving all auditing and non-auditing services permitted
to be performed by the independent auditors;
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reviewing and approving all proposed related party transactions;
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discussing the annual audited financial statements with management and the independent auditors;
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annually reviewing and reassessing the adequacy of our audit committee charter;
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meeting separately and periodically with management and the independent auditors;
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·
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reporting regularly to the full board of directors; and
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·
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such other matters that are specifically delegated to our audit committee by our board of directors
from time to time.
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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:
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reviewing and determining the compensation for our five most senior executives;
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·
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reviewing the compensation of our other employees and recommending any proposed changes to the
management;
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·
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reviewing and approving director and officer indemnification and insurance matters;
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·
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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
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·
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reviewing periodically and approving any long-term incentive compensation or equity plans, programs
or similar arrangements, annual bonuses, employee pensions and welfare benefits plans
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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.
Terms of Directors
and Officers
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.
Employment Agreements
and Indemnification Agreements
We have entered into
employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for
a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain
acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent
or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s
employment without cause upon three-month advance written notice. In such case of termination by us, we will provide severance
payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer is based.
The executive officer may resign at any time with a three-month advance written notice.
Each executive officer
has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and
not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable
law, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective
clients, or the confidential or proprietary information of any third party received by us and for which we have confidential obligations.
The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive,
develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest
in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs
and trade secrets.
In addition, each executive
officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her employment and
typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach
our suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity
as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships
with these persons or entities; (ii) assume employment with or provide services to any of our competitors, or engage, whether as
principal, partner, licensor or otherwise, any of our competitors, without our express consent; or (iii) seek directly or indirectly,
to solicit the services of, or hire or engage any of our employees who is employed by us on or after the date of the executive
officer’s termination, or in the year preceding such termination, without our express consent.
We have entered into
indemnification agreements with each of our directors and executive officers. Under these agreements, we may agree to indemnify
our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims
made by reason of their being a director or officer of our company.
Compensation of
Directors and Executive Officers
For the year
ended December 31, 2020, the aggregate cash compensation paid or payable to our directors and executive officers for their
services was approximately US$300,000. 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
Eighth 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 and December 2018. 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. As of the date of this prospectus, options to purchase 50,000 ordinary shares under the Option Plan were outstanding
and 91,965,000 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 forfeited 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 prospectus, 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.
The following paragraphs
describe the principal terms of the Option Plan.
Types of Awards.
The Option Plan permits the awards of options, stock purchase rights, restricted shares and restricted share units.
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.
The following table
provides a summary of the options and restricted shares granted to our directors and executive officers as of the date of this
prospectus and that remained outstanding.
|
|
Restricted
Shares Issued
|
|
|
Total Number
of Ordinary
Shares
Underlying
Options
|
|
|
Exercise Price
(in US$)
|
|
|
Expiration
Date
|
|
Jun Zhu
|
|
|
43,800,000(1)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Davin Alexander Mackenzie
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Kwok Keung Chau
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ka Keung Yeung
|
|
|
*
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
George Lai
|
|
|
8,849,991
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Chris Shen
|
|
|
600,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
All Directors and Senior Executive Officers as a Group
|
|
|
56,195,973
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
* Less
than 1% of our total issued and outstanding shares.
|
(1)
|
Consists of 7,500,000 Class B ordinary shares and 36,300,000
Class A ordinary shares.
|
As of the date of this
prospectus, 35,865,000 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.
PRINCIPAL
SHAREHOLDERS
Except as specifically
noted, the following table sets forth information with respect to the beneficial ownership of our Class A and Class B ordinary
shares as of the date of this prospectus by:
|
·
|
each of our directors and executive officers; and
|
|
·
|
each of principal shareholders known to us who beneficially own more than 5% of our total outstanding
ordinary shares.
|
The calculations in
the table below are based on 340,356,731 Class A ordinary shares and 13,607,334 Class B ordinary shares outstanding as of the date
of this prospectus and 424,956,731 Class A ordinary shares and 13,607,334 Class B ordinary shares outstanding immediately after
the completion of this offering, assuming the Warrants and the Representative’s Warrants are exercised in full.
Beneficial ownership is determined in accordance with the rules
and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that
person, we have included shares that the person has the right to acquire within 60 days, subject to certain conditions. These shares,
however, are not included in the computation of the percentage ownership of any other person.
|
|
Class
A
Ordinary
Shares
Beneficially
Owned Prior to
This Offering
|
|
|
Class
B
Ordinary
Shares
Beneficially
Owned Prior to
This
Offering
|
|
|
Total
Ordinary
Shares on an As-
Converted Basis Prior to
This Offering
|
|
|
Total
Voting
Power
Prior to
This
Offering(3)
|
|
|
Class
A
Ordinary
Shares
Beneficially
Owned
After This
Offering
|
|
|
Class
B
Ordinary
Shares
Beneficially
Owned
After This
Offering
|
|
|
Total
Ordinary
Shares on an As
Converted Basis
After This Offering
|
|
|
Total
Voting
Power
After this
Offering
|
|
|
|
Number
|
|
|
Number
|
|
|
Number(1)
|
|
|
%(2)
|
|
|
%
|
|
|
Number
|
|
|
Number
|
|
|
Number(1)
|
|
|
%(2)
|
|
|
%(3)
|
|
Directors and Executive Officers**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun Zhu(4)
|
|
|
42,563,545
|
|
|
|
13,607,334
|
|
|
|
56,170,879
|
|
|
|
15.9
|
|
|
|
70.8
|
|
|
|
42,563,545
|
|
|
|
13,607,334
|
|
|
|
56,170,879
|
|
|
|
12.8
|
|
|
|
65.4
|
|
Davin A. Mackenzie(5)
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Kwok Keung Chau(6)
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
Ka Keung Yeung(7)
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
George Lai (Lai Kwok Ho)(8)
|
|
|
8,849,991
|
|
|
|
—
|
|
|
|
8,849,991
|
|
|
|
2.5
|
|
|
|
*
|
|
|
|
8,849,991
|
|
|
|
—
|
|
|
|
8,849,991
|
|
|
|
2.0
|
|
|
|
*
|
|
Chris Shen
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
—
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
All Directors and Executive Officers as a Group
|
|
|
55,057,040
|
|
|
|
13,607,334
|
|
|
|
68,664,374
|
|
|
|
19.4
|
|
|
|
72.0
|
|
|
|
55,057,040
|
|
|
|
13,607,334
|
|
|
|
68,664,374
|
|
|
|
15.7
|
|
|
|
66.5
|
|
Principal Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun Zhu(4)
|
|
|
42,563,545
|
|
|
|
13,607,334
|
|
|
|
56,170,879
|
|
|
|
15.9
|
|
|
|
70.8
|
|
|
|
42,563,545
|
|
|
|
13,607,334
|
|
|
|
56,170,879
|
|
|
|
12.8
|
|
|
|
65.4
|
|
JPKONG LTD.(9)
|
|
|
49,801,786
|
|
|
|
—
|
|
|
|
49,801,786
|
|
|
|
12.4
|
|
|
|
*
|
|
|
|
49,801,800
|
|
|
|
—
|
|
|
|
49,801,800
|
|
|
|
10.3
|
|
|
|
*
|
|
Qifeng Sun Ltd.(10)
|
|
|
24,900,894
|
|
|
|
—
|
|
|
|
24,900,894
|
|
|
|
6.6
|
|
|
|
*
|
|
|
|
24,900,900
|
|
|
|
—
|
|
|
|
24,900,900
|
|
|
|
5.4
|
|
|
|
*
|
|
Root Grace Ltd.(11)
|
|
|
24,900,894
|
|
|
|
—
|
|
|
|
24,900,894
|
|
|
|
6.6
|
|
|
|
*
|
|
|
|
24,900,900
|
|
|
|
—
|
|
|
|
24,900,900
|
|
|
|
5.4
|
|
|
|
*
|
|
Plutux Labs Limited(12)
|
|
|
21,000,000
|
|
|
|
—
|
|
|
|
21,000,000
|
|
|
|
5.9
|
|
|
|
2.1
|
|
|
|
21,000,000
|
|
|
|
—
|
|
|
|
21,000,000
|
|
|
|
4.8
|
|
|
|
1.9
|
|
|
*
|
Less than
1% of our total outstanding shares.
|
|
**
|
Except
for Mr. Davin A. Mackenzie, Mr. Mr. Kwok Keung Chau and Mr. Ka Keung Yeung, the business
address for our directors and executive officers listed in the table is 17 Floor, No.
130 Wu Song Road, Hong Kou District, Shanghai 200080, People’s Republic of China.
|
|
(1)
|
Represents the sum of Class A and Class B ordinary
shares beneficially owned by such person or group. The total number of Class A and Class B ordinary shares on an as-converted
basis as of the date of this prospectus is 353,964,065. The total number of Class A and Class B ordinary shares on an as-converted
basis outstanding after the completion of this offering will be 438,564,065, including 424,956,731 Class A ordinary shares and
13,607,334 Class B ordinary shares, assuming the Warrants and the Representative’s Warrants are exercised in full.
|
|
(2)
|
For
each person and group included in this column, percentage ownership is calculated by
dividing the total number of ordinary shares beneficially owned by such person or group
by the sum of the total number of shares outstanding and the number of ordinary shares
such person or group has the right to acquire upon exercise of option, warrant or other
right within 60 days after the date of this prospectus.
|
|
(3)
|
For
each person or group included in this column, the percentage of total voting power represents
voting power based on both Class A and Class B ordinary shares on an as-converted basis
held by such person or group with respect to all of our outstanding Class A and Class
B ordinary shares on an as-converted basis as a single class. Each holder of Class A
ordinary shares is entitled to one vote per share. Each holder of Class B ordinary shares
is entitled to fifty votes per share on all matters requiring a shareholders’ vote.
Our Class B ordinary shares are convertible at any time by the holder into Class A ordinary
shares on a one-for-one basis, whereas Class A ordinary shares are not convertible into
Class B ordinary shares under any circumstances.
|
|
(4)
|
Includes
(i) 6,107,334 Class B ordinary shares and 912,094 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,
36,300,000 Class A ordinary shares in the form of restricted shares and 5,351,451 Class
A ordinary shares represented by ADSs held by Jun Zhu.
|
|
(5)
|
The
business address of Mr. Davin A. Mackenzie is Xinsheng South Rd Section 1 Lane 160 #12
8F, Taipei, Taiwan.
|
|
(6)
|
The
business address of Mr. Kwok Keung Chau is 16 Yuan Di Road, Nanhui Industrial Zone, Shanghai,
the People’s Republic of China.
|
|
(7)
|
The
business address of Mr. Ka Keung Yeung is No. 2-6 Dai King Street, Taipo Industrial Estate,
Taipo, N.T., Hong Kong.
|
|
(8)
|
Includes 5,400,021 Class A ordinary shares in the form of restricted
shares and 3,449,970 Class A ordinary shares represented by American depositary shares directly held by George Lai.
|
(9)
|
Includes
3,603,600 Class A ordinary shares directly held by JPKONG LTD. and 46,198,186 Class A ordinary shares issuable upon the exercise
of the Tranche I and Tranche II Warrants 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
|
(10)
|
Includes
1,801,800 Class A ordinary shares directly held by Qifeng Sun Ltd. and 23,099,094 Class A ordinary shares issuable upon the
exercise of the Tranche I and Tranche II Warrants 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
|
(11)
|
Includes
1,801,800 Class A ordinary shares directly held by Root Grace Ltd. and 23,099,094 Class A ordinary shares issuable upon the
exercise of the Tranche I and Tranche II Warrants 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
|
(12)
|
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 the date of this prospectus, 194,749,082 Class A ordinary shares (including 1,963,297 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.
RELATED
PARTY TRANSACTIONS
Investments or Agreements
entered into with Affiliated Entity or Associates
In February 2013, we
established a new joint venture, namely Zhongxing The9 Network Technology Co., Ltd., in cooperation with Shanghai Zhongxing Communication
Technology Enterprise Co., Ltd. and Shanghai Ruigao Information Technology Co., Ltd., in Wuxi, Jiangsu province of China, to develop
and operate home entertainment set top box business. In February 2014, Guangdong Hongtu Guangdian Investment Limited Company made
a capital investment of RMB12.5 million to acquire 10% equity interests in ZTE9. As of December 31, 2019, we held 26.0% equity
interest in ZTE9. ZTE9 charged net royalty and other service fee related to IPTV business to us in an amount of RMB7.1 million,
RMB5.2 million and nil in 2017, 2018 and 2019, respectively. Total amount due to ZTE9 for IPTV business was RMB2.7 million, RMB5.1
million and RMB0.2 million as of December 31, 2017, 2018 and 2019, respectively.
In 2017, 2018 and 2019,
we lent RMB4.0 million, RMB0.6 million and nil to ZTE9 to fund its operations, respectively. The loans are interest-free. As of
December 31, 2017, 2018 and 2019, total outstanding amount for loan due from ZTE9 was RMB2.1 million, RMB1.0 million and RMB1.0
million, respectively. As of June 30, 2020, the outstanding amount for loan due from ZTE9 was RMB1.0 million (US$0.1 million).
We charged service
fee to Big Data, a previous subsidiary and now an equity investee of ours, amounted to RMB0.05 million and RMB0.02 million in 2018
and 2019, respectively. As of December 31, 2018 and 2019, the total amount due from Big Data was RMB0.1 million and RMB0.1 million,
respectively. As of June 30, 2020, the total amount due from Big Data was RMB0.1 million.
In 2016, Asian Way
entered into a license agreement with T3 Entertainment, a then equity investee of ours, for developing a game using augmented reality
(AR) technologies based on the intellectual property relating to the game Audition. Upon commercial launch, Asian Way will share
certain percentages of revenues of the game to T3. The game is still under development as of December 31, 2019. In July 2019, we
disposed our equity interest in T3.
In 2017, we entered
into a share purchase agreement with Incsight Limited, which is controlled by Mr. Jun Zhu, our chairman and chief executive officer.
Pursuant to this agreement, Mr. Jun Zhu would acquire 12,500,000 of our newly issued shares for a total cash consideration of US$15.0
million. The transaction was terminated in February 2019 and the previously issued shares were surrendered and cancelled.
In 2017, we entered
into a share purchase agreement with Ark Pacific Special Opportunities Fund I, L.P., which caused it to beneficially own more than
10% of share capital in our company then. Pursuant to this agreement, Ark Pacific Special Opportunities Fund I, L.P. would acquire
12,500,000 of our newly issued shares for a total cash consideration of US$15.0 million. The transaction was terminated in February
2019 and the previously issued shares were surrendered and cancelled.
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.
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.
Loan from Related
Parties
Mr. Jun Zhu, the chairman
and chief executive officer, extended aggregate of RMB73.9 million, RMB11.0 million and RMB16.1 million in loan to us in 2017,
2018 and 2019, respectively. The loans are interest-free. As of December 31, 2017, 2018 and 2019, RMB75.2 million, RMB57.1 million
and RMB63.2 million of such loan remained outstanding, respectively. As of June 30, 2020, the balance of such loan remained outstanding
was RMB44.1 million (US$6.2 million).
Contractual Arrangements
with Our Variable Interest Entity and Its Shareholders
See “Corporate
History and Structure—Arrangements with Affiliated PRC Entity.”
Private Placements
See “Description
of Share Capital—History of Securities Issuances.”
Employment Agreements
and Indemnification Agreements
See “Management—Employment
Agreements and Indemnification Agreements.”
Share Incentive
Plan
See “Management—Share
Incentive Plan.”
DESCRIPTION
OF SHARE CAPITAL
We are a Cayman Islands
exempted company with limited liability and our corporate affairs are governed by our Second Amended and Restated Memorandum and
Articles of Association, as amended from time to time and the Companies Act of the Cayman Islands, which we refer
to as the Companies Act below, and the common law of the Cayman Islands.
Our authorized
share capital is US$50,000,000 divided into 5,000,000,000 shares comprising (i) 4,300,000,000 Class A ordinary shares of par
value US$0.01 each, (ii) 600,000,000 Class B ordinary shares of par value US$0.01 each, and (iii) 100,000,000 shares of
par value US$0.01 each of such class or classes (however designated) as our board of directors may determine in accordance
with our currently effective Second Amended and Restated Memorandum and Articles of Association. As of the date of this
prospectus, we have 340,356,731 Class A ordinary shares issued and outstanding, and 13,607,334 Class B ordinary shares issued
and outstanding.
Our Second Amended
and Restated Memorandum and Articles of Association
The following are summaries of material provisions of our currently
effective Second 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.
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 fifty 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 Second Amended and Restated 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.
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 Second Amended and Restated 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 Second
Amended and Restated Memorandum and 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 Second 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 Second 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:
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the designation of the series;
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the number of shares of the series and the subscription price thereof if different from the par
value thereof;
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the dividend rights, dividend rates, conversion rights, voting rights; and
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the rights and terms of redemption and liquidation preferences
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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. However, we will provide our shareholders with annual audited financial statements.
Anti-Takeover Provisions
Some provisions of
our Second 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:
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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
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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
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limit the ability of shareholders to requisition and convene
general meetings of shareholders.
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However, under Cayman
Islands law, our directors may only exercise the rights and powers granted to them under our Second 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:
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consolidate and divide all or any of our share capital into shares of a larger amount than our
existing shares;
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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
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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 our share capital by the amount of the shares so cancelled.
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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 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 and the current Companies Act of England. In addition,
the Companies Act 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.
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:
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the statutory provisions as to the required majority vote have been met;
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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;
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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
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the arrangement is not one that would more properly be sanctioned under some other provision of
the Companies Act.
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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.
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:
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an act which is ultra vires or illegal and is therefore incapable of ratification by the shareholders,
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an act which constitutes a fraud against the minority where the wrongdoers are themselves in control
of the company, and
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an act which requires a resolution with a qualified (or special) majority (i.e. more than a simple
majority) which has not been obtained.
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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 Second 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 Second 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.
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 Second 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
Second 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 Second 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 Second Amended and Restated 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 Second
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 Second Amended and Restated Memorandum and Articles of Association.
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 Second 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 Second Amended and Restated 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 Second Amended
and Restated Memorandum and Articles of Associations, our Second 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 Second 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 Second Amended and Restated Memorandum
and Articles of Association which require our company to disclose shareholder ownership above any particular ownership threshold.
History of Securities
Issuances
The following is a
summary of our securities issuances in the past three years.
Ordinary Shares
In September 2018,
we issued 21,000,000 ordinary shares to Leading Choice Holding Limited, a Hong Kong company, for approximately then 20.0% equity
interest in Leading Choice Holding Limited, as consideration. Such 21,000,000 ordinary shares were re-designated as 21,000,000
Class A ordinary shares in May 2019.
In September 2018,
we issued 21,000,000 ordinary shares to Plutux Limited, a Gibraltar company, for approximately then 8.0% equity interest in Plutux
Limited, as consideration. Such 21,000,000 ordinary shares were re-designated as 21,000,000 Class A ordinary shares in May 2019.
In May 2019, as a result
of the adoption of dual-class share structure, we re-designated and re-classified the then 13,607,334 authorized and issued ordinary
shares held by Incsight Limited and Mr. Jun Zhu as 13,607,334 Class B ordinary shares, and re-designated and re-classified the
then remaining 119,748,024 authorized and issued ordinary shares as 119,748,024 Class A ordinary shares.
In June 2019, we issued
3,444,882 Class A ordinary shares to Comtec Windpark Renewable (Holdings) Co., Ltd., in exchange for then 9.9% equity interest
in Zhenjiang Kexin Power System Design and Research Company.
In February 2020, we
issued (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.
In June 2020, we issued
32,400,000 Class A ordinary shares to Splendid Days Limited to settle the repayment for the Convertible Notes of US$7.6 million.
On October 2, 2020,
at the closing of our registered offering, we issued and sold 70,500,000 Class A ordinary shares, represented by ADSs, at a public
offering price of US$0.36 per ADS, each ADS then representing three Class A ordinary shares.
In November 2020, we
issued 3,040,050 Class A ordinary shares to Thurgau Limited to settle outstanding portion of their service fee in connection with
sale transaction entered into with Kapler Pte. Ltd. to sell three subsidiaries which collectively hold land use rights and office
buildings located at Zhangjiang, Shanghai.
On February 2, 2021,
we issued 8,108,100 Class A ordinary shares in aggregate to JPKONG Ltd., Qifeng Ltd., Luckylily Ltd. and Root Grace Ltd. at US$0.1233
per Class A ordinary share.
On February 2, 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.
On February 7, 2021,
we issued an aggregate of 26,838,360 Class A ordinary shares in exchange for cryptocurrency mining machines to several machine
owners.
On February 14, 2021,
we issued an aggregate of 33,090,000 Class A ordinary shares, including 32,190,000 restricted Class A ordinary shares and 900,000
Class A ordinary shares issued upon the vesting of the underlying restricted share units, to certain directors, executive officers,
employees and consultants of our company in consideration of their past and future services.
On February 16, 2021,
we issued an aggregate of 9,231,240 Class A ordinary shares to four investors in exchange for cash consideration of US$11.5 million.
On March 8, 2021, we issued an aggregate of 3,832,830 Class
A ordinary shares in exchange for cryptocurrency mining machines to several machine owners.
Convertible
Note
In February 2020,
we issued (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. The convertible note bears interest at a rate of 6.0%
per year, compounded daily. Iliad 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$10.5 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, Iliad has the right, exercisable
at any time in its sole and absolute discretion, to redeem any portion of the convertible note up to US$150,000 per calendar
month. Payment of the redemption amount could be in cash or our ADSs. In the event the principal amount and interest accrued
for the convertible note issued to Iliad are fully repaid, we have the right to repurchase the remaining Class A ordinary
shares held by Iliad that are unsold at US$0.0001 per share.
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.
On March 17, 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.
Warrants
On October 2, 2020,
at the closing of our registered offering, we issued and sold 23,500,000 Warrants at a public offering price of US$0.01 per Warrant,
each Warrant then 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. On October 29, 2020, we issued and sold 3,525,000 Warrants at a public offering
price of US$0.01 per Warrant, each Warrant then 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, pursuant to the exercise by the underwriter
of our registered offering of its option to purchase additional Warrants.
On October 2, 2020,
in connection with and at the closing of our registered offering, we issued Representative’s Warrants to purchase 1,175,000
ADSs, each ADS then representing three Class A ordinary shares, to Maxim Partners LLC.
On February 2, 2020,
we issued 207,891,840 warrants in aggregate, each warrant representing the right to purchase one Class A ordinary share, to JPKONG
Ltd., Qifeng Ltd., Luckylily Ltd. and Root Grace Ltd. The warrants are divided into four equal tranches: Tranche I Warrants, Tranche
II Warrants, Tranche III Warrants and Tranche IV Warrants.
Share Incentive
Awards Grants and Issuance
We have granted options
to purchase our Class A ordinary shares and restricted shares to certain of our directors, executive officers, employees and consultants.
See “Management—Share Incentive Plan.”
DESCRIPTION
OF AMERICAN DEPOSITARY SHARES and Warrants
American Depositary
Shares
The Bank of New York
Mellon, as depositary, will register and deliver American Depositary Shares, also referred to as ADSs. Each ADS will represent
thirty Class A ordinary shares deposited with The Hongkong and Shanghai Banking Corporation Limited, as custodian for the depositary
in Hong Kong. Each ADS will also represent any other securities, cash or other property which may be held by the depositary. The
deposited shares together with any other securities, cash or other property held by the depositary are referred to as the deposited
securities. The depositary’s office at which the ADSs will be administered and its principal executive office are located
at 240 Greenwich Street, New York, New York 10286.
You may hold ADSs either
(A) directly (i) by having an American Depositary Receipt, also referred to as an ADR, which is a certificate evidencing a specific
number of ADSs, registered in your name, or (ii) by having uncertificated ADSs registered in your name, or (B) indirectly by holding
a security entitlement in ADSs through your broker or other financial institution that is a direct or indirect participant in The
Depository Trust Company, also called DTC. If you hold ADSs directly, you are a registered ADS holder, also referred to as an ADS
holder. This description assumes you are an ADS holder. If you hold the ADSs indirectly, you must rely on the procedures of your
broker or other financial institution to assert the rights of ADS holders described in this section. You should consult with your
broker or financial institution to find out what those procedures are.
Registered holders
of uncertificated ADSs will receive statements from the depositary confirming their holdings.
As an ADS holder, we
will not treat you as one of our shareholders and you will not have shareholder rights. The laws of Cayman Islands govern shareholder
rights. The depositary will be the holder of the Class A ordinary shares underlying your ADSs. As a registered holder of ADSs,
you will have ADS holder rights. A deposit agreement among us, the depositary, ADS holders and all other persons indirectly holding
or beneficially owning ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. The laws of the
State of New York govern the deposit agreement and the ADSs.
The following is a
summary of the material provisions of the deposit agreement. For more complete information, you should read the entire deposit
agreement and the form of ADR. See “Where You Can Find Additional Information” for directions on how to obtain copies
of those documents.
Dividends and Other
Distributions
How will you
receive dividends and other distributions on the shares?
The depositary has
agreed to pay or distribute to ADS holders the cash dividends or other distributions it or the custodian receives on shares or
other deposited securities, upon payment or deduction of its fees and expenses. You will receive these distributions in proportion
to the number of shares your ADSs represent.
Cash.
The depositary will convert any cash dividend or other cash distribution we pay on the shares into U.S. dollars, if it can do so
on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any government approval
is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those
ADS holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the account of the ADS holders
who have not been paid. It will not invest the foreign currency and it will not be liable for any interest.
Before making a distribution,
any withholding taxes, or other governmental charges that must be paid will be deducted. See “Taxation.” The depositary
will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent. If the exchange rates
fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some of the value of the distribution.
Shares.
The depositary may distribute additional ADSs representing any shares we distribute as a dividend or free distribution. The depositary
will only distribute whole ADSs. It will sell shares which would require it to deliver a fraction of an ADS (or ADSs representing
those shares) and distribute the net proceeds in the same way as it does with cash. If the depositary does not distribute additional
ADSs, the outstanding ADSs will also represent the new shares. The depositary may sell a portion of the distributed shares (or
ADSs representing those shares) sufficient to pay its fees and expenses in connection with that distribution.
Rights to purchase
additional shares. If we offer holders of our securities any rights to subscribe for additional shares or any other rights,
the depositary may (i) exercise those rights on behalf of ADS holders, (ii) distribute those rights to ADS holders or (iii) sell
those rights and distribute the net proceeds to ADS holders, in each case after deduction or upon payment of its fees and expenses.
To the extent the depositary does not do any of those things, it will allow the rights to lapse. In that case, you will receive
no value for them. The depositary will exercise or distribute rights only if we ask it to and provide satisfactory assurances to
the depositary that it is legal to do so. If the depositary will exercise rights, it will purchase the securities to which the
rights relate and distribute those securities or, in the case of shares, new ADSs representing the new shares, to subscribing ADS
holders, but only if ADS holders have paid the exercise price to the depositary. U.S. securities laws may restrict the ability
of the depositary to distribute rights or ADSs or other securities issued on exercise of rights to all or certain ADS holders,
and the securities distributed may be subject to restrictions on transfer.
Other Distributions.
The depositary will send to ADS holders anything else we distribute on deposited securities by any means it thinks is legal,
fair and practical. If it cannot make the distribution in that way, the depositary has a choice. It may decide to sell what we
distributed and distribute the net proceeds, in the same way as it does with cash. Or, it may decide to hold what we distributed,
in which case ADSs will also represent the newly distributed property. However, the depositary is not required to distribute any
securities (other than ADSs) to ADS holders unless it receives satisfactory evidence from us that it is legal to make that distribution.
The depositary may sell a portion of the distributed securities or property sufficient to pay its fees and expenses in connection
with that distribution. U.S. securities laws may restrict the ability of the depositary to distribute securities to all or certain
ADS holders, and the securities distributed may be subject to restrictions on transfer.
The depositary is not
responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation
to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other
action to permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means that you may not receive
the distributions we make on our shares or any value for them if it is illegal or impractical for us to make them available to
you.
Deposit, Withdrawal
and Cancellation
How are ADSs
issued?
The depositary will
deliver ADSs if you or your broker deposits shares or evidence of rights to receive shares with the custodian. Upon payment of
its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register
the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order of the person or persons
that made the deposit.
How can ADS
holders withdraw the deposited securities?
You may surrender your
ADSs to the depositary for the purpose of withdrawal. Upon payment of its fees and expenses and of any taxes or charges, such as
stamp taxes or stock transfer taxes or fees, the depositary will deliver the shares and any other deposited securities underlying
the ADSs to the ADS holder or a person the ADS holder designates at the office of the custodian. Or, at your request, risk and
expense, the depositary will deliver the deposited securities at its office, if feasible. However, the depositary is not required
to accept surrender of ADSs to the extent it would require delivery of a fraction of a deposited share or other security. The depositary
may charge you a fee and its expenses for instructing the custodian regarding delivery of deposited securities.
How do ADS
holders interchange between certificated ADSs and uncertificated ADSs?
You may surrender your
ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary will cancel that ADR and will
send to the ADS holder a statement confirming that the ADS holder is the registered holder of uncertificated ADSs. Upon receipt
by the depositary of a proper instruction from a registered holder of uncertificated ADSs requesting the exchange of uncertificated
ADSs for certificated ADSs, the depositary will execute and deliver to the ADS holder an ADR evidencing those ADSs.
Voting Rights
How do you
vote?
ADS holders may instruct
the depositary how to vote the number of deposited shares their ADSs represent. If we request the depositary to solicit your voting
instructions (and we are not required to do so), the depositary will notify you of a shareholders’ meeting and send or make
voting materials available to you. Those materials will describe the matters to be voted on and explain how ADS holders may instruct
the depositary how to vote. For instructions to be valid, they must reach the depositary by a date set by the depositary. The depositary
will try, as far as practical, subject to the laws of the Cayman Islands and the provisions of our Second Amended and Restated
Memorandum and Articles of Association, to vote or to have its agents vote the shares or other deposited securities as instructed
by ADS holders. If we do not request the depositary to solicit your voting instructions, you can still send voting instructions,
and, in that case, the depositary may try to vote as you instruct, but it is not required to do so.
Except by instructing
the depositary as described above, you won’t be able to exercise voting rights unless you surrender your ADSs and withdraw
the shares. However, you may not know about the meeting enough in advance to withdraw the shares. In any event, the depositary
will not exercise any discretion in voting deposited securities and it will only vote or attempt to vote as instructed or as described
in the following sentences. If we timely asked the depositary to solicit your instructions but the depositary does not receive
voting instructions from you by the specified date and we confirm to the depositary that
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we wish to receive a discretionary proxy;
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as of the instruction cutoff date we reasonably do not know of any substantial shareholder opposition
to the particular question; and
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the particular question would not materially adverse to the interests of our shareholders,
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then the depositary will consider you to
have authorized and directed it to give a discretionary proxy to a person designated by us to vote the number of deposited securities
represented by your ADSs as to that question.
We cannot assure you
that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition,
the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out
voting instructions. This means that you may not be able to exercise voting rights and there may be nothing you can do if your
shares are not voted as you requested.
Fees and Expenses
Persons depositing or withdrawing shares or ADS holders must pay:
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US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
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Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property
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Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
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US$0.05 (or less) per ADS
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Any cash distribution to ADS holders
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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
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Distribution of securities distributed to holders of deposited securities (including rights) that are distributed by the depositary to ADS holders
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US$0.05 (or less) per ADS per calendar year
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Depositary services
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Registration or transfer fees
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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
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Expenses of the depositary
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Cable and facsimile transmissions (when expressly provided in the deposit agreement)
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Converting foreign currency to U.S. dollars
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Taxes and other governmental charges the depositary or the custodian has to pay on any ADSs
or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes
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As necessary
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Any charges incurred by the depositary or its agents for servicing the deposited securities
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As necessary
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The 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 deduction from cash distributions or by directly billing investors or by charging the book-entry
system accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution
payable (or by selling a portion of securities or other property distributable) to ADS holders that are obligated to pay those
fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
From time to time,
the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and maintenance
of the ADS program, waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected
from ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency
dealers or other service providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads
or commissions.
The depositary may
convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as
agent, advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction
spreads, that it will retain for its own account. The revenue is based on, among other things, the difference between the exchange
rate assigned to the currency conversion made under the deposit agreement and the rate that the depositary or its affiliate receives
when buying or selling foreign currency for its own account. The depositary makes no representation that the exchange rate used
or obtained in any currency conversion under the deposit agreement will be the most favorable rate that could be obtained at the
time or that the method by which that rate will be determined will be the most favorable to ADS holders, subject to the depositary’s
obligations under the deposit agreement. The methodology used to determine exchange rates used in currency conversions is available
upon request.
Payment of Taxes
You will be responsible
for any taxes or other governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs.
The depositary may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by
your ADSs until those taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented
by your American Depositary Shares to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells
deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds,
or send to ADS holders any property, remaining after it has paid the taxes.
Tender and Exchange
Offers; Redemption, Replacement or Cancellation of Deposited Securities
The depositary will
not tender deposited securities in any voluntary tender or exchange offer unless instructed to do by an ADS holder surrendering
ADSs and subject to any conditions or procedures the depositary may establish.
If deposited securities
are redeemed for cash in a transaction that is mandatory for the depositary as a holder of deposited securities, the depositary
will call for surrender of a corresponding number of ADSs and distribute the net redemption money to the holders of called ADSs
upon surrender of those ADSs.
If there is any change
in the deposited securities such as a sub-division, combination or other reclassification, or any merger, consolidation, recapitalization
or reorganization affecting the issuer of deposited securities in which the depositary receives new securities in exchange for
or in lieu of the old deposited securities, the depositary will hold those replacement securities as deposited securities under
the deposit agreement. However, if the depositary decides it would not be lawful and practical to hold the replacement securities
because those securities could not be distributed to ADS holders or for any other reason, the depositary may instead sell the replacement
securities and distribute the net proceeds upon surrender of the ADSs.
If there is a replacement
of the deposited securities and the depositary will continue to hold the replacement securities, the depositary may distribute
new ADSs representing the new deposited securities or ask you to surrender your outstanding ADRs in exchange for new ADRs identifying
the new deposited securities.
If there are no deposited
securities underlying ADSs, including if the deposited securities are cancelled, or if the deposited securities underlying ADSs
have become apparently worthless, the depositary may call for surrender or of those ADSs or cancel those ADSs upon notice to the
ADS holders.
Amendment and Termination
How may the
deposit agreement be amended?
We may agree with the
depositary to amend the deposit agreement and the ADRs without your consent for any reason. If an amendment adds or increases fees
or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs,
delivery charges or similar items, or prejudices a substantial right of ADS holders, it will not become effective for outstanding
ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, you
are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement
as amended.
How may the
deposit agreement be terminated?
The depositary will
initiate termination of the deposit agreement if we instruct it to do so. The depositary may initiate termination of the deposit
agreement if
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90 days have passed since the depositary told us it wants to resign but a successor depositary
has not been appointed and accepted its appointment;
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we delist our shares from an exchange in the United States on which they were listed and do not
list the ADSs on another exchange in the United States or make arrangements for trading of ADSs on the U.S. over-the-counter market;
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we delist our shares from an exchange outside the United States on which they were listed and do
not list the shares on another exchange outside the United States;
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the depositary has reason to believe the ADSs have become, or will become, ineligible for registration
on Form F-6 under the Securities Act of 1933;
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we appear to be insolvent or enter insolvency proceedings
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all or substantially all the value of the deposited securities has been distributed either in cash
or in the form of securities;
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there are no deposited securities underlying the ADSs or the underlying deposited securities have
become apparently worthless; or
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there has been a replacement of deposited securities.
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If the deposit agreement
will terminate, the depositary will notify ADS holders at least 90 days before the termination date. At any time after the termination
date, the depositary may sell the deposited securities. After that, the depositary will hold the money it received on the sale,
as well as any other cash it is holding under the deposit agreement, unsegregated and without liability for interest, for the pro
rata benefit of the ADS holders that have not surrendered their ADSs. Normally, the depositary will sell as soon as practicable
after the termination date.
After the termination
date and before the depositary sells, ADS holders can still surrender their ADSs and receive delivery of deposited securities,
except that the depositary may refuse to accept a surrender for the purpose of withdrawing deposited securities or reverse previously
accepted surrenders of that kind if it would interfere with the selling process. The depositary may refuse to accept a surrender
for the purpose of withdrawing sale proceeds until all the deposited securities have been sold. The depositary will continue to
collect distributions on deposited securities, but, after the termination date, the depositary is not required to register
any transfer of ADSs or distribute any dividends or other distributions on deposited securities to the ADSs holder (until they
surrender their ADSs) or give any notices or perform any other duties under the deposit agreement except as described in this paragraph.
Limitations on Obligations
and Liability
Limits on our
Obligations and the Obligations of the Depositary; Limits on Liability to Holders of ADSs
The deposit agreement
expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary.
We and the depositary:
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are only obligated to take the actions specifically set forth in the deposit agreement without
negligence or bad faith, and the depositary will not be a fiduciary or have any fiduciary duty to holders of ADSs;
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are not liable if we are or it is prevented or delayed by law or by events or circumstances beyond
our or its ability to prevent or counteract with reasonable care or effort from performing our or its obligations under the deposit
agreement;
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are not liable if we or it exercises discretion permitted under the deposit agreement;
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are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited
securities that is not made available to holders of ADSs under the terms of the deposit agreement, or for any special, consequential
or punitive damages for any breach of the terms of the deposit agreement;
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have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the
deposit agreement on your behalf or on behalf of any other person;
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may rely upon any documents we believe or it believes in good faith to be genuine and to have been
signed or presented by the proper person;
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are not liable for the acts or omissions of any securities depository, clearing agency or settlement
system; and
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the depositary has no duty to make any determination or provide any information as to our tax status,
or any liability for any tax consequences that may be incurred by ADS holders as a result of owning or holding ADSs or be liable
for the inability or failure of an ADS holder to obtain the benefit of a foreign tax credit, reduced rate of withholding or refund
of amounts withheld in respect of tax or any other tax benefit.
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In the deposit agreement,
we and the depositary agree to indemnify each other under certain circumstances.
Requirements for
Depositary Actions
Before the depositary
will deliver or register a transfer of ADSs, make a distribution on ADSs, or permit withdrawal of shares, the depositary may require:
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payment of stock transfer or other taxes or other governmental charges and transfer or registration
fees charged by third parties for the transfer of any shares or other deposited securities;
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satisfactory proof of the identity and genuineness of any signature or other information it deems
necessary; and
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compliance with regulations it may establish, from time to time, consistent with the deposit agreement,
including presentation of transfer documents.
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The depositary may
refuse to deliver ADSs or register transfers of ADSs when the transfer books of the depositary or our transfer books are closed
or at any time if the depositary or we think it advisable to do so.
Your Right to Receive
the Shares Underlying your ADSs
ADS holders have the
right to cancel their ADSs and withdraw the underlying Class A ordinary shares at any time except:
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when temporary delays arise because: (i) the depositary has closed its transfer books or we have
closed our transfer books; (ii) the transfer of shares is blocked to permit voting at a shareholders’ meeting; or (iii) we
are paying a dividend on our shares;
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when you owe money to pay fees, taxes and similar charges; or
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when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations
that apply to ADSs or to the withdrawal of shares or other deposited securities.
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This right of withdrawal
may not be limited by any other provision of the deposit agreement.
Direct Registration
System
In the deposit agreement,
all parties to the deposit agreement acknowledge that the Direct Registration System, also referred to as DRS, and Profile Modification
System, also referred to as Profile, will apply to the ADSs. DRS is a system administered by DTC that facilitates interchange between
registered holding of uncertificated ADSs and holding of security entitlements in ADSs through DTC and a DTC participant. Profile
is feature of DRS that allows a DTC participant, claiming to act on behalf of a registered holder of uncertificated ADSs, to direct
the depositary to register a transfer of those ADSs to DTC or its nominee and to deliver those ADSs to the DTC account of that
DTC participant without receipt by the depositary of prior authorization from the ADS holder to register that transfer.
In connection with
and in accordance with the arrangements and procedures relating to DRS/Profile, the parties to the deposit agreement understand
that the depositary will not determine whether the DTC participant that is claiming to be acting on behalf of an ADS holder in
requesting registration of transfer and delivery as described in the paragraph above has the actual authority to act on behalf
of the ADS holder (notwithstanding any requirements under the Uniform Commercial Code). In the deposit agreement, the parties agree
that the depositary’s reliance on and compliance with instructions received by the depositary through the DRS/Profile system
and in accordance with the deposit agreement will not constitute negligence or bad faith on the part of the depositary.
Shareholder communications;
inspection of register of holders of ADSs
The depositary will
make available for your inspection at its office all communications that it receives from us as a holder of deposited securities
that we make generally available to holders of deposited securities. The depositary will send you copies of those communications
or otherwise make those communications available to you if we ask it to. You have a right to inspect the register of holders of
ADSs, but not for the purpose of contacting those holders about a matter unrelated to our business or the ADSs.
Jury Trial Waiver
The deposit agreement
provides that, to the 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 in the facts and circumstances of that case in accordance with applicable case law.
You will not, by agreeing
to the terms of the deposit agreement, be deemed to have waived our or the depositary’s compliance with U.S. federal securities
laws or the rules and regulations promulgated thereunder.
Arbitration Provision
The deposit agreement
gives the depositary or an ADS holder asserting a claim against us the right to require us to submit that claim to binding arbitration
in New York under the International Arbitration Rules of the International Centre for Dispute Resolution, including any securities
law claim. However, a claimant could also elect not to submit its claim to arbitration and instead bring its claim in any court
having jurisdiction of it. The deposit agreement does not give us the right to require anyone to submit any claim to arbitration.
Warrants Issued
in Connection with this Offering
The following is a
brief summary of certain terms and conditions of the Warrants and is subject in all respects to the provisions contained in the
Warrants accompanying the ADSs offered hereby and the Warrant Agent Agreement. You should review a copy of the form of Warrant
and Warrant Agent Agreement for a complete description of the terms and conditions applicable to the Warrants.
Form. The
Warrants will be issued in electronic certificated form.
Term. The
Warrants will be exercisable on the date of issuance and will expire on the third anniversary of the date of issuance.
Exercisability.
The Warrants will be exercisable, at the option of each holder, by delivering to us a duly executed exercise notice and
cash payment in full for the number of ADSs purchased upon such exercise, unless cashless exercise is allowed. The exercise of
the Warrants is subject to limits as described below under the caption “—Exercise Limitations.”
Exercise
Price. Each Warrant currently represents the right to purchase 0.1 ADS at the exercise price of US$3.7 per ADS,
each ADS currently representing thirty Class A ordinary shares. The number 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. The exercise price is subject to appropriate adjustment in the event of certain stock splits, stock
dividends, recapitalizations or otherwise.
Cashless Exercise.
In the event that (i) the SEC has issued a stop order with respect to this registration statement, (ii) the SEC otherwise has suspended
or withdrawn the effectiveness of this registration statement, either temporarily or permanently, (iii) we have suspended or withdrawn
the effectiveness of this registration statement, either temporarily or permanently. (iv) the prospectus contained in this registration
statement is not available for the issuance of the ADSs underlying the Warrants, (v) this registration statement or the prospectus
contained in this registration statement is not current and does not conform to the requirements of the applicable rules and regulations,
or the SEC has not declared effective a post-effective amendment to this registration statement if one is required to be filed
to update the disclosure in this registration statement, or (vi) otherwise, the Warrants should only be exercisable on a cashless
basis. Upon a cashless exercise, the holder would be entitled to receive a number of ADS in accordance with certain formula set
forth in the Warrant
Delivery of ADSs.
We shall cause our Depositary to deliver the ADSs underlying the Warrants to the holders exercising such Warrants by no later
than 5:00 P.M. New York City time on the fifth trading day following the Warrants exercise date, provided the funds in payment
of the exercise price for such Warrants have cleared on the trading day following the exercise date.
No Fractional
Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrants,
and the number of Warrants will be rounded to the nearest whole number.
Transferability.
Subject to applicable laws and the restriction on transfer set forth in the Warrant, the Warrant may be transferred at
the option of the holder in accordance with the procedures set forth in the Warrant.
Authorized Shares.
During the period the Warrants are outstanding, we will reserve from our authorized and unissued Ordinary Shares a sufficient number
of shares to provide for the issuance of shares of ADSs underlying the warrants upon the exercise of the Warrants.
Exchange Listing.
We do not plan on applying to list the Warrants on the Nasdaq, or any other national securities exchange.
Fundamental Transactions.
In the event of any fundamental transaction, as described in the Warrant Agent Agreement and generally including any merger with
or into another entity, sale of all or substantially all of our assets, tender offer or exchange offer, reclassification of our
ordinary shares or the consummation of a transaction whereby another entity acquires more than 50% of our outstanding voting power,
then the holder shall have the right to receive for each ordinary share that would have been issuable upon such exercise immediately
prior to the occurrence of such fundamental transaction, the number of ordinary shares of the successor or acquiring corporation
and any additional consideration receivable upon or as a result of such transaction by a holder of the number of ordinary shares
for which the warrant is exercisable immediately prior to such event.
Exercise Limitations.
A Warrant holder will not have the right to exercise any portion of the Warrant if the holder, together with its affiliates, would
hold more than 4.99% of Class A ordinary shares outstanding immediately after the exercise. The holders may from time to time increase
or decrease such exercise limitation to any other percentage not in excess of 9.99% by providing a written notice to us, provided
that such increase in the exercise limitation will not be effective until the 61st day after the delivery of such notice. The increase
or decrease in exercise limitation would only apply to the Warrant holders and its affiliates but not to any other holders of Warrants.
Right as a Shareholder.
Except as otherwise provided in the Warrants or by virtue of such holder’s ownership of our ordinary shares, the holders
of the Warrants do not have the rights or privileges of holders of our ADSs until they receive the ADSs underlying the Warrants.
Waivers and Amendments.
Any term of the Warrants issued in the offering may be amended or waived with the written consent of holders of the Warrants.
TAXATION
The following summary
of the material Cayman Islands, PRC and United States federal income tax consequences of an investment in our securities is based
upon laws and relevant interpretations thereof in effect as of the date of this registration statement, all of which are subject
to change. This summary does not deal with all possible tax consequences relating to an investment in our securities, such as the
tax consequences under U.S. state and local tax laws or under the tax laws of jurisdictions other than the Cayman Islands, the
People’s Republic of China and the United States.
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.
United States Federal
Income Tax Considerations
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, Warrants or ordinary shares. This discussion applies only to U.S. Holders of the ADSs, Warrants 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 prospectus and on U.S. Treasury regulations in effect or, in some cases, proposed as of
the date of this prospectus, 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:
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banks and other financial institutions;
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regulated investment companies;
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real estate investment trusts;
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traders that elect to use a mark-to-market method of accounting;
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U.S. expatriates or entities subject to the U.S. anti-inversion rules;
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tax-exempt entities (including private foundations);
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persons liable for alternative minimum tax;
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persons whose functional currency is not the U.S. dollar;
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persons holding ADSs, Warrants or ordinary shares as part of a straddle, hedging, conversion or
integrated transaction for U.S. federal income tax purposes;
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persons holding ADSs, Warrants or ordinary shares through a bank, financial institution or other
entity, or a branch thereof, located, organized or resident outside the United States;
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persons that directly, indirectly or constructively own 10% or more of our stock (by vote or value);
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partnerships or other pass-through entities, or persons holding ADSs, Warrants or ordinary shares
through such entities; or
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persons who acquired ADSs, Warrants or ordinary shares pursuant to the exercise of any employee
share option or otherwise as compensation.
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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, WARRANTS OR ORDINARY
SHARES AND THE EXERCISE OF WARRANTS.
For the purpose of
this discussion, a “U.S. Holder” is a beneficial owner of ADSs, Warrants or ordinary shares that is, for U.S. federal
income tax purposes:
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an individual who is a citizen or resident of the United States;
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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;
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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.
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If a partnership (or
other entity taxable as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ADSs, Warrants 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, Warrants 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, Warrants 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:
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at least 75% of its gross income for such year consists of certain types of passive income (the
“income test”); or
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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”).
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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 composition of income and assets, we expect to be a PFIC for United States federal income tax purposes
for our current taxable year and the foreseeable future unless the market price of our ADSs increases, the portion of our gross
income attributable to the passive types decreases, 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, Warrants 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, Warrants 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 under “—Passive Foreign Investment Company
Rules,” you may avoid some of the adverse effects of the PFIC regime by making a “deemed sale” election with
respect to the ADSs, Warrants or ordinary shares, as applicable. If such election is made, you will be deemed to have sold our
ADSs, Warrants or ordinary shares you hold at their fair market value and any gain from such deemed sale would be subject to the
rules described in the following two paragraphs. After the deemed sale election, so long as we do not become a PFIC in a subsequent
taxable year, your ADSs, Warrants 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, Warrants 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.
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 of the ADSs, Warrants 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, Warrants or ordinary shares:
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the excess distribution or recognized gain will be allocated ratably over your holding period for
the ADSs, Warrants or ordinary shares;
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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;
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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
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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.
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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, Warrants or ordinary shares cannot be
treated as capital, even if you hold the ADSs, Warrants 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, Warrants or ordinary shares. It is possible that
one or more of our subsidiaries are also PFICs for the current taxable year or future taxable years. You should consult your tax
advisors regarding the application of the PFIC rules to any of our subsidiaries.
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, Warrants 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, Warrants or ordinary shares as of the close of your taxable year over your adjusted
basis in such ADSs, Warrants or ordinary shares. You will be allowed a deduction for the excess, if any, of the adjusted basis
of the ADSs, Warrants 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, Warrants 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, Warrants 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, Warrants or ordinary shares, as well as to any loss
from the actual sale or other disposition of the ADSs, Warrants 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, Warrants or ordinary shares. Your basis in the
ADSs, Warrants 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, Warrants or Ordinary Shares,” except that the lower tax rate applicable to qualified
dividend income would not apply.
The mark-to-market
election is available only for “marketable stock,” which is stock that is traded in greater than de minimis
quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market,
as defined in applicable U.S. Treasury regulations. 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 “Risk Factors—Risks Related to our ADSs, Warrants and this Offering— 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.”), 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 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, Warrants 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, WARRANTS
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.
Allocation
of Purchase Price
For U.S. federal income
tax purposes, the ADSs and Warrants acquired in this Offering will be treated as an “investment unit” consisting of
(i) one ADS and (ii) one Warrant to purchase one ADS. The purchase price for each investment unit will be allocated between these
two components in proportion to their relative fair market values at the time the unit is purchased by the U.S. Holder. This allocation
of the purchase price for each unit will establish the U.S. Holder’s initial tax basis for U.S. federal income tax purposes
in the ADS and the Warrant included in each unit. The separation of the ADS and the Warrant included in each unit should not be
a taxable event for U.S. federal income tax purposes. You should consult your tax advisors regarding the allocation of the purchase
price for a unit.
Exercise and
Expiration of Warrants
In general, a U.S.
Holder will not recognize gain or loss for U.S. federal income tax purposes upon exercise of a Warrant. The U.S. Holder will take
a tax basis in the ADSs acquired on the exercise of a Warrant equal to the exercise price of the Warrant, increased by the U.S.
Holder’s adjusted tax basis in the Warrant exercised (as determined pursuant to the rules discussed above). The U.S. Holder’s
holding period in the ADSs acquired on exercise of the Warrant will begin on the date of exercise of the Warrant, and will not
include any period for which the U.S. Holder held the Warrant.
In certain limited
circumstances, a U.S. Holder may be permitted to undertake a cashless exercise of Warrants into our ADS. The U.S. federal income
tax treatment of a cashless exercise of Warrants into our ADS is unclear, and the tax consequences of a cashless exercise could
differ from the consequences upon the exercise of a Warrant described in the preceding paragraph. You should consult your tax advisors
regarding the U.S. federal income tax consequences of a cashless exercise of Warrants.
The lapse or expiration
of a Warrant will be treated as if the U.S. Holder sold or exchanged the Warrant and recognized a capital loss equal to the U.S.
Holder’s tax basis in the Warrant. As discussed below, the deductibility of capital losses is subject to limitations.
Taxation of
Dividends and Other Distributions on the ADSs, Warrants or Ordinary Shares
As discussed above,
we expect to be a PFIC for our current taxable year and the foreseeable future. Therefore, dividends will be taxed as described
above under “Passive Foreign Investment Company Rules.”
Subject to the PFIC
rules discussed above, the gross amount of any distribution we make to you with respect to the ADSs or ordinary shares generally
will be includible in your gross income as dividend income on the date of receipt by the depositary, in the case of ADSs, or by
you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings
and profits (as computed under U.S. federal income tax principles). The dividends will not be eligible for the dividends-received
deduction allowed to corporations in respect of dividends received from other U.S. corporations. To the extent the amount of the
distribution exceeds our current and accumulated earnings and profits, (as computed under U.S. federal income tax principles) such
excess amount will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and then, to the extent
such excess amount exceeds your tax basis, as a capital gain. Because we do not intend to determine our earnings and profits on
the basis of U. S. federal income tax principles, any distribution paid will generally be reported as a “dividend”
for U. S. federal income tax purposes.
With respect to certain
non-corporate U.S. Holders, including individual U.S. Holders, dividends will be taxed at the lower capital gains rate applicable
to “qualified dividend income,” provided that (1) the ADSs or ordinary shares, as applicable, are readily tradable
on an established securities market in the United States, or we are eligible for the benefits of a qualifying income tax treaty
with the United States that includes an exchange of information program, (2) we are neither a PFIC nor treated as such with respect
to you for the taxable year in which the dividend was paid and the preceding taxable year, and (3) certain holding period requirements
are met. Under 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 “Risk Factors—Risks Related to our ADSs, Warrants and this
Offering— 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.”), 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, 2019. If we are treated as a “resident
enterprise” for PRC tax purposes under the EIT Law (see “Risk Factors—Risks Related to Our Company and Our Industry—The
PRC income tax laws may increase our tax burden or the tax burden on the holders of our shares or ADSs, and tax benefits available
to us may be reduced or repealed, causing the value of your investment in us to suffer”), we may be eligible for the benefits
of the income tax treaty between the United States and the PRC. You should consult your tax advisors regarding the availability
of the lower capital gains rate applicable to qualified dividend income for dividends paid with respect to our ADSs or ordinary
shares.
Dividends will constitute
foreign source income for foreign tax credit limitation purposes. If the dividends are taxed as qualified dividend income (as discussed
above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation in general
will be limited to the gross amount of the dividend, multiplied by the reduced tax rate applicable to qualified dividend income
and divided by the highest tax rate normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to the ADSs or
ordinary shares generally will constitute “passive category income” but could, in the case of certain U.S. Holders,
constitute “general category income.”
If PRC withholding
taxes apply to dividends paid to you with respect to our ADSs or ordinary shares (see “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.
Taxation of
Disposition of the ADSs, Warrants or Ordinary Shares
As discussed above,
we expect to be a PFIC for our current taxable year and the foreseeable future. Therefore, gains will be taxed as described above
under “Passive Foreign Investment Company Rules.”
Subject to the PFIC
rules discussed above, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADS, Warrant
or ordinary share equal to the difference between the amount realized (in U.S. dollars) for the ADS, Warrant 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, Warrant 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, Warrants 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, Warrant or ordinary
share for more than one year, you generally will be eligible for reduced tax rates. The deductibility of capital losses is subject
to limitations.
Any gain or loss that
you recognize on a disposition of ADSs, Warrants or ordinary shares generally will be treated as U.S. source income or loss for
foreign tax credit limitation purposes (in the case of loss, subject to certain limitations). However, if we are treated as a “resident
enterprise” for PRC tax purposes and PRC tax were to be imposed on any gain from the disposition of the ADSs, Warrants or
ordinary shares (see “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”), a U.S. Holder that is eligible for the benefits of
the income tax treaty between the United States and the PRC may elect to treat the gain as PRC source income for foreign tax credit
purposes. You should consult your tax advisors regarding the proper treatment of gain or loss in your particular circumstances,
including the effect of any applicable income tax treaties.
PLAN
OF DISTRIBUTION
We will deliver ADSs
representing our Class A ordinary shares upon the exercise of the Warrants and the Representative’s Warrants. Each of the
Warrants and the Representative’s Warrants contains instruction for exercise. We will deliver ADSs in the manner described
above in the section titled “Description of American Depositary Shares and Warrants—Warrants Issued in Connection with
this Offering.”
LEGAL
MATTERS
We are being represented
by Skadden, Arps, Slate, Meagher & Flom LLP with respect to certain legal matters as to United States federal securities
and New York State law. The validity of the Class A ordinary shares represented by the ADSs offered in this offering will be passed
upon for us by Maples and Calder (Hong Kong) LLP. Certain legal matters as to PRC law will be passed upon for us by Grandall Law
Firm. Skadden, Arps, Slate, Meagher & Flom LLP may rely upon Maples and Calder (Hong Kong) LLP with respect to matters governed
by Cayman Islands law and Grandall Law Firm with respect to matters governed by PRC law.
EXPERTS
The audited
consolidated financial statements included in this prospectus and elsewhere in the registration statement have been so
included in reliance on the report of Grant Thornton, an independent registered public accountants, upon the authority of
said firm as experts in accounting and auditing.
The registered business
address of Grant Thornton is located at level 45, Raffles City, 268 Xizang Zhong Road, Huangpu District, Shanghai, People’s
Republic of China.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration
statement, including relevant exhibits, with the SEC on Form F-1 under the Securities Act with respect to the underlying Class
A ordinary shares represented by the ADSs to be sold in this offering. This prospectus, which constitutes a part of the registration
statement on Form F-1, does not contain all of the information contained in the registration statement. You should read our registration
statement and its exhibits and schedules for further information with respect to us and our ADSs and Warrants.
We are subject to periodic
reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Accordingly, we will
be required to file reports, including annual reports on Form 20-F, and other information with the SEC. All information filed with
the SEC can be obtained over the internet at the SEC’s website at www.sec.gov or inspected and copied at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of documents,
upon payment of a duplicating fee, by writing to the SEC.
As a foreign private
issuer, we are exempt under the Exchange Act from, among other things, the rules prescribing the furnishing and content of proxy
statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit
recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to
file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act. However, we intend to furnish the depositary with our annual reports, which will include a review
of operations and annual audited consolidated combined financial statements prepared in conformity with U.S. GAAP, and all
notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders.
The depositary will make such notices, reports and communications available to holders of ADSs and, if we so request, will mail
to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary
from us.
THE9 LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2017, 2018 and 2019
|
F-3
|
Consolidated Balance Sheets as of December 31, 2018 and 2019
|
F-5
|
Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2018 and 2019
|
F-7
|
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2018 and 2019
|
F-10
|
Notes to the Consolidated Financial Statements
|
F-12
|
Schedule 1 – Additional Financial Information of Parent Company
|
F-76
|
Unaudited Interim Condensed Consolidated Statements
of Operations and Comprehensive (Loss) Gain for the Six Months ended June 30, 2019 and 2020
|
F-80
|
Unaudited Interim Condensed Consolidated Balance Sheets
as of December 31, 2019 and June 30, 2020
|
F-82
|
Unaudited Interim Condensed Consolidated Statements
of Changes in Equity for the Six Months ended June 30, 2019 and 2020
|
F-84
|
Unaudited Interim Condensed Consolidated Statements
of Cash Flows for the Six Months ended June 30, 2019 and 2020
|
F-86
|
Notes to the Unaudited
Interim Condensed Consolidated Financial Statements
|
F-88
|
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, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, changes in equity,
and cash flows for each of the three years in the period ended December 31, 2019, 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, 2019 and 2018, and
the results of its operations, changes in equity, and cash flows for each of the three years in the period ended December 31, 2019,
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
consolidated financial statements, the Group has an accumulated deficit of approximately RMB3,410.9 million (US$489.9 million)
as of December 31, 2019, and incurred a net loss of approximately RMB196.2 million (US$28.2 million) for the year ended December
31, 2019. These conditions, along with other matters set forth in Note 2.1, 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. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in accounting principles
As discussed in Note
2.23, the Group has changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification
(“ASC”) 842, Leases.
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
since 2016.
Shanghai, China
April 30, 2020
THE9
LIMITED
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE
YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online game services
|
|
|
71,564,023
|
|
|
|
16,551,080
|
|
|
|
303,577
|
|
|
|
43,606
|
|
Other revenues
|
|
|
1,644,143
|
|
|
|
941,335
|
|
|
|
39,500
|
|
|
|
5,674
|
|
|
|
|
73,208,166
|
|
|
|
17,492,415
|
|
|
|
343,077
|
|
|
|
49,280
|
|
Sales taxes
|
|
|
(59,610
|
)
|
|
|
(60,557
|
)
|
|
|
(1,582
|
)
|
|
|
(227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
73,148,556
|
|
|
|
17,431,858
|
|
|
|
341,495
|
|
|
|
49,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
(23,782,054
|
)
|
|
|
(16,435,590
|
)
|
|
|
(1,342,266
|
)
|
|
|
(192,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
49,366,502
|
|
|
|
996,268
|
|
|
|
(1,000,771
|
)
|
|
|
(143,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (expenses) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
(45,112,396
|
)
|
|
|
(24,555,308
|
)
|
|
|
(13,090,530
|
)
|
|
|
(1,880,337
|
)
|
Sales and marketing
|
|
|
(9,089,969
|
)
|
|
|
(2,325,818
|
)
|
|
|
(2,114,519
|
)
|
|
|
(303,732
|
)
|
General and administrative
|
|
|
(108,824,680
|
)
|
|
|
(89,583,331
|
)
|
|
|
(113,867,000
|
)
|
|
|
(16,355,971
|
)
|
Impairment of other long-lived assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,881,000
|
)
|
|
|
(5,010,342
|
)
|
Gain on disposal of subsidiaries
|
|
|
-
|
|
|
|
10,473,159
|
|
|
|
1,206,925
|
|
|
|
173,364
|
|
Total operating expenses
|
|
|
(163,027,045
|
)
|
|
|
(105,991,298
|
)
|
|
|
(162,746,124
|
)
|
|
|
(23,377,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income, net
|
|
|
349,954
|
|
|
|
229,538
|
|
|
|
30,240
|
|
|
|
4,344
|
|
Loss from operations
|
|
|
(113,310,589
|
)
|
|
|
(104,765,492
|
)
|
|
|
(163,716,655
|
)
|
|
|
(23,516,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment on equity investments and available-for-sale investments
|
|
|
-
|
|
|
|
(1,386,174
|
)
|
|
|
(4,666,128
|
)
|
|
|
(670,247
|
)
|
Impairment on other investments
|
|
|
(9,109,312
|
)
|
|
|
(7,776,157
|
)
|
|
|
(3,791,039
|
)
|
|
|
(544,549
|
)
|
Impairment on other advances
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,980,788
|
)
|
|
|
(859,087
|
)
|
Interest income
|
|
|
30,525
|
|
|
|
193,928
|
|
|
|
18,576
|
|
|
|
2,668
|
|
Interest expense
|
|
|
(83,922,200
|
)
|
|
|
(104,776,674
|
)
|
|
|
(34,501,556
|
)
|
|
|
(4,955,838
|
)
|
Fair value change on warrants liability
|
|
|
12,615,466
|
|
|
|
2,251,427
|
|
|
|
1,292,244
|
|
|
|
185,619
|
|
Gain on disposal of equity investee and available-for-sale investments
|
|
|
115,349
|
|
|
|
-
|
|
|
|
694,628
|
|
|
|
99,777
|
|
Gain on disposal of other investments
|
|
|
-
|
|
|
|
-
|
|
|
|
13,430,588
|
|
|
|
1,929,183
|
|
Foreign exchange gain (loss)
|
|
|
19,206,747
|
|
|
|
(20,331,430
|
)
|
|
|
(5,474,002
|
)
|
|
|
(786,291
|
)
|
Other income, net
|
|
|
4,669,587
|
|
|
|
1,598,663
|
|
|
|
9,372,652
|
|
|
|
1,346,297
|
|
Loss before income tax expense and share of loss in equity method investments
|
|
|
(169,704,427
|
)
|
|
|
(234,991,909
|
)
|
|
|
(193,321,480
|
)
|
|
|
(27,768,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recovery of equity investment in excess of cost
|
|
|
60,548,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Share of loss in equity method investments
|
|
|
(2,937,131
|
)
|
|
|
(4,292,887
|
)
|
|
|
(2,847,260
|
)
|
|
|
(408,983
|
)
|
Net loss
|
|
|
(112,092,907
|
)
|
|
|
(239,284,796
|
)
|
|
|
(196,168,740
|
)
|
|
|
(28,177,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) attributable to noncontrolling interest
|
|
|
3,955,640
|
|
|
|
(16,332,968
|
)
|
|
|
(13,517,983
|
)
|
|
|
(1,941,737
|
)
|
Net gain (loss) attributable to redeemable noncontrolling interest
|
|
|
2,117,303
|
|
|
|
(5,858,902
|
)
|
|
|
(4,855,589
|
)
|
|
|
(697,462
|
)
|
Net loss attributable to The9 Limited
|
|
|
(118,165,850
|
)
|
|
|
(217,092,926
|
)
|
|
|
(177,795,168
|
)
|
|
|
(25,538,677
|
)
|
Change in redemption value of redeemable noncontrolling interest
|
|
|
(57,126,233
|
)
|
|
|
(40,918,773
|
)
|
|
|
(12,827,598
|
)
|
|
|
(1,842,569
|
)
|
Net loss attributable to holders of ordinary shares
|
|
|
(175,292,083
|
)
|
|
|
(258,011,699
|
)
|
|
|
(190,622,766
|
)
|
|
|
(27,381,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
(9,525,761
|
)
|
|
|
(1,314,265
|
)
|
|
|
(793,531
|
)
|
|
|
(113,984
|
)
|
Total comprehensive loss
|
|
|
(121,618,668
|
)
|
|
|
(240,599,061
|
)
|
|
|
(196,962,271
|
)
|
|
|
(28,291,860
|
)
|
THE9
LIMITED
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE
YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019 (Continued)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Comprehensive gain (loss) attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
13,457,650
|
|
|
|
(24,888,425
|
)
|
|
|
(19,738,118
|
)
|
|
|
(2,835,203
|
)
|
Redeemable noncontrolling interest
|
|
|
2,117,303
|
|
|
|
(5,858,902
|
)
|
|
|
(4,855,589
|
)
|
|
|
(697,462
|
)
|
The9 Limited
|
|
|
(137,193,621
|
)
|
|
|
(209,851,734
|
)
|
|
|
(172,368,564
|
)
|
|
|
(24,759,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to holders of ordinary shares per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
(5.24
|
)
|
|
|
(4.15
|
)
|
|
|
(1.79
|
)
|
|
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
33,426,448
|
|
|
|
62,114,760
|
|
|
|
106,407,008
|
|
|
|
106,407,008
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
THE9
LIMITED
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2018 AND 2019
|
|
December 31,
2018
|
|
|
December 31,
2019
|
|
|
December 31,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
4,256,449
|
|
|
|
10,113,141
|
|
|
|
1,452,662
|
|
Accounts receivable, net of allowance for doubtful accounts of RMB1,149,864 and RMB1,319,331 as of December 31, 2018 and 2019, respectively
|
|
|
592,897
|
|
|
|
110,437
|
|
|
|
15,863
|
|
Advances to suppliers
|
|
|
15,808,042
|
|
|
|
11,246,608
|
|
|
|
1,615,474
|
|
Prepayments and other current assets, net of allowance for doubtful accounts of RMB 20,770,928 and RMB 5,343,427 as of December 31, 2018 and 2019, respectively
|
|
|
6,148,787
|
|
|
|
8,848,534
|
|
|
|
1,271,012
|
|
Amounts due from related parties
|
|
|
6,207,846
|
|
|
|
758,761
|
|
|
|
108,989
|
|
Assets classified as held-for-sale
|
|
|
-
|
|
|
|
123,390,350
|
|
|
|
17,723,915
|
|
Total current assets
|
|
|
33,014,021
|
|
|
|
154,467,831
|
|
|
|
22,187,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
45,216,118
|
|
|
|
10,000,000
|
|
|
|
1,436,410
|
|
Property, equipment and software, net
|
|
|
17,352,445
|
|
|
|
1,218,521
|
|
|
|
175,030
|
|
Land use rights, net
|
|
|
62,589,656
|
|
|
|
-
|
|
|
|
-
|
|
Operating lease right-of-use assets
|
|
|
-
|
|
|
|
9,257,604
|
|
|
|
1,329,772
|
|
Other long-lived assets, net
|
|
|
6,515,200
|
|
|
|
6,515,200
|
|
|
|
935,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
164,687,440
|
|
|
|
181,459,156
|
|
|
|
26,064,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (including short-term borrowings of the consolidated VIEs without recourse to the Group of nil as of both December 31, 2018 and 2019)
|
|
|
112,461,383
|
|
|
|
117,526,089
|
|
|
|
16,881,566
|
|
Accounts payable (including accounts payable of the consolidated VIEs without recourse to the Group of RMB5,920,126 and RMB5,640,424 as of December 31, 2018 and 2019, respectively)
|
|
|
38,035,661
|
|
|
|
38,232,425
|
|
|
|
5,491,744
|
|
Other taxes payable (including other taxes payable of the consolidated VIEs without recourse to the Group of RMB1,398,996 and RMB1,391,227 as of December 31, 2018 and 2019, respectively)
|
|
|
2,949,082
|
|
|
|
1,203,644
|
|
|
|
173,893
|
|
Advances from customers (including advances from customers of the consolidated VIEs without recourse to the Group of RMB23,976,676 and RMB64,335,073 as of December 31, 2018 and 2019, respectively)
|
|
|
39,631,950
|
|
|
|
39,527,778
|
|
|
|
5,677,810
|
|
Other advances (including other advances of the consolidated
VIEs without recourse to the Group of nil as of both December 31, 2018 and 2019)
|
|
|
-
|
|
|
|
56,276,200
|
|
|
|
8,083,570
|
|
Amounts due to related parties (including amounts due to related parties of the consolidated VIEs without recourse to the Group of RMB62,268,751 and RMB59,306,848 as of December 31, 2018 and 2019, respectively)
|
|
|
71,849,633
|
|
|
|
74,379,529
|
|
|
|
10,683,951
|
|
Deferred revenue (including deferred revenue of the consolidated VIEs without recourse to the Group of nil as of both December 31, 2018 and 2019, respectively)
|
|
|
159,125
|
|
|
|
-
|
|
|
|
-
|
|
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, 2018 and 2019)
|
|
|
169,998,682
|
|
|
|
169,998,682
|
|
|
|
24,418,783
|
|
Warrants (including warrants of consolidated VIEs without recourse to the Group of nil as of both December 31, 2018 and 2019)
|
|
|
1,490,844
|
|
|
|
198,600
|
|
|
|
28,527
|
|
Convertible notes (including convertible notes of consolidated VIEs without recourse to the Group of nil as of both December 31, 2018 and 2019)
|
|
|
375,257,140
|
|
|
|
414,127,908
|
|
|
|
59,485,752
|
|
Interest payable (including interest payable of consolidated VIEs without recourse to the Group of nil as of both December 31, 2018 and 2019)
|
|
|
15,298,961
|
|
|
|
5,371,931
|
|
|
|
771,630
|
|
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Group of RMB67,862,435 and RMB71,176,256 as of December 31, 2018 and 2019, respectively)
|
|
|
81,291,306
|
|
|
|
93,140,843
|
|
|
|
13,378,845
|
|
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 RMB34,227 as of December 31, 2019)
|
|
|
-
|
|
|
|
3,407,670
|
|
|
|
489,481
|
|
Liabilities directly associated with assets held-for-sale
|
|
|
-
|
|
|
|
44,691,296
|
|
|
|
6,419,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
908,423,767
|
|
|
|
1,058,082,595
|
|
|
|
151,984,055
|
|
THE9 LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND 2019 (Continued)
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 RMB18,287 as of December 31, 2019)
|
|
|
-
|
|
|
|
6,251,705
|
|
|
|
898,001
|
|
TOTAL LIABILITIES
|
|
|
908,423,767
|
|
|
|
1,064,334,300
|
|
|
|
152,882,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 30)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest (Note 28)
|
|
|
341,074,539
|
|
|
|
349,046,548
|
|
|
|
50,137,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (US$0.01 par value; 350,000,000 shares authorized, 91,315,465 and nil shares issued and outstanding as of December 31, 2018 and 2019, respectively)
|
|
|
6,502,658
|
|
|
|
-
|
|
|
|
-
|
|
Class A ordinary shares (US$0.01 par value; 4,300,000,000 shares authorized, nil and 103,737,691 shares issued and outstanding as of December 31, 2018 and 2019, respectively)
|
|
|
-
|
|
|
|
7,321,099
|
|
|
|
1,051,610
|
|
Class B ordinary shares (US$0.01 par value; 600,000,000 shares authorized, nil and 9,192,011 shares issued and outstanding as of December 31, 2018 and 2019, respectively)
|
|
|
-
|
|
|
|
648,709
|
|
|
|
93,181
|
|
Additional paid-in capital
|
|
|
2,496,069,065
|
|
|
|
2,539,552,478
|
|
|
|
364,783,889
|
|
Statutory reserves
|
|
|
28,071,982
|
|
|
|
28,071,982
|
|
|
|
4,032,288
|
|
Accumulated other comprehensive loss
|
|
|
(9,204,556
|
)
|
|
|
(3,777,952
|
)
|
|
|
(542,669
|
)
|
Accumulated deficit
|
|
|
(3,233,061,063
|
)
|
|
|
(3,410,856,231
|
)
|
|
|
(489,938,842
|
)
|
The9 Limited shareholders’ deficit
|
|
|
(711,621,914
|
)
|
|
|
(839,039,915
|
)
|
|
|
(120,520,543
|
)
|
Noncontrolling interest
|
|
|
(373,188,952
|
)
|
|
|
(392,881,777
|
)
|
|
|
(56,433,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ deficit
|
|
|
(1,084,810,866
|
)
|
|
|
(1,231,921,692
|
)
|
|
|
(176,954,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
|
|
|
164,687,440
|
|
|
|
181,459,156
|
|
|
|
26,064,977
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
FOR
THE YEAR ENDED DECEMBER 31, 2017
|
|
|
Ordinary
shares
|
|
|
Additional
paid-in capital
|
|
|
Statutory
reserves
|
|
|
Accumulated
other comprehensive income (loss)
|
|
|
Accumulated
deficit
|
|
|
Equity
(deficit) attributable to
The9 Limited
|
|
|
Noncontrolling
interest
|
|
|
Total
shareholder equity (deficit)
|
|
|
|
(US$0.01
par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
Par
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance as of January 1,
2017
|
|
|
23,915,501
|
|
|
|
1,931,642
|
|
|
|
2,525,599,832
|
|
|
|
28,071,982
|
|
|
|
2,582,023
|
|
|
|
(2,897,802,287
|
)
|
|
|
(339,616,808
|
)
|
|
|
(362,437,649
|
)
|
|
|
(702,054,457
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(118,165,850
|
)
|
|
|
(118,165,850
|
)
|
|
|
3,955,640
|
|
|
|
(114,210,210
|
)
|
Currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,027,771
|
)
|
|
|
-
|
|
|
|
(19,027,771
|
)
|
|
|
9,502,010
|
|
|
|
(9,525,761
|
)
|
Disposal of Yunmei Partnership
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
117,983
|
|
|
|
117,983
|
|
Contributions from noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000,000
|
|
|
|
20,000,000
|
|
Exercise of options
|
|
|
6,328,535
|
|
|
|
425,483
|
|
|
|
(425,483
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
37,727,861
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,727,861
|
|
|
|
301,852
|
|
|
|
38,029,713
|
|
Change in redemption value of redeemable noncontrolling
interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(57,126,233
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(57,126,233
|
)
|
|
|
-
|
|
|
|
(57,126,233
|
)
|
Change in equity interest attributable to
noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,060
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,060
|
)
|
|
|
7,060
|
|
|
|
-
|
|
Issuance of shares
|
|
|
14,300,000
|
|
|
|
971,727
|
|
|
|
21,446,398
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,418,125
|
|
|
|
-
|
|
|
|
22,418,125
|
|
Balance as of December 31, 2017
|
|
|
44,544,036
|
|
|
|
3,328,852
|
|
|
|
2,527,215,315
|
|
|
|
28,071,982
|
|
|
|
(16,445,748
|
)
|
|
|
(3,015,968,137
|
)
|
|
|
(473,797,736
|
)
|
|
|
(328,553,104
|
)
|
|
|
(802,350,840
|
)
|
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2018 (Continued)
|
|
|
Ordinary
shares
|
|
|
Additional
paid-in capital
|
|
|
Statutory
reserves
|
|
|
Accumulated
other comprehensive loss
|
|
|
Accumulated
deficit
|
|
|
Equity
(deficit) attributable to
The9 Limited
|
|
|
Noncontrolling
interest
|
|
|
Total
shareholder equity (deficit)
|
|
|
|
(US$0.01
par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
Par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance
as of January 1, 2018
|
|
|
44,544,036
|
|
|
|
3,328,852
|
|
|
|
2,527,215,315
|
|
|
|
28,071,982
|
|
|
|
(16,445,748
|
)
|
|
|
(3,015,968,137
|
)
|
|
|
(473,797,736
|
)
|
|
|
(328,553,104
|
)
|
|
|
(802,350,840
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(217,092,926
|
)
|
|
|
(217,092,926
|
)
|
|
|
(16,332,968
|
)
|
|
|
(233,425,894
|
)
|
Currency translation
adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,241,192
|
|
|
|
-
|
|
|
|
7,241,192
|
|
|
|
(8,555,457
|
)
|
|
|
(1,314,265
|
)
|
Derecognition of noncontrolling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,000,000
|
)
|
|
|
(20,000,000
|
)
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
3,645,751
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,645,751
|
|
|
|
252,577
|
|
|
|
3,898,328
|
|
Change in redemption
value of redeemable noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,918,773
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,918,773
|
)
|
|
|
-
|
|
|
|
(40,918,773
|
)
|
Issuance of shares
|
|
|
46,771,429
|
|
|
|
3,173,806
|
|
|
|
6,126,772
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,300,578
|
|
|
|
-
|
|
|
|
9,300,578
|
|
Balance as of December
31, 2018
|
|
|
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
|
)
|
CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
FOR
THE YEAR ENDED DECEMBER 31, 2019 (Continued)
|
|
|
Ordinary
shares
|
|
|
Additional
paid-in capital
|
|
|
Statutory
reserves
|
|
|
Accumulated
other comprehensive (income) loss
|
|
|
Accumulated
deficit
|
|
|
Equity
(deficit) attributable to
The9 Limited
|
|
|
Noncontrolling
interest
|
|
|
Total
shareholder equity (deficit)
|
|
|
|
(US$0.01
par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of shares
|
|
|
Par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance
as of January 1,2019
|
|
|
91,315,465
|
|
|
|
6,502,658
|
|
|
|
2,496,069,065
|
|
|
|
28,071,982
|
|
|
|
(9,204,556
|
)
|
|
|
(3,233,061,063
|
)
|
|
|
(711,621,914
|
)
|
|
|
(373,188,952
|
)
|
|
|
(1,084,810,866
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(177,795,168
|
)
|
|
|
(177,795,168
|
)
|
|
|
(13,517,983
|
)
|
|
|
(191,313,151
|
)
|
Currency translation
adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,426,604
|
|
|
|
-
|
|
|
|
5,426,604
|
|
|
|
(6,220,135
|
)
|
|
|
(793,531
|
)
|
Share-based compensation
|
|
|
6,169,355
|
|
|
|
425,593
|
|
|
|
21,279,647
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,705,240
|
|
|
|
45,293
|
|
|
|
21,750,533
|
|
Change in redemption
value of redeemable noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,827,598
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,827,598
|
)
|
|
|
-
|
|
|
|
(12,827,598
|
)
|
Issuance of shares
|
|
|
15,444,882
|
|
|
|
1,041,557
|
|
|
|
35,031,364
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,072,921
|
|
|
|
-
|
|
|
|
36,072,921
|
|
Balance as of December
31, 2019
|
|
|
112,929,702
|
|
|
|
7,969,808
|
|
|
|
2,539,552,478
|
|
|
|
28,071,982
|
|
|
|
(3,777,952
|
)
|
|
|
(3,410,856,231
|
)
|
|
|
(839,039,915
|
)
|
|
|
(392,881,777
|
)
|
|
|
(1,231,921,692
|
)
|
Balance as of December
31, 2019(US$ except share data, Note 3)
|
|
|
112,929,702
|
|
|
|
1,144,791
|
|
|
|
364,783,889
|
|
|
|
4,032,288
|
|
|
|
(542,669
|
)
|
|
|
(489,938,842
|
)
|
|
|
(120,520,543
|
)
|
|
|
(56,433,936
|
)
|
|
|
(176,954,479
|
)
|
The accompanying notes
are an integral part of these consolidated financial statements.
THE9 LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017,
2018 AND 2019
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(112,092,907
|
)
|
|
|
(239,284,796
|
)
|
|
|
(196,168,740
|
)
|
|
|
(28,177,876
|
)
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of property, equipment and software
|
|
|
18,460
|
|
|
|
(183,767
|
)
|
|
|
(2,153,158
|
)
|
|
|
(309,282
|
)
|
Gain on disposal of subsidiaries
|
|
|
-
|
|
|
|
(10,473,159
|
)
|
|
|
(1,206,925
|
)
|
|
|
(173,364
|
)
|
Gain on disposal of other investments
|
|
|
-
|
|
|
|
-
|
|
|
|
(13,430,588
|
)
|
|
|
(1,929,183
|
)
|
Share-based compensation expenses
|
|
|
38,029,713
|
|
|
|
3,898,328
|
|
|
|
21,750,533
|
|
|
|
3,124,269
|
|
Impairment on equity investments
|
|
|
-
|
|
|
|
1,386,174
|
|
|
|
4,666,128
|
|
|
|
670,247
|
|
Impairment on other investments and available-for-sale investments
|
|
|
9,109,312
|
|
|
|
7,776,157
|
|
|
|
3,791,039
|
|
|
|
544,549
|
|
Impairment on other long-lived assets
|
|
|
-
|
|
|
|
-
|
|
|
|
34,881,000
|
|
|
|
5,010,342
|
|
Provision for doubtful accounts receivable
|
|
|
47,948
|
|
|
|
109,939
|
|
|
|
169,416
|
|
|
|
24,335
|
|
Impairment on advances to suppliers
|
|
|
-
|
|
|
|
7,765,482
|
|
|
|
-
|
|
|
|
-
|
|
Impairment on other advances
|
|
|
-
|
|
|
|
-
|
|
|
|
5,980,787
|
|
|
|
859,086
|
|
Provision for doubtful other receivables
|
|
|
-
|
|
|
|
21,042,700
|
|
|
|
-
|
|
|
|
-
|
|
Consulting fee paid by issuance of shares
|
|
|
13,454,692
|
|
|
|
4,172,800
|
|
|
|
35,091,686
|
|
|
|
5,040,605
|
|
Depreciation and amortization of property, equipment and software
|
|
|
5,299,059
|
|
|
|
3,650,261
|
|
|
|
2,778,778
|
|
|
|
399,146
|
|
Amortization of land use right
|
|
|
1,920,910
|
|
|
|
1,920,910
|
|
|
|
1,440,682
|
|
|
|
206,941
|
|
Recovery of equity investment in excess of cost
|
|
|
(60,548,651
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Share of loss in equity method investments
|
|
|
2,937,131
|
|
|
|
4,292,887
|
|
|
|
2,847,260
|
|
|
|
408,983
|
|
Gain on disposal of investment in equity investee and available-for-sales investment
|
|
|
(115,349
|
)
|
|
|
-
|
|
|
|
(694,628
|
)
|
|
|
(99,777
|
)
|
Foreign currency exchange (gain) loss
|
|
|
(19,206,747
|
)
|
|
|
20,331,430
|
|
|
|
5,474,002
|
|
|
|
786,291
|
|
Fair value change on warrant liability
|
|
|
(12,615,466
|
)
|
|
|
(2,251,427
|
)
|
|
|
(1,292,244
|
)
|
|
|
(185,619
|
)
|
Amortization of discount and interest on convertible notes
|
|
|
76,990,826
|
|
|
|
98,308,205
|
|
|
|
33,154,191
|
|
|
|
4,762,302
|
|
Non-cash lease expense
|
|
|
-
|
|
|
|
-
|
|
|
|
409,048
|
|
|
|
58,756
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accounts receivable
|
|
|
5,742,365
|
|
|
|
1,904,732
|
|
|
|
313,044
|
|
|
|
44,966
|
|
Change in advances to suppliers
|
|
|
2,462,761
|
|
|
|
(1,400,665
|
)
|
|
|
(1,419,353
|
)
|
|
|
(203,877
|
)
|
Change in prepayments and other current assets
|
|
|
3,169,076
|
|
|
|
(20,575,190
|
)
|
|
|
(6,628,897
|
)
|
|
|
(952,181
|
)
|
Change in right-of-use assets
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,666,652
|
)
|
|
|
(1,388,528
|
)
|
Change in other long-lived assets
|
|
|
-
|
|
|
|
6,220
|
|
|
|
-
|
|
|
|
-
|
|
Change in accounts payable
|
|
|
2,073,797
|
|
|
|
905,990
|
|
|
|
246,764
|
|
|
|
35,445
|
|
Change in amounts due to related parties
|
|
|
(53,060,754
|
)
|
|
|
(1,628,877
|
)
|
|
|
3,144,106
|
|
|
|
451,623
|
|
Change in other taxes payable
|
|
|
1,430,998
|
|
|
|
1,234,090
|
|
|
|
(491,112
|
)
|
|
|
(70,544
|
)
|
Change in advances from customers
|
|
|
21,137,125
|
|
|
|
(2,336,252
|
)
|
|
|
(15,887
|
)
|
|
|
(2,282
|
)
|
Change in deferred revenue
|
|
|
(10,345,604
|
)
|
|
|
(5,417,144
|
)
|
|
|
(159,125
|
)
|
|
|
(22,857
|
)
|
Change in interest payable
|
|
|
5,452,770
|
|
|
|
6,053,191
|
|
|
|
1,457,811
|
|
|
|
209,401
|
|
Change in accrued expenses and other current liabilities
|
|
|
(7,943,127
|
)
|
|
|
(2,408,745
|
)
|
|
|
11,896,337
|
|
|
|
1,708,802
|
|
Change in lease liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
9,659,375
|
|
|
|
1,387,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(86,651,662
|
)
|
|
|
(101,200,526
|
)
|
|
|
(54,175,322
|
)
|
|
|
(7,781,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of other investment
|
|
|
1,158,040
|
|
|
|
-
|
|
|
|
37,026,498
|
|
|
|
5,318,524
|
|
Proceeds from disposal of equity investee and available-for-sale investment
|
|
|
115,349
|
|
|
|
-
|
|
|
|
694,628
|
|
|
|
99,777
|
|
Purchase of other investments
|
|
|
(4,000,000
|
)
|
|
|
(5,300,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Deposit for joint venture arrangement
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,881,000
|
)
|
|
|
(5,010,342
|
)
|
Advances to subscribe tokens (Note 5)
|
|
|
-
|
|
|
|
(14,070,581
|
)
|
|
|
-
|
|
|
|
-
|
|
Disbursement for loans receivable from a related party
|
|
|
(4,000,000
|
)
|
|
|
(600,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Collection of loans receivable from related party
|
|
|
3,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Proceeds from disposal of property, equipment and software
|
|
|
292,074
|
|
|
|
81,848
|
|
|
|
2,648,259
|
|
|
|
380,399
|
|
Proceeds from disposal of assets and liabilities classified as held-for-sale (Note 7)
|
|
|
-
|
|
|
|
2,800,000
|
|
|
|
49,300,000
|
|
|
|
7,081,502
|
|
Proceeds from tokens transferred (Note 5)
|
|
|
-
|
|
|
|
-
|
|
|
|
6,887,915
|
|
|
|
989,387
|
|
Settlement payment from investee
|
|
|
165,812,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Purchase of property, equipment and software
|
|
|
(454,560
|
)
|
|
|
(226,717
|
)
|
|
|
(796,921
|
)
|
|
|
(114,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
161,923,403
|
|
|
|
(17,315,450
|
)
|
|
|
60,879,379
|
|
|
|
8,744,777
|
|
THE9 LIMITED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019 (Continued)
|
|
|
2017
|
|
|
|
2018
|
|
|
|
2019
|
|
|
|
2019
|
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of bank borrowings
|
|
|
(25,528,388
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans from a related party
|
|
|
73,930,427
|
|
|
|
11,030,602
|
|
|
|
16,065,376
|
|
|
|
2,307,647
|
|
Repayment of loans from a related party
|
|
|
(23,950,421
|
)
|
|
|
(29,127,540
|
)
|
|
|
(10,023,576
|
)
|
|
|
(1,439,797
|
)
|
Proceeds from other loans
|
|
|
19,881,900
|
|
|
|
-
|
|
|
|
34,881,000
|
|
|
|
5,010,342
|
|
Repayments of other loans
|
|
|
(20,260,085
|
)
|
|
|
(260,073
|
)
|
|
|
-
|
|
|
|
-
|
|
Contribution from noncontrolling interest
|
|
|
20,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
44,073,433
|
|
|
|
(18,357,011
|
)
|
|
|
40,922,800
|
|
|
|
5,878,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
|
4,527,918
|
|
|
|
(1,494,584
|
)
|
|
|
1,257,310
|
|
|
|
180,601
|
|
Cash reclassified as held for sale
|
|
|
(20,127,148
|
)
|
|
|
-
|
|
|
|
(43,027,475
|
)
|
|
|
(6,180,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
103,745,944
|
|
|
|
(138,367,571
|
)
|
|
|
5,856,692
|
|
|
|
841,261
|
|
Cash and cash equivalents, beginning of year
|
|
|
38,878,076
|
|
|
|
142,624,020
|
|
|
|
4,256,449
|
|
|
|
611,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
142,624,020
|
|
|
|
4,256,449
|
|
|
|
10,113,141
|
|
|
|
1,452,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
892,159
|
|
|
|
260,073
|
|
|
|
-
|
|
|
|
-
|
|
Income taxes paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable related to the disposition
of a subsidiary
|
|
|
1,600,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares issued for equity investments and other investments
|
|
|
-
|
|
|
|
3,091,986
|
|
|
|
236,667
|
|
|
|
33,995
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
1,271,769
|
|
|
|
182,678
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
THE9 LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017,
2018 AND 2019
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 Group is principally engaged in the development
and operation of online games and internet related businesses. In 2019, the Group attempted enter into electric vehicle industry
and now aims to become a diversified high-tech Internet company.
The
Company’s principal subsidiaries and VIEs are as follows as of December 31, 2019:
Name of Entity
|
|
Date of
Registration
|
|
Place of
Registration
|
|
Legal Ownership
|
Principal subsidiaries:
|
|
|
|
|
|
|
GameNow.net (Hong Kong) Ltd. (“GameNow Hong Kong”)
|
|
January-2000
|
|
Hong Kong
|
|
100%
|
China The9 Interactive Limited (“C9I”)
|
|
October-2003
|
|
Hong Kong
|
|
100%
|
China The9 Interactive (Shanghai) Limited (“C9I Shanghai”)
|
|
February-2005
|
|
People’s Republic of China (“PRC”)
|
|
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 Development Ltd. (“Asian Development”)
|
|
January-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%
|
Red 5 Studios, Inc. (“Red 5”) (Note 2.2)
|
|
June-2005
|
|
USA
|
|
34.71%
|
Red 5 Singapore Pte. Ltd. (“Red 5 Singapore”) (Note 2.2)
|
|
April-2010
|
|
Singapore
|
|
34.71%
|
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%
|
Name of Entity
|
|
Date of
Registration
|
|
Place of
Registration
|
|
Legal Ownership
|
The9 Singapore Pte. Ltd. (“The9 Singapore”)
|
|
April-2010
|
|
Singapore
|
|
100%
|
Fast Supreme Development Limited (“Fast Supreme”)
|
|
July-2017
|
|
Hong Kong
|
|
99.99%
|
Ninebit Inc. (“Ninebit”)
|
|
January -2018
|
|
Cayman Islands
|
|
100%
|
1111 Limited (“1111”)
|
|
January -2018
|
|
Hong Kong
|
|
100%
|
Supreme Exchange Limited (“Supreme”)
|
|
December-2018
|
|
Malta
|
|
90%
|
BET 111 Ltd. (“Bet 111”)
|
|
Jan-2019
|
|
Malta
|
|
90%
|
Coin Exchange Ltd (“Coin”)
|
|
Jan-2019
|
|
Malta
|
|
90%
|
The9 EV Limited (“The9 EV”)
|
|
May-2019
|
|
Hong Kong
|
|
100%
|
Comtec Solar (China) Investment Holding Limited (“Comtec Solar”)
|
|
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%
|
|
|
|
|
|
|
|
Variable interest entity:
|
|
|
|
|
|
|
Shanghai
The9 Information Technology Co., Ltd. (“Shanghai IT”) (Note 4)
|
|
September-2000
|
|
PRC
|
|
N/A
|
Subsidiaries and VIEs of Shanghai IT:
Name of Entity
|
|
Date of
Registration
|
|
Place of
Registration
|
|
Legal Ownership Held 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%
|
Wuxi Interest Dynamic Network Technology Co., Ltd. (“Wuxi Qudong”)
|
|
June-2016
|
|
PRC
|
|
100%
|
Changsha Quxiang Network Technology Co., Ltd. (“Changsha Quxiang”)
|
|
July-2016
|
|
PRC
|
|
100%
|
Silver Express Investments Ltd. (“Silver Express”)
|
|
November-2007
|
|
Hong Kong
|
|
100%
|
The9 Computer Technology Consulting (Shanghai) Co., Ltd. (“The9 Computer”)
|
|
June-2000
|
|
PRC
|
|
100%
|
Shanghai Kaie Information Technology Co., Ltd. (“Shanghai Kaie”)
|
|
January -2019
|
|
PRC
|
|
100%
|
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 accompanying consolidated financial
statements have been prepared on a going concern basis. The Group has accumulated deficit of approximately RMB3,410.9 million (US$489.9
million) and total current liabilities exceeded total assets by approximately RMB876.6 million (US$125.9 million) as of December
31, 2019. The Group also suffered a net loss of approximately RMB196.2 million (US$28.2 million) for the year ended December 31,
2019. The Group expects to continue to incur product development and sales and marketing expenses for licensed and proprietary
new games in order to achieve overall revenue growth.
To meet its working capital needs, the Group
is considering multiple alternatives, including, but not limited to, additional equity financing, settlement of secured convertible
notes, launch of new games and new operations, and cost controls as outlined below. There can be no assurance that the Group will
be able to complete any such transaction on acceptable terms or otherwise. If the Group is unable to obtain the necessary capital,
it will need to pursue a plan to license or sell its assets, seek to be acquired by another entity, or cease operations.
These factors raise substantial doubt about
the Group’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset or liability amounts that might result from the outcome
of this uncertainty.
Additional Equity Financing
The Group intends to obtain financial support
from Mr. Jun Zhu, CEO and Chairman of the Group, if needed in 2020.
Settlement of Secured Convertible
Notes (see Note 19)
On November 24, 2015, the Group entered into
an agreement with Splendid Days Limited for a private placement of secured convertible notes
for gross proceeds of US$40,050,000. This transaction closed on December 11, 2015. Pursuant to the terms of the agreement, the
convertible notes matured in December 2018, subject to a two-year extension at the discretion of the investor. In March 2019, the
Group entered into a deed of settlement agreement relating to the settlement of convertible notes which matured in December 2018,
pursuant to which the convertible notes should be repaid by May 31, 2019 through the proceeds from the sale of the Group’s
subsidiaries that hold office buildings located at Zhangjiang, Shanghai. In November 2019, Splendid
Days Limited agreed to extend the repayment date to December 31, 2019 as disposal of those Group subsidiaries was still
in process. Subsequent to December 31, 2019, the Group completed disposal of those Group subsidiaries, has repaid the principal
and interest due on the entrusted bank loan and has repaid US$4.8 million to the issuer of convertible notes. The Group plans to
use proceeds from the above sale to settle remaining outstanding balance of convertible notes amounting to US$55.5 million.
Launch of New Games and New Operations
The Group plans to launch our proprietary
online mobile games on different platforms, including the CrossFire New Mobile Game and Audition. In November 2017, the Group entered
into an exclusive publishing agreement with two third-party companies, pursuant to which these third-party companies were granted
an exclusive right to publish CrossFire New Mobile Game and Audition in the PRC. The Group has invested significant financial and
personnel resources in development of our proprietary CrossFire New Mobile Game and the Group expects to obtain regulatory approval
to launch this game in 2020.
In
February 2018, the Group subscribed for a total of 5,297,157 tokens to be issued by Telegram Inc. at a consideration of US$2.0
million with a third-party company and the tokens were expected to be issued in 2019. In October 2019, Telegram notified participants
of the tokens offering that the U.S. Securities and Exchange Commission (“SEC”) filed a lawsuit against them in United
States and that the expected launch date has been extended to April 2020. As of December 31, 2019, the Group has provided a valuation
allowance on these subscribed tokens. As of the issuance date of these consolidated financial statements, these subscribed tokens
have not been issued. Telegram may further extend the launch date or may enter into a termination arrangement depending on the
development of the future events.
In March 2019, the Group entered into a
joint venture agreement with Faraday & Future Inc. (“F&F”), and subsequently attempted to enter into electric
vehicle business. The Group has established a joint venture with F&F to manufacture, market, distribute and sell certain of
F&F’s car models in the PRC. As of December 31, 2019, the Group has not entered into a license agreement with F&F
and has not fulfilled its first installment capital commitment to the development of the joint venture. While the joint venture
arrangement remains effective, the Group is currently in the process of identifying alternative business development areas.
Cost Controls
Currently, a significant portion of our cash
outflows is attributable to administrative expenses. The Group has the ability to control the level of discretionary spending on
administrative expenses by implementation of cost savings on non-essential expenses from the day-to-day business operations.
<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 (see Note 9). After the transaction, the Group owned 34.71% shareholding in Red 5. As the
Group controls a majority of Board of Director seats and only a majority vote is required to approve Board of Director resolutions,
and as the Group has continuously funded the operation of Red 5, the Group still retained effective control over Red 5. Red 5 remained
as a consolidated entity of the Group as of December 31, 2019.
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
our 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 our 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, Red 5, The9 Interactive, and Red 5 Singapore, is the RMB. The functional currency of Red 5, The9 Interactive,
and Red 5 Singapore, is the United States dollar (“US$” or “U.S. dollar”), U.S. dollar, and Singapore dollar,
respectively. Assets and liabilities of Red 5, The9 Interactive, and Red 5 Singapore, 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 income (loss) in the consolidated statements of changes in equity for the years presented.
Transactions
denominated in currencies other than functional currencies, are translated into functional currencies at the exchange rates prevailing
at the dates of the transactions. Gains and losses resulting from foreign currency transactions are included in the consolidated
statements of operations and comprehensive loss. 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) gain in the consolidated statements of operations and comprehensive loss.
<5>
Cash and cash equivalents
Cash
and cash equivalents represent cash on hand and highly liquid investments with a maturity date when acquired of three months
or less. As of December 31, 2018 and 2019, 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, 2018 and 2019 are amounts denominated
in U.S. dollar totaling US$0.08 million and US$0.35 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 RMB3.6 million and
RMB7.6 million (US$1.1 million) as of December 31, 2018 and 2019, respectively.
<6> Allowance for doubtful accounts
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. The Group determines the allowances for doubtful accounts when facts and circumstances
indicate that the receivable is unlikely to be collected. Allowances for doubtful accounts are charged to general and administrative
expenses. If the financial condition of the Group’s customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. The Company provided an allowance for doubtful accounts of RMB0.05 million,
RMB21.2 million and RMB0.2 million (US$0.01 million) for the years ended December 2017, 2018 and 2019, 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.
<8>
Available-for-sale investments
Investments
in debt and equity securities are, on initial recognition, classified into the three categories: held-to-maturity securities, trading
securities and available-for-sale securities. Debt securities that the Company has the positive intent and ability to hold to maturity
are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought
and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity securities
or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses
recognized in accumulated other comprehensive income.
When
there is objective evidence that an available-for-sale investment is impaired, the cumulative losses from declines in fair value
that had been recognized directly in other comprehensive income are removed from equity and recognized in earnings. When the available-for-sale
investment is sold, the cumulative fair value adjustments previously recognized in accumulated other comprehensive income are
recognized in the current period operating results. When the Group determines that the impairment of an available-for-sale equity
security is other-than-temporary, the Group recognizes an impairment loss in earnings equal to the difference between the investment’s
cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. When other-than-temporary
impairment has occurred for an available-for-sale debt security and the Group intends to sell the security or more likely than
not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, an impairment
loss is recognized in earnings equal to the difference between the investment’s amortized cost basis and its fair value at
the balance sheet date. The new cost basis will not be changed for subsequent recoveries in fair value. To determine whether a
loss is other-than-temporary, the Group reviews the cause and duration of the impairment, the extent to which fair value is less
than cost, the financial condition and near-term prospects of the issuer, and the Group’s intent and ability to hold the
security for a period of time sufficient to allow for any anticipated recovery of its amortized cost.
<9>
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
|
3 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 an agreement with
Kapler Pte. Ltd., a third-party, to sell three subsidiaries which hold land use rights and office buildings located at Zhangjiang,
Shanghai. As of December 31, 2019, the transaction was in process and the Group has presented both the land use rights and office
buildings as assets held-for-sale (see Note 7).
<10>
Goodwill
Goodwill represents the excess of the purchase
price over the fair value of the identifiable assets and liabilities acquired as a result of the Group’s business acquisitions.
Goodwill is not depreciated or amortized but is tested for impairment at the reporting unit level on an annual basis, and between
annual tests when an event or circumstances change occurs that indicate the asset might be impaired. In 2010, the Group recognized
goodwill of US$1.6 million in connection with the acquisition of Red 5 and provided a full valuation allowance against that goodwill
in 2016. Subsequently, the Group has not recognized additional goodwill.
<11>
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 Accounting Standards Codification
(“ASC”) 360-10-45-9 are met:
|
·
|
Management, having the authority to approve the action, commits to a plan to sell the asset;
|
|
·
|
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.
<12>
Intangible assets, net
Intangible
assets consist primarily of acquired game licenses and acquired game development costs from business combinations.
Acquired game licenses are amortized on a
straight-line basis over the shorter of the useful economic life of the relevant online game or license period, which range from
two to seven years. Amortization of acquired game licenses commences upon monetization of the related online game. In September
2011, the Group paid US$10.0 million and guaranteed an additional payment of US$12.7 million due within four years to the third-party
game publisher to acquire game licenses. In addition, the Group is subject to additional contingent payments to be calculated
based on certain percentages of the proceeds received from future game licensing and royalties, if any. The total consideration
paid, including the US$10.0 million and the guaranteed amount of US$12.7 million, was recorded as an acquired game license. The
contingent payments will be recorded as cost of services when incurred. The remaining payable related to this game license fee
was US$3.1 million as of both December 31, 2018 and 2019. The acquired game licenses were fully amortized or impaired in 2016.
The Group recognizes intangible assets acquired through business
acquisitions as assets separate from goodwill. Acquired in-process research and development costs are initially considered an indefinite-lived
asset. Upon completion of the research and development efforts, these costs are recorded as acquired game development costs and
are amortized on a straight-line basis over the estimated useful economic life of the relevant online game. Amortization of acquired
game development cost commences upon monetization of the related online game. The acquired game development cost was fully amortized
or impaired in 2016.
<13>
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. As of December 31, 2019, the transaction was in process and the Group has presented both the
land use right and office buildings as assets held-for sale (see Note 7).
<14>
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.
<15>
Revenue recognition
On January 1, 2018, the Group adopted ASC
606, Revenue from Contracts with Customers, applying the modified retrospective method to contracts that were not completed
as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC 606, while prior
period results are not adjusted.
Revenues are recognized when control of the
promised goods or services is transferred to the Group’s customers, in an amount that reflects the consideration of the Group
expects 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.
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.
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.
Deferred revenue 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 RMB5.4 million and RMB0.2 million (US$0.02 million) was recognized during the years ended December 31, 2018 and 2019, respectively.
<16> 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.
<17> Convertible notes and warrants
Convertible
Notes and Beneficial Conversion Feature (“BCF”)
The
Group issued convertible notes and warrants in December 2015. The Group has 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 the Group’s evaluation, the conversion feature is not considered
an embedded derivative instrument subject to bifurcation as the 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 per the terms of the convertible
notes agreement is below market value. In these instances, the value of the BCF is determined as the intrinsic value of the conversion
feature 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 at the date of issuance. The allocated fair value for the warrants and the value of the BCF are both recorded in
the consolidated financial statements as a debt discount from the face amount of the notes, which is then accreted to interest
expense over the life of the related debt using the effective interest method.
The Group present the occurred
debt issuance costs as a direct deduction from the convertible notes. Amortization of the costs is reported as interest expense.
Warrants
The Group accounts for the
detachable warrants issued in connection with convertible notes under the authoritative guidance on accounting for derivative financial
instruments indexed to, and potentially settled in, a company’s own stock. The Group classifies warrants in its consolidated
balance sheet as a liability which is revalued at each balance sheet date subsequent to the initial issuance. The Group uses the
Black-Scholes-Merton pricing model (the “Black-Scholes Model”) to value the warrants. Determining the appropriate fair-value
model and calculating the fair value of warrants requires considerable judgment. A small change in the estimates used may cause
a relatively large change in the estimated valuation. The estimated volatility of the Group’s common stock at the date of
issuance, and at each subsequent reporting period, is based on historical fluctuations in the Company’s stock price. The
risk-free interest rate is based on United States Treasury zero-coupon issues with a maturity similar to the expected remaining
life of the warrants at the valuation date. The expected life of the warrants is based on the historical pattern of exercises of
warrants.
<18>
Cost of revenues
Cost of revenues consists primarily of 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.
<19>
Product development costs
For software development costs, including
online games, to be sold or marketed to customers, the Group expenses software development costs incurred prior to reaching technological
feasibility. Once a software product has reached technological feasibility, all subsequent software costs for that product are
capitalized until that product is released for marketing. After an online game is released, the capitalized product development
costs are amortized over the estimated product life. For the years ended December 31, 2017, 2018 and 2019, although software
products has reached technological feasibility, total software costs incurred subsequent to reaching technological feasibility
amounted to be immaterial and therefore not capitalized.
For
website and internally used software development costs, the Group expenses all costs that are incurred in connection with the planning
and implementation phases of development and costs that are associated with repair or maintenance of the existing websites and
software. Costs incurred in the application and infrastructure development phase are capitalized and amortized over the estimated
product life. Since the inception of the Group, the amount of internally generated costs qualifying for capitalization has
been immaterial and, as a result, all website and internally used software development costs have been expensed as incurred.
Product
development costs consist primarily of outsourced research and development, 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.
<20>
Sales and marketing expenses
Sales
and marketing expenses consist primarily of advertising and promotional expenses, payroll and other overhead expenses incurred
by the Group’s sales and marketing personnel. Advertising expenses in the amount of RMB0.9 million, RMB0.3 million and RMB0.2
million (US$0.04 million) for the years ended December 31, 2017, 2018 and 2019, respectively, were expensed as incurred.
<21>
Government grants
Unrestricted government subsidies from local
government agencies allowing the Group full discretion to utilize the funds were RMB2.3 million, RMB1.6 million and RMB1.2 million
(US$0.2 million) for the years ended December 31, 2017, 2018 and 2019, respectively, which were recorded in other income, net in
the consolidated statements of operations and comprehensive loss.
<22>
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 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.
On June 6, 2017, the Board of Directors of
the Group approved cancellation of a portion of the options and accelerated vesting of the remaining options in addition to the
repricing of the exercise price which was US$0.00. Pursuant to the option agreement entered with the optionees, options totaling
6,328,535 were exercised and options totaling 10,806,665 were canceled. An independent appraiser engaged by the Group prepared
a valuation report assessing the fair value of the options. The cancellation and acceleration of the options were considered as
an option modification. Subject to ASC 718-20-35, the remaining unrecognized compensation cost of unvested stock option measured
at grant date shall be recognized at the date of modification. The incremental compensation cost which is the excess of the fair
value of the replacement award over the fair value of the canceled award was recognized at the date of cancelation.
<23>
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.
On
January 1, 2019, the effective date of ASC 842, the Group has no lease assets and lease liabilities to be recognized as
the Group has no lease contracts that require transition. There was no impact to retained earnings at adoption.
<24>
Income taxes
Current
income taxes are provided for in accordance with the laws and regulations applicable to the Group as enacted by the relevant tax
authorities. Income taxes are accounted for under the asset and liability method. Deferred taxes are determined based upon differences
between the financial reporting and tax bases of assets and liabilities at currently enacted statutory tax rates for the years
in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized as income
in the period of change. A valuation allowance is provided on deferred tax assets to the extent that it is more likely than not
that such deferred tax assets will not be realized. The total income tax provision includes current tax expenses under applicable
tax regulations and the change in the balance of deferred tax assets and liabilities.
The
Group recognizes the impact of an uncertain income tax position at the largest amount that is more-likely-than not to be sustained
upon audit by the relevant tax authority. Income tax related interest is classified as interest expenses and penalties as
income tax expense.
<25> Redeemable noncontrolling interests
Redeemable
noncontrolling interests are equity interests of our 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.
<26> 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 sheet and modifies the presentation of net income by requiring earnings and other comprehensive
income loss to be attributed to controlling and noncontrolling interest.
<27>
Loss per share
Basic
loss per share is computed by dividing net loss attributable to the holders of ordinary shares by the weighted average number of
ordinary shares outstanding during the year. Diluted loss per share is calculated by dividing net income attributable to the holders
of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of
ordinary shares and dilutive ordinary share equivalents outstanding during the period. Ordinary share equivalents of stock options
and warrants are calculated using the treasury stock method 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 is recorded.
<28>
Segment reporting
The
Group has one operating segment whose business is developing and operating online games and related services. The Group’s
chief operating decision maker is the chief executive officer, who reviews consolidated results when making decisions about allocating
resources and assessing performance of the Group. The Group generates its revenues from customers in Greater China, North
America, and other areas.
<29>
Certain risks and concentration
Financial
instruments that potentially subject the Group to significant concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable and prepayments and other current assets. As of December 31, 2018 and 2019, substantially
all of the Group’s cash and cash equivalents were held by major financial institutions, which management believes are of
high credit worthiness.
<30>
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.
<31>
Financial instruments
Financial
instruments primarily consist of cash and cash equivalents, investments, accounts receivable, accounts payable, short-term
borrowings, warrants and convertible notes. The carrying value of the Group’s cash and cash equivalents, investments, accounts
receivable, accounts payable and short-term borrowings approximate their market values due to the short-term nature of these instruments.
Warrants are recorded in the consolidated balance sheets based on fair value. Both carrying value and fair value of convertible
notes as of December 31, 2019 were RMB414.1 million (US$59.5 million).
<32>
Recent accounting pronouncements
Financial Instruments – Credit Losses
In June 2016, the FASB issued ASU No. 2016-13
Financial Instruments—Credit Losses (“ASU 2016-13”). Further, as clarification of the new guidance, the FASB
issued several subsequent amendments and updates to ASU 2016-13. ASU 2016-13 replaces the incurred loss impairment methodology
in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable
and supportable information to inform credit loss estimates. The amendments are effective for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. The Company will adopt ASU 2016-13 beginning January 1, 2020 by
applying the modified retrospective method with the cumulative effect of initially applying the guidance recognized at the date
of initial application. The Group’s adoption of ASU 2016-13 did not have a material impact on the consolidated financial
statements.
Fair Value Measurements
In August 2018, the FASB
issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements
for Fair Value Measurement,” which eliminates, adds and modifies certain disclosure requirements for fair value measurements
as part of the FASB’s disclosure framework project. The new guidance is effective for the fiscal years and interim reporting
periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for the adoption of either the
entire ASU or only the provisions that eliminate or modify the requirements. The Group’s adoption of ASU 2018-13 did not
have a material impact to the consolidated financial statements.
Income Taxes
In December 2019, the FASB
issued ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 provides an exception to
the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss
for the year. This update also (1) requires an entity to recognize a franchise tax (or similar tax) that is partially based on
income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (2) requires an entity
to evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which goodwill
was originally recognized for accounting purposes and when it should be considered a separate transaction, and (3) requires that
an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim
period that includes the enactment date. The standard is effective for the Company for fiscal years beginning after December 15,
2020, with early adoption permitted. The Group is currently evaluating the impact of ASU 2019-12 on its financial position, results
of operations, and cash flow .
3. CONVENIENCE TRANSLATION
The
Group, with the exception of its subsidiaries, Red 5, The9 Interactive and Red 5 Singapore, maintains its accounting records
and prepares its financial statements in RMB. The U.S. dollar amounts disclosed in the accompanying financial statements are presented
solely for the convenience of the readers at the rate of US$1.00 = RMB6.9618, 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, 2019. 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.
A summary of these contractual agreements
is as follows:
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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.
|
|
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.
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 our 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 our 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.
|
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, 2018
|
|
|
December 31, 2019
|
|
|
December 31, 2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Total assets
|
|
|
80,531,978
|
|
|
|
150,615,709
|
|
|
|
21,634,593
|
|
Total liabilities
|
|
|
335,980,249
|
|
|
|
423,900,573
|
|
|
|
60,889,508
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Net revenues
|
|
|
19,995,118
|
|
|
|
16,567,372
|
|
|
|
182,119
|
|
|
|
26,160
|
|
Net loss
|
|
|
(71,839,112
|
)
|
|
|
(49,024,050
|
)
|
|
|
(51,667,515
|
)
|
|
|
(7,421,574
|
)
|
The VIEs contributed an aggregate of 27.3%,
95.0% % and 53.3% of the consolidated net revenues for the years ended December 31, 2017, 2018 and 2019, respectively. As of the
fiscal years ended December 31, 2018 and 2019, the VIEs accounted for an aggregate of 48.9% and 83.0%, respectively, of the consolidated
total assets, and 37.0% and 39.8%, 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 27 for disclosure of restricted net assets.
5.
ADVANCES TO SUPPLIERS
Advances
to suppliers are as follows:
|
|
December
31, 2018
|
|
|
December
31, 2019
|
|
|
December
31, 2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Advance to subscribe tokens
|
|
|
14,070,581
|
|
|
|
10,094,972
|
|
|
|
1,450,052
|
|
Company registration fee
|
|
|
1,383,962
|
|
|
|
794,692
|
|
|
|
114,150
|
|
Advertising fee
|
|
|
255,259
|
|
|
|
255,259
|
|
|
|
36,666
|
|
Financing fee
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
98,240
|
|
|
|
101,685
|
|
|
|
14,606
|
|
|
|
|
15,808,042
|
|
|
|
11,246,608
|
|
|
|
1,615,474
|
|
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, 2019,
the Group had paid RMB7.5 million (US$1.1 million) as the financing fee of the total funds raised and to be raised amounting to
RMB157.5 million (US$22.6 million). According to the agreement, the Group paid the total financing fee of RMB7.5 million (US$1.1
million) upon receipt of the first payment in October 2016 (see Note 17). Due to unforeseen circumstances, the Group is not planning
to finance the remaining RMB100.0 million (US$14.4 million) and due to non-recovery of the advance financing fee, the Group has
fully impaired the advance financing fee in 2018.
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 RMB14.1 million (US$2.0 million). The issuer was expected to issue the tokens in April 2020 or to
further extend the launch date or enter into a termination arrangement depending on the development of the events. In July
2019, the Group received an advance of RMB7.0 million
(US$1.0 million) from a third-party to transfer approximately 2,222,222 tokens to this third-party. This advanced amount has been
presented as other advances as of December 31, 2019 on the consolidated balance sheets.
Due to unexpected events to the development
for issuance of tokens by the issuer, the Group has performed an impairment assessment to consider on the recoverable amount.
The Group has provided an impairment loss of nil and RMB6.0 million (US$0.9 million) for the years ended December 31, 2018 and
2019, respectively.
6.
PREPAYMENTS AND OTHER CURRENT ASSETS, NET
Prepayments
and other current assets are as follows:
|
|
December
31, 2018
|
|
|
December
31, 2019
|
|
|
December
31, 2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Employee advances
|
|
|
2,158,987
|
|
|
|
1,648,197
|
|
|
|
236,749
|
|
Prepayments and deposits
|
|
|
693,111
|
|
|
|
1,488,463
|
|
|
|
213,804
|
|
Input VAT recoverable
|
|
|
1,448,075
|
|
|
|
1,441,700
|
|
|
|
207,087
|
|
Refundable withholding tax
|
|
|
-
|
|
|
|
1,297,016
|
|
|
|
186,305
|
|
Other receivables, net of allowance for doubtful accounts of RMB 20,770,928 and RMB 5,343,427 as of December 31, 2018 and 2019, respectively
|
|
|
1,848,614
|
|
|
|
2,973,158
|
|
|
|
427,067
|
|
|
|
|
6,148,787
|
|
|
|
8,848,534
|
|
|
|
1,271,012
|
|
7.
ASSETS HELD-FOR-SALE AND LIABILITIES HELD-FOR-SALE
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$70.8 million).
These subsidiaries hold land use rights and office buildings located at Zhangjiang, Shanghai. Proceeds from the disposal will be
used to repay both the outstanding entrusted bank loan and convertible notes, with the residual to be used as working capital for
the Group’s operations.
As of December 31, 2019, Shanghai IT had
received an advance of RMB49.3 million, which is 10% of total consideration and accounted under other advances on the consolidated
balance sheets. The sale of the subsidiaries was subsequently completed on February 21, 2020. As of the issuance date of these
consolidated financial statements, the Group had collected 90% of proceeds from Kapler Pte. Ltd.
and the remaining 10% of proceeds is expected to be received in May 2020. As of the issuance
date of these consolidated financial statements, the Group has repaid the principal and interest due on the entrusted bank loan
and has repaid US$4.8 million to the issuer of convertible notes. The Group plans to use proceeds from the above sale to settle
the remaining outstanding balance of convertible notes amounting to US$55.5 million.
|
|
December 31, 2019
|
|
|
December 31, 2019
|
|
|
|
RMB
|
|
|
US$
(Note 3)
|
|
Assets classified as held-for-sale
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
43,027,475
|
|
|
|
6,180,510
|
|
Prepayments and other current assets
|
|
|
5,162,857
|
|
|
|
741,598
|
|
Property, equipment and software, net
|
|
|
14,051,044
|
|
|
|
2,018,306
|
|
Land use rights, net
|
|
|
61,148,974
|
|
|
|
8,783,501
|
|
Total assets classified as held-for-sale
|
|
|
123,390,350
|
|
|
|
17,723,915
|
|
|
|
|
|
|
|
|
|
|
Liabilities directly associated with assets held-for-sale
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
50,000
|
|
|
|
7,182
|
|
Other taxes payable
|
|
|
1,585,095
|
|
|
|
227,685
|
|
Other payables and accruals
|
|
|
46,800
|
|
|
|
6,722
|
|
Interest payable
|
|
|
11,384,841
|
|
|
|
1,635,330
|
|
Long-term borrowing due within one year
|
|
|
31,624,560
|
|
|
|
4,542,584
|
|
Total liabilities directly associated with assets held-for-sale
|
|
|
44,691,296
|
|
|
|
6,419,503
|
|
8.
INVESTMENTS
The Group’s investments comprise
the following:
|
|
December 31, 2018
|
|
|
December 31, 2019
|
|
|
December 31, 2019
|
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
US$
( Note 3)
|
|
Investments accounted for under equity method:
|
|
|
|
|
|
|
|
|
|
|
|
|
ZTE9 Network Technology Co., Ltd., Wuxi (“ZTE9”)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
System Link Corporation Limited (“System Link”) <1>
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shanghai Big Data
Cultures & Media Co., Ltd. (“Big Data”) <2>
|
|
|
6,146,104
|
|
|
|
-
|
|
|
|
-
|
|
Maxline Holdings Limited (“Maxline”) <6>
|
|
|
1,367,285
|
|
|
|
-
|
|
|
|
-
|
|
Leading Choice Holdings Limited (“Leading Choice”) <7>
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments accounted for under cost method:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai Institute of Visual Art of Fudan University (“SIVA”)
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
|
|
1,436,410
|
|
T3 Entertainment Co., Ltd. (“T3”) <3>
|
|
|
24,892,921
|
|
|
|
-
|
|
|
|
-
|
|
Smartposting Co, Ltd. (“Smartposting”) <4>
|
|
|
2,809,808
|
|
|
|
-
|
|
|
|
-
|
|
Beijing Ti Knight Network Technology Co., Ltd. (“Beijing Ti Knight”) <5>
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shanghai The9 Education Technology Co., Ltd. (“The9 Education Technology”) <8>
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shanghai Ronglei Culture Communication Co., Ltd. (“Shanghai Ronglei”) <9>
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Plutux Limited (“Plutux”) <10>
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Zhenjiang Kexin Power System Design and Research Co., Ltd. (“Zhenjiang Kexin”) <11>
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
45,216,118
|
|
|
|
10,000,000
|
|
|
|
1,436,410
|
|
<1> System Link
In August 2015, System Link entered into an
agreement with Smilegate Entertainment, Inc. (“Smilegate”) to form a joint venture company, Oriental Shiny Star Limited
(“Oriental Shiny”), for the operation of the CrossFire 2 game. In the event of a successful commercial launch of CrossFire
2, Smilegate would receive a 30% equity share of Oriental Shiny.
In November 2015, Oriental Shiny entered into
a license and distribution agreement with Smilegate for publishing and operating CrossFire 2 on an exclusive basis for a five-year
term in the PRC (the “License Agreement”). In consideration for the exclusive license, Oriental Shiny made an upfront
payment of US$50.0 million and was to make additional payments totaling US$450.0 million based on certain development and operation
milestones of CrossFire 2. The payment of license fees was guaranteed by the Group and Qihoo 360 Technology Co., Ltd. (“Qihoo
360”) proportional to their equity interest in System Link.
In October 2017, Oriental Shiny and Smilegate
agreed to terminate the License Agreement. In November 2017, Smilegate made a settlement payment of US$25.0 million to both the
Group and Qihoo 360, total of US$50.0 million. A settlement agreement was signed among the Group, Qihoo 360 and Smilegate whereby
subsequent to the payment of US$50.0 million, the joint venture agreement signed among Oriental Shiny and Smilegate was terminated.
During 2017, the Group offset its 2017 share of losses in System Link against the US$25.0 million recovery and reduced its investment
in System Link to nil, with the remaining portion of the recovery, RMB60.5 million (US$8.7 million), recorded as gain as the Group
then had no future funding obligation to System Link or Oriental Shiny.
As of December 31, 2018, System Link met the
criteria as a significant subsidiary in accordance with Rule 3-09 of SEC Regulation S-X but the Group has applied for and received
a waiver from the SEC dated June 13, 2019 to not provide separate financial statements of System Link for the fiscal year ended
December 31, 2018 and any other filings that would require such separate financial statements for the three years ended December
31, 2018.
<2> Big Data
Shanghai Jiucheng Advertisement Co., Ltd.
(“Jiucheng Advertisement”) was previously a subsidiary of the Company. In 2015, the Company granted 33.3% equity interest
of Jiucheng Advertisement to two of its employees as share-based compensation and share exchange transaction with Fei Fan Information
Technology Co., Ltd. (“Fei Fan”), whereby Jiucheng Advertisement acquired 100% equity interest in Fei Fan in exchange
of 30% equity interest in Jiucheng Advertisement. Upon completion of the exchange, the Group’s equity interest in Jiucheng
Advertisement was diluted to 46.7%. In November 2015, the Group’s equity interest in Jiucheng Advertisement was further diluted
to 42.0% as a result of capital injection by other shareholders. In August 2016, Jiucheng Advertisement raised capital from the
Group and a third-party, and as a result, the Group’s equity interest in Jiucheng Advertisement became 43.7%. In October
2016, the Group’s equity interest in Jiucheng Advertisement further increased to 44.5% after the execution of certain terms
under the investment agreements among certain investors of Jiucheng Advertisement.
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 RMB18.3 million (US$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 RMB2.8
million (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 RMB3.4 million (US$0.5 million) was recorded
for the year ended December 31, 2019.
<3> T3
In April 2008, the Group, through China Crown
Technology, acquired 3,031,232 preferred shares issued by G10 Incorporation (“G10”), an established Korean online game
developer and operator, which accounted for less than 20% of the equity interest in G10 and accounted the investment under cost
method. In December 2011, pursuant to the agreement between the shareholders of G10 and T3, a wholly-owned subsidiary of G10, G10
was spun off and the shareholders of G10 became shareholders of T3 at the same shareholding percentages. In February 2012, the
changes in shareholding structures of G10 and T3 was completed and the Group owned 32,290 ordinary shares of T3, which reflects
the same percentage of equity the Group owned in G10 on as an converted basis.
In July 2019, China Crown Technology disposed
all of its ordinary shares in T3 to third-parties for a total consideration of KRW6,092.8 million, approximately US$5.2 million,
and recorded a gain on disposal of RMB10.4 million (US$1.5 million).
<4> Smartposting
In June 2017, the Group completed a share
exchange transaction with IE Limited (“IE”), which was a listed company on Korean Securities Dealers Automated Quotations
of Korea Exchange (“KOSDAQ”) for issuance and sale of 12,500,000 ordinary shares of the Company with a 10-year lock-up
period. In exchange, IE transferred 14.55% equity interest in Smartposting, a wholly-owned subsidiary of IE. The fair value of
14.55% equity interest in Smartposting was considered to be the value of the assets surrendered to the Group in this non-monetary
exchange transaction. Due to weaker than expected operating performance of Smartposting, the Group recorded an impairment of RMB5.1
million, RMB1.1million and RMB2.8 million (US$0.4 million) for the years ended December 31, 2017, 2018 and 2019, respectively.
<5> Beijing Ti Knight
In June 2017, the Group entered into an
investment agreement with shareholders of Beijing Ti Knight where the Group invested a total of RMB9.0 million (US$1.3 million)
in Beijing Ti Knight. As of December 31, 2018, the Group has invested RMB4.9 million (US$0.7 million). Due to weaker than expected
operating performance, the investment in Beijing Ti Knight was fully impaired and impairment losses of RMB4.0 million, RMB0.9 million
and nil were recorded for the years ended December 31, 2017, 2018 and 2019, respectively (see Note 30.1).
<6> Maxline
In
January 2018, the Group completed a share exchange transaction with Red Ace Limited (“Red Ace”), which was a private
company incorporated under the laws of the British Virgin Islands for issuance and sale of 3,571,429 ordinary shares of the Company
with a specific lock-up period. In exchange, Red Ace transferred 29% equity interest in Maxline, an associate of Red Ace. The fair
value of 29% equity interest in Maxline was considered to be the value of the assets surrendered to the Group in this nonmonetary
exchange transaction. In 2019, due to weaker than expected operating performance of Maxline, the Group recorded an impairment
loss of RMB1.3 million (US$0.2 million).
<7> 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. In 2018, due to weaker than expected operating performance of Leading
Choice, the Group recorded a full impairment loss of RMB1.4 million (US$0.2 million).
<8> The9 Education Technology
In April 2018, the Group invested RMB0.4 million
(US$0.1 million) in The9 Education Technology. Due to weaker than expected operating performance, the investment in The9 Education
Technology was fully impaired and an impairment loss of RMB0.4 million (US$0.1 million) was recorded for the year ended December
31, 2018.
<9> Shanghai Ronglei
In December 2017, the Group has entered into
an investment agreement with a shareholder of Shanghai Ronglei, where the Group agreed to invest a total of RMB5.0 million (US$0.7
million) in Shanghai Ronglei. As of December 31, 2018, the Group has invested RMB4.0 million (US$0.6 million) but due to weaker
than expected operating performance, the investment in Shanghai Ronglei was fully impaired and the impairment of RMB4.0 million
(US$0.6 million) was recorded for the year ended December 31, 2018. In June 2019, both the Group and shareholder of Shanghai Ronglei
has agreed to terminate the investment agreement and the shareholder of Shanghai Ronglei agreed to repurchase the shares issued
to the Group at original cost. The Group disposed of its equity interest in Shanghai Ronglei and received RMB3.0 million (US$0.4
million) for the year ended December 31, 2019.
<10> Plutux
In September 2018, the Group completed a share
exchange transaction with Plutux Labs Limited (“Plutux Labs”), which was a private company incorporated under the laws
of Cayman Islands for issuance and sale of 21,000,000 ordinary shares of the Company with a specific lock-up period. In exchange,
Plutux Labs transferred 8% equity interest in Plutux, a wholly-owned subsidiary of Plutux Labs. The fair value of 8% equity interest
in Plutux was considered to be the nominal value of ordinary shares of the Group in the nonmonetary exchange transaction. In 2018,
due to weaker than expected operating performance of Plutux, the Group recorded a full impairment loss of RMB1.4 million (US$0.2
million). Cyrus Jun-Ming Wen is a director of Plutux Labs according to the Schedule 13G filed by Plutux Labs on September 13, 2018.
According to the Schedule 13D filed by Splendid Days Limited, the Group’s convertible notes investor (see Note 19), on February
21, 2019, Cyrus Jun-Ming Wen is also a director of Truth Beauty Limited, the shareholder of Splendid Days Limited.
<11> Zhenjiang Kexin
In June 2019, the Group completed a share
exchange transaction with Comtec Windpark Renewable (Holdings) Co., Ltd. (“Comtec”), which was a private company incorporated
under the laws of British Virgin Islands for issuance and sale of 3,444,882 ordinary shares of the Group. In exchange, Comtec transferred
9.9% equity interest in Zhenjiang Kexin, a company incorporated under the laws of PRC. The fair value of 9.9% equity interest in
Zhenjiang Kexin was considered to be the value of the assets surrendered to the Group in the nonmonetary exchange transaction.
In 2019, due to weaker than expected operating performance of Zhenjiang Kexin, the Group recorded an impairment loss of RMB1.0
million (US$0.1 million).
In total, the Group recorded impairment charges
relating to its investments in equity and other of RMB9.1 million, RMB9.2 million and RMB8.5 million (US$1.2 million) for the years
ended December 31, 2017, 2018 and 2019, respectively.
9.
AVAILABLE-FOR-SALE INVESTMENTS
Investment
in L&A
In June 2016, the Group along with certain
other shareholders of Red 5 completed a share exchange transaction with L&A, a Cayman Islands company with shares publicly
listed on the Growth Enterprise Market of the Hong Kong Stock Exchange (Stock Code: 8195). The Group exchanged approximately 30.6%
equity interest (on a fully-diluted basis) in Red 5 for a total of 723,313,020 (after a one-to-five stock split) newly issued shares
of L&A, after deducting 6% of shares received (46,168,920 shares) as payment of a service fee to a third-party consultant.
In June 2016, Asian Development, a wholly-owned
subsidiary of the Group incorporated in Hong Kong, borrowed a total of HK$92.3 million from a financial services company, which
was secured by a pledge of 417,440,000 shares of L&A (see Note 16). In 2016, Asian Development was in default on the loan
due to a sharp decline in share price of L&A. The lender is entitled to foreclose on the pledged shares and become the legal
and beneficial owner of the pledged shares (see Note 30.2). In 2016, the Group provided a full impairment allowance of RMB244.8
million (US$35.2 million) on the investment in L&A. In 2019, the loan remained in default and the lender has not made any
claim against Asian Development to recover any outstanding amounts under the agreement.
In 2017, the Group sold 18,360,000 shares
in L&A for consideration of RMB0.1 million (US$0.01 million). In an extraordinary general meeting in October 2017, Board of
Directors of L&A passed a resolution to consolidate every twenty issued and unissued shares into one share. The Group owned
14,375,651 shares in L&A after the share consolidation. In 2019, the Group sold all of its shares in L&A for consideration
of RMB0.7 million (US$0.1 million).
As of December 31, 2019, the Group has no
available-for-sale investments.
10. PROPERTY, EQUIPMENT AND SOFTWARE,
NET
Property, equipment and software and related
accumulated depreciation and amortization are as follows:
|
|
December 31, 2018
|
|
|
December 31, 2019
|
|
|
December 31, 2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Office buildings
|
|
69,341,652
|
|
|
69,341,652
|
|
|
9,960,305
|
|
Computers and equipment
|
|
84,134,612
|
|
|
5,181,577
|
|
|
744,287
|
|
Leasehold improvements
|
|
10,365,904
|
|
|
9,359,857
|
|
|
1,344,459
|
|
Office furniture and fixtures
|
|
6,194,658
|
|
|
1,787,549
|
|
|
256,765
|
|
Motor vehicles
|
|
7,038,397
|
|
|
5,031,201
|
|
|
722,687
|
|
Software
|
|
15,832,264
|
|
|
14,542,095
|
|
|
2,088,842
|
|
Less: accumulated depreciation and amortization
|
|
(175,555,042
|
)
|
|
(89,974,366
|
)
|
|
(12,924,009
|
)
|
Less: property, equipment and software, net, held-for-sale
|
|
-
|
|
|
(14,051,044
|
)
|
|
(2,018,306
|
)
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
17,352,445
|
|
|
1,218,521
|
|
|
175,030
|
|
Depreciation and amortization charges for
the years ended December 31, 2017, 2018 and 2019 amounting to RMB5.3 million, RMB3.7 million and RMB2.8 million (US$0.4 million),
respectively. In 2019, the Group has disposed large quantity of computers and equipment which are not in-use and the value of these
assets have been fully depreciated or impaired in the past. The Group has recorded a gain on disposal of property, equipment and
software amounting to RMB0.02 million, RMB0.2 million, RMB2.2 million (US$0.3 million), as other income, net for the years ended
December 31, 2017, 2018 and 2019. The office buildings were mortgaged as collateral for the convertible notes and entrusted bank
loan in 2015 (see Note 19 and Note 16). Property, equipment and software classified as held-for-sale represents office buildings
held by The9 Computer, C9I Shanghai and Shanghai Kaie which are in the process of disposal as of December 31, 2019 (see Note 7).
11. LAND USE RIGHTS, NET
Gross
carrying amount, accumulated amortization and net book value of land use rights are as follows:
|
|
December 31,
2018
|
|
|
December 31,
2019
|
|
|
December 31,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Land use rights
|
|
85,160,348
|
|
|
85,160,348
|
|
|
12,232,519
|
|
Less: accumulated amortization
|
|
(22,570,692
|
)
|
|
(24,011,374
|
)
|
|
(3,449,018
|
)
|
Less: land use right, net, held-for-sale
|
|
-
|
|
|
(61,148,974
|
)
|
|
(8,783,501
|
)
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
62,589,656
|
|
|
-
|
|
|
-
|
|
Amortization charge for the years ended
December 31, 2017, 2018 and 2019 amounting to RMB1.9 million, RMB1.9 million and RMB1.4 million (US$0.2 million), respectively.
The land use rights were mortgaged for the convertible notes and entrusted bank loan in 2015 (see Note 19 and Note 16). Land use
rights classified as held-for-sale represented land use rights held by The9 Computer, C9I Shanghai and Shanghai Kaie in relation
to the office buildings located at Zhangjiang, Shanghai which are in the process of disposal as of December 31, 2019 (see Note
7).
12. LEASES
The
Group has operating leases primarily for office space, parking lots and warehouse after relocation of their principal office in
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 we 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. As of December 31, 2019, the prepaid rental expense of RMB0.01 million (US$0.01 million)
was recorded in operating lease right-of-use assets.
As of December 31, 2019, the items related
to operating lease in the consolidated balance sheet are summarized below:
|
|
December 31,
2019
|
|
|
December 31,
2019
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
(Note 3)
|
|
Operating lease right-of-use assets
|
|
|
9,257,604
|
|
|
|
1,329,772
|
|
Operating lease liabilities-current portion
|
|
|
3,407,670
|
|
|
|
489,481
|
|
Operating lease liabilities-non-current portion
|
|
|
6,251,705
|
|
|
|
898,001
|
|
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
|
|
December 31,
2019
|
|
December 31,
2019
|
|
|
|
|
|
RMB
|
|
US$
|
|
|
|
|
|
|
|
(Note 3)
|
|
Operating lease cost
|
|
Operating expenses
|
|
1,606,340
|
|
230,736
|
|
Cost of other leases with terms less
than one year
|
|
Operating expenses
|
|
82,232
|
|
11,812
|
|
Total
|
|
|
|
1,688,572
|
|
242,548
|
|
Maturities of operating lease liabilities
are as follows:
|
|
December 31,
2019
|
|
|
December 31,
2019
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
(Note 3)
|
|
Due within one year
|
|
|
3,779,845
|
|
|
|
542,941
|
|
Due in the second year
|
|
|
3,995,768
|
|
|
|
573,956
|
|
Due in the third year
|
|
|
2,502,839
|
|
|
|
359,510
|
|
Total lease payments
|
|
|
10,278,452
|
|
|
|
1,476,407
|
|
Less: imputed interest
|
|
|
(619,077
|
)
|
|
|
(88,925
|
)
|
Total
|
|
|
9,659,375
|
|
|
|
1,387,482
|
|
As of December 31, 2019, the Group does
not have any 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,
2019
|
|
|
December 31,
2019
|
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
(Note 3)
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
|
|
1,271,769
|
|
|
|
182,678
|
|
13. OTHER LONG-LIVED ASSETS, NET
Other long-lived assets are as follows:
|
|
December 31,
2018
|
|
|
December 31,
2019
|
|
|
December 31,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Prepaid license fee
|
|
|
6,515,200
|
|
|
|
6,515,200
|
|
|
935,850
|
|
Prepaid deposit for joint venture
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,515,200
|
|
|
|
6,515,200
|
|
|
935,850
|
|
Prepaid license fee represents the payment
made by the Group pursuant to an IP license agreement with an online game company in January 2016 to use its IP to develop a mobile
game for a period of two years after commercialization of the game. The contract is effective through October 31, 2020 for the
development phase and the mobile game is expected to be launched in second half of 2020. Amortization of the license will be commenced
upon the commercialization of the game over its license period.
The Group has been monitoring
its licensed games that have not commercially launched, including but not limited to their market acceptance and operational performance
in other regions where they are commercially launched and operated by other operators. The Group incorporates these factors into
its continuous evaluation of the forecasted results of the respective games and takes into account the Group’s expected
commercial launch and cash flows in the evaluation of potential impairment of the carrying value of upfront licensing fees. Based
on the Group’s impairment tests, there was no impairment of upfront licensing fees in 2017, 2018 and 2019.
In March 2019, the Group entered into a joint
venture agreement with F&F in an attempt to enter the electric vehicle business. The Group paid an initial deposit of US$5.0
million to F&F through an interest-free loan from Ark Pacific Associates Limited in April 2019. In accordance with the joint
venture agreement, in the event the Group cannot make the required capital contribution in accordance with the joint venture agreement,
the total amount of capital contribution that has been made by the Group will automatically convert into Class B ordinary shares
in Smart King Limited, the holding company of F&F at a pre-agreed conversion price set forth in the joint venture agreement.
As of December 31, 2019, as the actual progress of the joint venture is below expectations and the Group recorded a full impairment
loss of RMB34.9 million (US$5.0 million) (see Note 30.1).
14.
FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair
Value on a Recurring Basis
The fair values of common stock warrants
were measured using the Black-Scholes Model (see Note 23). Inputs used to determine estimated fair value of the warrant liabilities
include the estimated fair value of the underlying stock at the valuation date, the estimated term of the warrants, risk-free interest
rates, expected dividends and the expected volatility of the underlying stock. The significant unobservable inputs used in the
fair value measurement of the warrant liability are the fair value of the underlying stock at the valuation date and the estimated
term of the warrants. The fair value of convertible note is based on a discounted cash flow model with an unobservable input of
discount rate. (Level 3)
In 2015, the Group issued warrants in
connection with its convertible notes. The warrants are recorded at fair market value at the date of issuance and subsequently
at each reporting date. The following table presents the change in the warrants liability that were measured at fair value on
a recurring basis using significant Level 3 inputs during 2018 and 2019 (see Note 20).
|
|
December
31,
2018
|
|
|
December
31,
2019
|
|
|
December
31,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Balance at issuance date/beginning of year
|
|
|
3,742,271
|
|
|
|
1,490,844
|
|
|
|
214,146
|
|
Fair value change on warrants liability recognized in other comprehensive income
|
|
|
(2,251,427
|
)
|
|
|
(1,292,244
|
)
|
|
|
(185,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
|
1,490,844
|
|
|
|
198,600
|
|
|
|
28,527
|
|
15. 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, 2017, 2018 and 2019. 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, 2017, 2018 and 2019. 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 Shanghai IT did not have taxable income for the years ended December 31,
2017, 2018 and 2019, 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 California and are subject to U.S. federal
corporate marginal income tax rate of 21% and state income tax rate of 0.28%, 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.
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,
|
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Current income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other jurisdictions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
(84,042,632
|
)
|
|
|
(39,763,083
|
)
|
|
|
(5,772,005
|
)
|
|
|
(829,097
|
)
|
Other jurisdictions
|
|
|
(124,313,755
|
)
|
|
|
(19,816,235
|
)
|
|
|
(15,151,553
|
)
|
|
|
(2,176,384
|
)
|
Subtotal
|
|
|
(208,356,387
|
)
|
|
|
(59,579,318
|
)
|
|
|
(20,923,558
|
)
|
|
|
(3,005,481
|
)
|
Change in valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
84,042,632
|
|
|
|
39,763,083
|
|
|
|
5,772,005
|
|
|
|
829,097
|
|
Other jurisdictions
|
|
|
124,313,755
|
|
|
|
19,816,235
|
|
|
|
15,151,553
|
|
|
|
2,176,384
|
|
Subtotal
|
|
|
208,356,387
|
|
|
|
59,579,318
|
|
|
|
20,923,558
|
|
|
|
3,005,481
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Reconciliation of the differences between
statutory tax rate and the effective tax rate
Reconciliation between the statutory EIT
rate and the Group’s effective tax rate is as follows:
|
|
For
the year ended
December 31,
2017
|
|
|
For
the year ended
December 31,
2018
|
|
|
For
the year ended
December 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
PRC statutory EIT rate
|
|
|
25
|
%
|
|
|
25
|
%
|
|
|
25
|
%
|
Effect of different tax rates in other jurisdictions
|
|
|
(2
|
%)
|
|
|
2
|
%
|
|
|
1
|
%
|
Change in future tax rate (upon expiration of preferential rate)
|
|
|
(22
|
%)
|
|
|
1
|
%
|
|
|
2
|
%
|
Change of prior year deferred tax assets
|
|
|
(8
|
%)
|
|
|
(11
|
%)
|
|
|
(15
|
%)
|
Change of valuation allowance
|
|
|
61
|
%
|
|
|
(2
|
%)
|
|
|
(18
|
%)
|
Income not subject to tax and non-deductible expenses, net
|
|
|
(1
|
%)
|
|
|
0
|
%
|
|
|
0
|
%
|
Effect of expired net operating loss
|
|
|
(53
|
%)
|
|
|
(15
|
%)
|
|
|
5
|
%
|
Effective EIT rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Significant components of deferred tax
assets
|
|
For the year ended
December 31,
2018
|
|
|
For the year ended
December 31,
2019
|
|
|
For the year ended
December 31,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Temporary differences related to expenses and accruals
|
|
|
1,087,421
|
|
|
|
1,076,708
|
|
|
|
154,659
|
|
Temporary differences related to impairment on advances to suppliers
|
|
|
2,451,767
|
|
|
|
3,438,597
|
|
|
|
493,924
|
|
Temporary differences related to provision for doubtful accounts
|
|
|
3,077,784
|
|
|
|
1,078,742
|
|
|
|
154,952
|
|
Others
|
|
|
7,152,217
|
|
|
|
8,771,868
|
|
|
|
1,260,000
|
|
Temporary differences related to depreciation, amortization, and impairment of equipment and intangible assets
|
|
|
23,165,631
|
|
|
|
24,890,416
|
|
|
|
3,575,285
|
|
Startup expenses and advertising fees
|
|
|
608,399
|
|
|
|
199,704
|
|
|
|
28,686
|
|
Temporary differences related to research and development credits
|
|
|
1,106,956
|
|
|
|
1,120,850
|
|
|
|
161,000
|
|
Temporary differences related to equity investments
|
|
|
3,978,269
|
|
|
|
5,069,035
|
|
|
|
728,121
|
|
Foreign tax credits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Temporary differences related to provision for prepayment for equipment
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
718,205
|
|
Tax loss carry forwards
|
|
|
294,535,956
|
|
|
|
270,594,922
|
|
|
|
38,868,529
|
|
Total deferred tax assets
|
|
|
342,164,400
|
|
|
|
321,240,842
|
|
|
|
46,143,361
|
|
Less: Valuation allowance
|
|
|
(342,164,400
|
)
|
|
|
(321,240,842
|
)
|
|
|
(46,143,361
|
)
|
Total deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Movement of valuation allowance on deferred
tax assets
|
|
For the year ended
December 31,
2018
|
|
|
For the year ended
December 31,
2019
|
|
|
For the year ended
December 31,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Beginning balance
|
|
|
401,743,718
|
|
|
|
342,164,400
|
|
|
|
49,148,842
|
|
Decrease in valuation allowance
|
|
|
(59,579,318
|
)
|
|
|
(20,923,558
|
)
|
|
|
(3,005,481
|
)
|
Ending balance
|
|
|
342,164,400
|
|
|
|
321,240,842
|
|
|
|
46,143,361
|
|
For the years ended December 31, 2018 and
2019, the Group recorded a reversal of valuation allowance of approximately RMB59.6 million and RMB 20.9 million (US$3.0 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, 2019, the Group’s PRC subsidiaries had net operating loss carry forwards amounting to RMB343.7 million
which will expire from 2020 to 2029. 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.
As
of December 31, 2019, Red 5 had net operating loss carry forwards for federal and state income tax purposes of approximately
US$126.4 million and US$68.5 million, respectively, which will begin to expire in 2026 and 2028, respectively. Red 5 also had credits
for increasing research activities available to offset future federal and state taxes payable of approximately US$0.1 million and
US$0.1 million, respectively, that will begin to expire in 2026 for federal purposes and which have no expiration for state purposes.
Red 5 had foreign tax credits for federal purposes of approximately US$2.5 million, which expired in 2018. Pursuant to US tax laws
and regulations, the utilization of an acquired entity’s net operating losses and credits are subject to annual limitation
computed based on the fair value of the acquired entity. As a result of the limitation, the Group provided a full valuation allowance
on its deferred tax assets as it is not more likely than not that the net operating losses and credits carried forward can be utilized
before expiration.
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, 2018 and 2019.
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, 2018 and 2019.
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, 2018 and 2019. 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, 2017, 2018 and 2019, the Group did not have
any material interest and penalties associated with its tax positions.
According to PRC Tax Administration and Collection Law, the
statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or withholding
agent. The statute of limitations will be extended five years under special circumstances, which are not clearly defined (but an
underpayment of tax liability exceeding RMB 0.1 million is specifically listed as a special circumstance). In the case of a related
party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. From
inception to 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.
16.
SHORT-TERM BORROWINGS
Short-term
borrowings are as follows:
|
|
December
31,
2018
|
|
|
December
31,
2019
|
|
|
December
31,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Pledged loan
|
|
|
80,836,823
|
|
|
|
82,645,089
|
|
|
|
11,871,224
|
|
Interest-free loan
|
|
|
-
|
|
|
|
34,881,000
|
|
|
|
5,010,342
|
|
Long-term borrowing due within one year
|
|
|
31,624,560
|
|
|
|
31,624,560
|
|
|
|
4,542,584
|
|
Less: borrowing classified as held for sale
|
|
|
-
|
|
|
|
(31,624,560
|
)
|
|
|
(4,542,584
|
)
|
Total
|
|
|
112,461,383
|
|
|
|
117,526,089
|
|
|
|
16,881,566
|
|
In June 2016, the Group completed a share
exchange transaction with L&A for a total of 769,481,940 (after a 1 to 5 stock split) newly issued shares of L&A. In June
2016, Asian Development borrowed a total of HK$92.3 million from a financial services company at an annual interest rate of 2%
for a term of 24 months, which is secured by a pledge of 417,440,000 shares of L&A. The outstanding balance as of December
31, 2019 is RMB88.0 million (US$13.0 million), which includes RMB5.4 million (US$0.8 million) of interest payable and the pledged
loan was due in June 2018. Asian Development has defaulted the loan in June 2016 due to a sharp decline in share price of L&A
(see Note 30.2)
In December 2015, the Group entered an entrusted
bank loan agreement, amounted to RMB31.6 million (US$4.6 million), with a subsidiary of the investor holding the convertible notes
(see Note 19) and China Merchants Bank as entrustment bank. The borrowing agreement matured in December 2018, with the annual
interest rate of 12% continuing after maturity of the loan. The loan is secured by the Group’s office buildings. The outstanding
balance as of December 31, 2019 is RMB43.0 million (US$6.0 million), including RMB11.4 million (US$1.6 million) of interest payable.
In December 2019, the Group signed a confirmation letter with the lender regarding settlement. According to the confirmation letter,
if the total amount of principal and interest of the entrusted bank loan amounted to RMB43.0 million is repaid before December
31, 2019, the overdue interest since December 2018 will be exempted. The parties agreed to extend the payment period from December
31, 2019 to February 29, 2020 to allow for completion of the disposal transaction with Kapler Pte. Ltd. (see Note 7). Both the
principal and interest of the entrusted bank loan was repaid on February 11, 2020 and the overdue interest has been exempted.
In
March 2019, the Group entered into a joint venture agreement with F&F, to establish a joint venture in China to manufacture
and distribute electric vehicles designed and developed by F&F with a committed capital investment amounting to US$600.0 million.
The Group made the initial deposit of US$5.0 million to F&F in April 2019 through an interest-free loan granted from Ark Pacific
Associates Limited, an entity affiliated with the Group’s former president as of the issuance date of these consolidated
financial statements, for a period of one year. The loan was due on March 31, 2020 and the Group is still in negotiation with
Ark Pacific Associates Limited regarding settlement of the interest-free loan.
17. ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued
expenses and other current liabilities are as follows:
|
|
December 31,
2018
|
|
|
December 31,
2019
|
|
|
December 31,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Funds raised for CrossFire New Mobile Game
|
|
|
57,499,910
|
|
|
|
57,499,910
|
|
|
|
8,259,345
|
|
Professional services
|
|
|
6,879,775
|
|
|
|
11,844,738
|
|
|
|
1,701,390
|
|
Staff cost related payables
|
|
|
4,245,967
|
|
|
|
9,851,024
|
|
|
|
1,415,011
|
|
Office expenses
|
|
|
3,377,709
|
|
|
|
3,543,495
|
|
|
|
508,991
|
|
Other payables
|
|
|
1,840,000
|
|
|
|
3,540,000
|
|
|
|
508,489
|
|
Utility fees
|
|
|
1,547,898
|
|
|
|
1,646,394
|
|
|
|
236,490
|
|
Product development services
|
|
|
892,216
|
|
|
|
906,906
|
|
|
|
130,269
|
|
Others
|
|
|
5,007,831
|
|
|
|
4,308,376
|
|
|
|
618,860
|
|
Total
|
|
|
81,291,306
|
|
|
|
93,140,843
|
|
|
|
13,378,845
|
|
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, 2019, the Group had raised RMB57.5 million (US$8.3
million). The Group continues to cooperate with a third-party company for development and operation of CrossFire New Mobile Game.
The Group plans to apply for a license (“Banhao”) from GAPPRPT for CrossFire New Mobile Game as soon as development
of the game is finalized to launch the game. The Group does not plan to finance the remaining RMB100.0 million (US$14.4 million)
from the planned fund raising arrangement, and due to non-recovery of the advance financing fee, the Group fully impaired the
advance financing fee in 2018. In November 2017, the Group entered into an exclusive publishing agreement with a third-party company,
pursuant to which this third-party company was granted an exclusive right to publish the CrossFire New Mobile Game in China. Upon
commercialization of the game, the Group will share certain percentages of the revenues from CrossFire New Mobile Game with investors
providing funding to the Group. 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 refund of RMB57.5 million (US$8.3 million), which the Group has previously raised through Inner Mongolia Culture
Assets and Equity Exchange to finance the early phase development of CrossFire New Mobile Game with compensation of interest on
the principal financed (see Note 32).
18.
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$28.8 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$3.7 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$24.4 million)
as of both December 31, 2018 and 2019.
19.
CONVERTIBLE NOTES
On November 24, 2015, the Group entered into an agreement with
Splendid Days Limited for a private placement of secured convertible notes and warrants for gross proceeds of US$40,050,000. The
transaction closed on December 11, 2015. Pursuant to the terms of the agreement, the convertible notes shall mature in December
2018, subject to an extension for two years at the discretion of the investor. The convertible notes accrue interest at a rate
of 12% per annum and are payable upon maturity of the notes. According to the Schedule 13D filed by Splendid Days Limited on March
5, 2018, Splendid Days Limited’s equity was transferred from Ark Pacific Special Opportunities Fund I, L.P., an entity affiliated
with the Group's former president as of the issuance date of these consolidated financial statements to Truth Beauty Limited. The
notes are secured by the equity interest of the Group’s subsidiaries (The9 Computer and C9I Shanghai), and the Group’s
office buildings with a total net book value of RMB14.1 million as of December 31, 2019. The net book value of office buildings
has been classified as assets held-for-sale as of December 31, 2019. Splendid Days Limited is entitled to put the convertible notes
to the Group upon a change in control and upon an event of default. The Group has entered into a deed of settlement with the Splendid
Days Limited on March 12, 2019 wherein the Group will proceed to dispose of office buildings and use the proceeds to repay both
convertible notes and the entrusted bank loan. Annual interest rate on the loan remained at 12% up to settlement date. In September
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$70.8 million). These subsidiaries hold land use rights and office
buildings located at Zhangjiang, Shanghai. The transaction was subsequently completed on February 21, 2020. As of the issuance
date of these consolidated financial statements, the Group has repaid the principal and interest due on the entrusted bank loan
and has repaid US$4.8 million to the issuer of convertible notes and is planning to use the consideration received for payment
of the remaining outstanding balance of convertible notes amounting to US$55.5 million.
The notes are divided into three tranches
and can be converted into a total of 11,695,513 shares of the Group’s ADS at any time as follows:
Convertible Notes
|
|
|
Principal Amount
|
|
|
|
Conversion Price
|
|
Tranche A
|
|
US$
|
22,250,000
|
|
|
US$
|
2.60
|
|
Tranche B
|
|
US$
|
13,350,000
|
|
|
US$
|
5.20
|
|
Tranche C
|
|
US$
|
4,450,000
|
|
|
US$
|
7.80
|
|
The conversion
prices are subject to anti-dilution adjustments in the event the Group issues ordinary shares at a price per share lower than the
applicable conversion price in effect immediately prior to the issuance. As of December 31, 2019, no adjustments to the conversion
prices had occurred.
The Group has
determined that there was BCF attributable to the Tranche A convertible loan as the conversion price is lower than market value
at the date of issuance of the convertible notes. The value of the BCF is determined to be US$8.1 million, which is equal to the
intrinsic value of the conversion feature. The convertible notes are recorded at net carrying value at the date of issuance as
follows:
Principal Amount
|
|
US$
|
40,050,000
|
|
Less:
|
|
|
|
|
Fair value allocated to warrants (Note 21)
|
|
|
8,821,883
|
|
Beneficial conversion feature
|
|
|
8,112,556
|
|
Issuance cost
|
|
|
3,200,000
|
|
Net carrying value
|
|
US$
|
19,915,561
|
|
The fair value of warrants, BCF and issuance costs are recorded
as debt discount and accreted to interest expense over three years using the effective interest method. The convertible notes should
be repaid with principal and interest based on the agreement. As of December 31, 2018 and 2019, the total carrying amount of the
convertible notes principal and interest payable is RMB375.3 million and RMB414.1 million (US$59.5million), respectively. Interest
expenses recognized on the convertible notes are RMB77.0 million, RMB98.3 million, and RMB33.2 million (US$4.8 million) for the
years ended December 31, 2017, 2018 and 2019, respectively.
20.
WARRANTS ON CONVERTIBLE NOTES
The warrants are exercisable at any time
after the commitment date to purchase up to 4,778,846 shares of the Group’s ADS as follows:
Warrants
|
|
|
Principal Amount
|
|
|
|
Exercise Price
|
|
Tranche I
|
|
US$
|
5,000,000
|
|
|
US$
|
1.50
|
|
Tranche A
|
|
US$
|
2,750,000
|
|
|
US$
|
2.60
|
|
Tranche B
|
|
US$
|
1,650,000
|
|
|
US$
|
5.20
|
|
Tranche C
|
|
US$
|
550,000
|
|
|
US$
|
7.80
|
|
For
the tranches A, B and C, the expiration date is the third anniversary of the issuance date or if the holder has exercised its option
to extend the maturity date of all or any portion of the convertible notes in accordance with the terms and conditions thereof,
the fifth anniversary of the issuance date. Tranches A, B and C expired on December 20, 2018. Tranche I will expire in December
2020.
The exercise prices
of the warrants are subject to anti-dilution adjustments in the event the Company issue ordinary shares at a price per share lower
than the applicable exercise price in effect immediately prior to the issuance. As of December 31, 2019, no adjustments to the
exercise prices had occurred.
The Group performs
valuations of the warrants using a probability weighted Black-Scholes Model. This model requires input of assumptions including
the risk-free interest rates, volatility, expected life and dividend rates, and has also considered the likelihood of “down-round”
financings. Selection of these inputs involves management’s judgment and may affect net income.
The assumptions used in the Black-Scholes
option pricing model for Tranche I was as follows:
Warrants
|
|
Tranche I
|
|
Risk-free interest rate
|
|
|
1.59%
|
|
Expected volatility of common stock
|
|
|
93.67%
|
|
Dividend yield
|
|
|
0.00
|
|
Expected life of warrants
|
|
|
0.9 years
|
|
The fair value of the warrants as of issuance
date, December 31, 2018 and 2019 is RMB1.5million and RMB0.2 million (US$0.03 million), respectively. The change in fair value
of the warrants liability resulted in a loss of RMB12.6 million, RMB2.3million and RMB1.3 million (US$0.2 million) for the years
ended December 31, 2017, 2018 and 2019, respectively.
21. SHAREHOLDER RIGHTS PLAN
On January 8, 2009, the Company adopted
a shareholder rights plan. The shareholder rights plan is designed to protect the best interests of the Company and its shareholders
by discouraging third-parties from seeking to obtain control of the Company in a tender offer or similar hostile transaction. The
shareholder rights plan was amended on March 9, 2009, June 8, 2017, and June 16, 2017.
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. Only Mr. Jun Zhu and Incsight Limited (“Incsight”) hold Class
B ordinary shares. As of December 31, 2019, there were 112,929,702 ordinary shares issued or outstanding, being the sum of 103,737,691
Class A ordinary shares and 9,192,011 Class B ordinary shares.
22.
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 loss for such employee benefits amounted to RMB12.9 million,
RMB7.9 million and RMB4.5 million (US$0.6 million) for the years ended December 31, 2017, 2018 and 2019, respectively. The PRC
government is responsible for the medical benefits and ultimate pension liability to these employees.
23.
SHARE-BASED COMPENSATION
23.1 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$0.01 each, of the Group. According to the agreements, 6,328,535 options were exercised to ordinary
shares, and 10,806,665 options were canceled. In December 2018, the 2004 Option Plan was amended to increase the maximum aggregate
number of ordinary shares to 100,000,000 shares. As of December 31, 2019, options to purchase 1,050,000 ordinary shares are outstanding
and options to purchase 64,527,118 ordinary shares are available for future grant under the 2004 Option Plan.
Stock Options
The
following table summarizes the Group’s share option activities with its employees and directors:
|
|
Number of
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual Term
(years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding as of January 1, 2019
|
|
|
50,000
|
|
|
US$
|
0.93
|
|
|
|
4.07
|
|
|
|
Nil
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nil
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nil
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nil
|
|
Outstanding as of December 31, 2019
|
|
|
50,000
|
|
|
US$
|
0.93
|
|
|
|
3.07
|
|
|
|
Nil
|
|
Vested and expected to vest as of December 31, 2019
|
|
|
50,000
|
|
|
US$
|
0.93
|
|
|
|
3.07
|
|
|
|
Nil
|
|
Exercisable as of December 31, 2019
|
|
|
50,000
|
|
|
US$
|
0.93
|
|
|
|
3.07
|
|
|
|
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, 2017, 2018 and 2019.
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 remaining 1,000,000 share options
were forfeited due to the resignation of directors.
The
weighted-average grant-date fair value of options granted during 2018 was US$0.51. The fair value of the share options were
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
|
On August 6, 2016, the Group granted share
options totaling 6,000,000 shares to Mr. Jun Zhu, chairman and chief executive officer, and a third-party consultant as a reward
for facilitating the Mongolia funding platform with total funding amount of RMB157.5 million (US$22.6 million) to the Group. According
to ASC 718, the share option was applicable to the performance condition due to the share options would be vested in line with
the percentage of funding received by the Group. In 2017, the options totaling 5,000,000 granted to Mr. Jun Zhu were canceled.
Stock options to purchase 1,000,000 shares issued to the third-party consultant were canceled on January 22, 2019.
On January 24, 2018, as approved by the
Board of Directors, the Group granted share options totaling 2,500,000 shares to directors and consultant, subject to performance
conditions, of which 1,000,000 shares granted will vest upon the success of improvement on the Group’s online game business
and 1,500,000 shares will vest upon the success of the Group’s fund raising efforts. On September 4, 2018, the Group canceled
1,500,000 share options granted to director and consultant.
The following table summarizes the share
option activities subject to performance condition:
|
|
Number of
Options
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual Term
(years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding as of January 1, 2019
|
|
|
2,000,000
|
|
|
US$
|
1.86
|
|
|
|
2.06
|
|
|
|
Nil
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nil
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nil
|
|
Forfeited
|
|
|
(1,000,000
|
)
|
|
US$
|
0.93
|
|
|
|
-
|
|
|
|
Nil
|
|
Outstanding as of December 31, 2019
|
|
|
1,000,000
|
|
|
US$
|
0.93
|
|
|
|
3.07
|
|
|
|
Nil
|
|
Vested and expected to vest as of December 31, 2019
|
|
|
1,000,000
|
|
|
US$
|
0.93
|
|
|
|
3.07
|
|
|
|
Nil
|
|
Exercisable as of December 31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nil
|
|
The grant-date fair value of share options
with performance condition during 2018 was US$0.51. The fair value of the awards that are based on the performance condition was
calculated using the Black-Scholes option pricing model with the following assumptions:
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
|
Cancelation and Acceleration Vesting
of Share-Based Awards
On June 6, 2017, the Group canceled a portion
of the options totaling 10,806,665 and accelerated the vesting and exercise of the remaining options totaling 6,328,535 for options
granted to 15 directors, officers and employees. The exercise price was modified to US$0.00, which the original exercise price
of the accelerated vesting options ranged from US$1.53 to US$1.86. The incremental compensation cost recognized due to the cancelation
and acceleration vesting of options was RMB33.0 million (US$4.7 million) in 2017. The fair value of the options canceled and accelerated
vested under service and performance condition was measured on the modification date using Binomial Tree Pricing Model with the
following assumptions:
Risk-free interest rate
|
1.16%-1.62%
|
Expected life (years)
|
4.49-5.00
|
Expected dividend yield
|
0.00%
|
Volatility
|
62%-74%
|
Fair value of options at modification date
|
US$0.06-US$0.31
|
The fair value of the options canceled
and accelerated vested under market condition was measured on the modification date using the Monte Carlo Simulation model with
the following assumptions:
Risk-free interest rate
|
1.52%
|
Expected life (years)
|
5.00
|
Expected dividend yield
|
0.00%
|
Volatility
|
72%
|
Fair value of options at modification date
|
US$0.18-US$0.25
|
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.
Share-Based Compensation
For the years ended December 31, 2017,
2018 and 2019, the Group recorded share-based compensation of RMB38.0 million, RMB3.9 million and RMB21.3 million (US$3.1 million),
respectively, for options granted to the Group’s employees and directors.
As of December 31, 2019, there was approximately
RMB35.0 million (US$5.0 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.
23.2 Ordinary Shares Granted to Incsight
Incsight
is a company incorporated in the British Virgin Islands and wholly owned by Mr. Jun Zhu. On December 8, 2010, as approved
by the Board of Directors, the Company granted 1,500,000 ordinary shares to Incsight, subject to performance conditions, of which
500,000 ordinary shares granted will vest when the Group achieves breakeven and 1,000,000 ordinary shares will vest when the Group’s
cumulative profit reaches US$5.0 million in a quarter subsequent to the quarter in which the Group breaks even. The ordinary shares
granted are not entitled to receive dividends until vested. The Board of Directors considered the grant of ordinary shares as an
incentive to retain Mr. Jun Zhu’s services with the Group. The awarded non-vested shares would be valid for five years from
December 8, 2010. For the quarter ended September 30, 2014, the Group achieved breakeven. It was considered probable the performance
targets would be met for the total of 1,500,000 ordinary shares. The fair value of the granted non-vested shares was US$6.48 per
share, the market price on the date of grant. On December 7, 2015, 500,000 ordinary shares granted to Incsight were vested. The
awarded non-vested shares were valid for additional three years and expired on December 7, 2018. The Group recorded share-based
compensation of RMB0.5 million, nil and nil for the years ended December 31, 2017, 2018 and 2019, respectively. As of December
31, 2019, there was no outstanding non-vested shares granted to Incsight.
23.3 Stock Options and Ordinary Shares
Granted by Red 5
In
February 2006, Red 5 adopted a Stock Incentive Plan (“Red 5 Stock Incentive Plan”) under which Red 5 may grant to its
employees, director and consultants stock options to purchase common shares or restricted shares. As of December 31, 2010, 13,626,955
shares were reserved under Red 5 Stock Incentive Plan. In September 2011, Red 5 further increased the number of common shares
reserved to 22,855,591. If an option shall expire or terminate for any reason without having been exercised in full, the reserved
shares subject to such option shall again be available for subsequent option grants under the plan. From the inception of this
plan to December 31, 2019, Red 5 granted a total of 38,191,879 options to its employees and directors at the exercise price ranging
from US$0.0001 to US$0.2450 per share, which vest over four years commencing from grant date. Options expire within a period of
not more than ten years from the grant date. An option granted to a person who is a greater than 10% shareholder on the date of
grant may not be exercisable more than five years after the grant date. As of December 31, 2019, options to purchase 5,111,250
shares of common stock were outstanding and options to purchase 15,480,087 shares of common stock were available for future grant.
The
following table summarizes the Red 5’s share option activities with its employees and directors for the year ended
December 31, 2019:
|
|
|
Number of
Options
|
|
|
Weighted-Average Exercise Price per Option
|
|
|
Weighted-Average Remaining Contractual Term (years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding as of January 1, 2019
|
|
|
|
5,111,250
|
|
|
US$
|
0.049
|
|
|
|
2.24
|
|
|
|
Nil
|
|
Granted
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nil
|
|
Exercised
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nil
|
|
Forfeited
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
Nil
|
|
Outstanding as of December 31, 2019
|
|
|
|
5,111,250
|
|
|
US$
|
0.049
|
|
|
|
1.24
|
|
|
|
Nil
|
|
Vested and expected to vest as of December 31, 2019
|
|
|
|
5,111,250
|
|
|
US$
|
0.049
|
|
|
|
1.24
|
|
|
|
Nil
|
|
Exercisable as of December 31, 2019
|
|
|
|
5,111,250
|
|
|
US$
|
0.049
|
|
|
|
1.24
|
|
|
|
Nil
|
|
The option’s intrinsic value was
calculated by the excess of the estimated fair value of Red 5’s common shares, which was determined by the Group with the
assistance of an independent valuation firm.
The
options expected to vest are estimated by applying the pre-vesting forfeiture rate assumptions to total unvested options. The total
intrinsic value of options exercised for the year ended December 31, 2017, 2018 and 2019 were nil.
The
fair value of options granted at US$0.0178, measured on the grant date based on the Black-Scholes option pricing model
with assumptions made regarding expected term and volatility, risk-free interest rate and dividend yield:
Risk-free interest rate
|
|
0.78%
|
Expected life (years)
|
|
4.00
|
Expected dividend yield
|
|
0.00%
|
Volatility
|
|
45.70%
|
Red 5 recorded share-based compensation
of RMB0.3 million, RMB0.04 million and RMB0.05 million (US$0.01 million) for options and shares of restricted common stock granted
for the years ended December 31, 2017, 2018 and 2019, respectively. The share-based payment awards were recorded as a component
of noncontrolling interest in the consolidated financial statements.
As
of December 31, 2019, unrecognized compensation cost related to share-based awards granted to Red 5 grantees was nil.
24. 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. Net royalty and other service
fees related to IPTV business charged by ZTE9 to the Group amounted to RMB5.2million and nil for the years ended December 31, 2018
and 2019, respectively. The Group provided IPTV related supporting service to ZTE9 of RMB0.2 million and nil for the years ended
December 31, 2018 and 2019, respectively. Total amount due to ZTE9 for IPTV business was RMB5.1 million and RMB0.2 million (US$0.03
million) as of December 31, 2018 and 2019, respectively. The Group lent RMB0.6 million and nil to ZTE9 to fund its operations in
2018 and 2019, respectively. ZTE9 has repaid RMB1.7 million and nil in 2018 and 2019, respectively. Total amount due from ZTE9
for outstanding loans was RMB1.0 million and RMB1.0 million (US$0.1 million) as of December 31, 2018 and 2019, respectively.
The Group charged service fees to Big
Data of RMB0.05 million and RMB 0.02 million (US$0.01 million) for the years ended December 31, 2018 and 2019, respectively. The
Group charged outsourcing service fee of RMB0.4 million and nil for the years ended December 31, 2018 and 2019, respectively.
Total amount due from Big Data was RMB0.1 million and RMB0.1 million (US$0.02 million) as of December, 2018 and 2019, respectively.
In 2014, the Group entered into a license
agreement with System Link, a 50% joint venture of the Group, for publishing and operating Firefall for a five-year term in the
PRC. Under this license agreement, System Link is expected to pay Red 5 and Red 5 Singapore a total of no less than US$160.0 million
(including license fee and royalties) during the term of the agreement. In 2015, System Link paid US$10.0 million to the Group
as a license fee. The Group recorded the US$10.0 million as amount due to the related party and was to amortize the amount over
the five-year period. System Link has been dormant since the cessation of Firefall in March 2016 and the termination of CrossFire
2 license in November 2017. Red 5 Singapore filed a lawsuit against System Link in 2016. Due to ongoing litigation and non-operation
of Firefall, Red 5 was no longer required to render any service to System Link in relation to the operation of Firefall. As such,
Red 5 recognized the remaining unamortized license fee as revenue in 2017. The balance due to System Link (non-current) was nil
as both of December 31, 2018 and 2019. The Group recognized licensing revenue of RMB51.1 million, nil and nil for the years ended
December 31, 2017, 2018 and 2019, respectively. In 2019, the Group has reached an out-of-court settlement with Qihoo 360 where
Red 5 Singapore has withdrawn the litigation from Shanghai Intellectual Property Court in May 2019 and the Group is implementing
a mediation agreement with Qihoo 360 to settle the arbitration proceeding in Hong Kong as of the issuance date of these consolidated
financial statements (see Note 30.2).
Transaction with T3
In 2016, Asian Way entered into a license
agreement with T3, an equity investee of the Group, for developing a game using augmented reality (“AR”) technologies
based on the intellectual property relating to the game. Upon commercial launch, Asian Way will share certain percentages of revenues
of the game to T3. The game is still under development as of December 31, 2019. The Group has sold all its equity interest in T3
during the year.
Transaction
with Mr. Jun Zhu
Mr.
Jun Zhu, the chairman and chief executive officer, provided loans of RMB11.0 million and RMB16.1 million (US$2.3 million)
to the Group in 2018 and 2019, respectively. The loans were interest-free and the outstanding balance of RMB57.1 million and RMB63.2
million (US$9.1 million) remained as of December 31, 2018 and 2019, respectively.
In May 2019, the issued and outstanding
ordinary shares then held by Incsight, which is wholly owned by Mr. Jun Zhu, and the issued and outstanding ordinary shares then
held by Mr. Jun Zhu himself, were re-designated and re-classified as Class B ordinary shares. All other ordinary shares then issued
and outstanding were re-designated and re-classified as Class A ordinary shares. On the same date, the Company amended and restated
then effective Amended and Restated Memorandum of Association and Articles of Association in their entirety and adopted the Second
Amended and Restated Memorandum and Articles of Association which reflect, among other things, the changes to the capital structure
of the Company. As a result of such changes, Mr. Jun Zhu holds the majority of our outstanding voting power and we became a “controlled
company” as defined under Nasdaq Stock Market Rules.
Transaction with Comtec
In June 2019, the Group entered into a share purchase agreement
with Comtec, a wholly-owned subsidiary of Comtec Solar Systems Group Limited (SEHK: 00712) (“Comtec Group”), an entity
affiliated with Kwok Keung Chau, independent director of the Company. Pursuant to the share purchase agreement, the Company has
issued 3,444,882 Class A ordinary shares to purchase 9.9% equity interest in Zhenjiang Kexin, a lithium battery management system
and power storage system supplier.
25.
LOSS PER SHARE
Loss per share is calculated as follows:
|
|
For the year ended December 31, 2017
|
|
|
For the year ended December 31, 2018
|
|
|
For the year ended December 31, 2019
|
|
|
For the year ended December 31, 2019
|
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ordinary shareholders before change in redeemable noncontrolling interest
|
|
|
(118,165,850
|
)
|
|
|
(217,092,926
|
)
|
|
|
(177,795,168
|
)
|
|
|
(25,538,677
|
)
|
Change in redeemable noncontrolling interest
|
|
|
(57,126,233
|
)
|
|
|
(40,918,773
|
)
|
|
|
(12,827,598
|
)
|
|
|
(1,842,569
|
)
|
Net loss attributable to ordinary shareholders
|
|
|
(175,292,083
|
)
|
|
|
(258,011,699
|
)
|
|
|
(190,622,766
|
)
|
|
|
(27,381,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share – weighted-average shares outstanding
|
|
|
33,426,448
|
|
|
|
62,114,760
|
|
|
|
106,407,008
|
|
|
|
106,407,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
(5.24
|
)
|
|
|
(4.15
|
)
|
|
|
(1.79
|
)
|
|
|
(0.26
|
)
|
The Company had 5,778,846, 20,383,333 and 13,213,978 stock
options, warrants and non-vested shares outstanding as of December 31, 2017, 2018 and 2019, respectively, which were excluded
in the computation of diluted loss per share in the periods presented, as their effect would have been anti-dilutive due to the
net loss reported in such periods.
26.
RESTRICTED NET ASSETS
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, 2017, 2018 and 2019. The accumulated reserves as of December 31, 2019 were RMB3.8 million (US$0.5 million).
In addition, due to restrictions on the distribution of registered capital from the Company’s PRC subsidiaries, the PRC subsidiaries’
registered capital of RMB11.5 million (US$1.6 million) as of December 31, 2019, were considered restricted. As a result of these
PRC laws and regulations, as of December 31, 2019, approximately RMB7.7 million (US$1.1 million), were not available for distribution
to the Company by its PRC subsidiaries in the form of dividends, loans or advances.
27.
NONCONTROLLING INTEREST
As
of December 31, 2019, the Group’s noncontrolling interests mainly included equity interest in Red 5 and equity awards
granted as compensation by the Group’s subsidiaries. The following schedule shows the effects of changes in the ownership
interest of The9 Limited in its subsidiaries on equity attributed to The9 Limited for the years ended December 31, 2017, 2018 and
2019.
|
|
December 31,
2017
|
|
|
December 31,
2018
|
|
|
December 31,
2019
|
|
|
December 31,
2019
|
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
US$
(Note 3)
|
|
Net loss attributable to The9 Limited
|
|
|
(118,165,850
|
)
|
|
|
(217,092,926
|
)
|
|
|
(177,795,168
|
)
|
|
|
(25,538,677
|
)
|
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 (1)
|
|
|
(7,060
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change from net loss attributable to The9 Limited and transfers to noncontrolling interests
|
|
|
(118,172,910
|
)
|
|
|
(217,092,926
|
)
|
|
|
(177,795,168
|
)
|
|
|
(25,538,677
|
)
|
(1)
In June 2016, the Group completed a share exchange transaction with L&A and certain other shareholders of Red 5, whereby
the Group exchanged approximately 30.6% equity interest (on a fully-diluted basis) owned in Red 5 for a total of 723,313,020 (after
a one-to-five stock split) of newly issued shares of L&A, after deducting a 6% of total shares received (769,481,940 shares)
for the payment of a service fee to a third-party consultant. As a result, the percentage of noncontrolling interest in Red 5 changed
from 10.4% to 58.1%, after deducting shares of Series B redeemable convertible preferred shares (“SBPS”) from total
shares of Red 5.
28. REDEEMABLE NONCONTROLLING INTEREST
In
January 2014, Red 5 issued 27,438,952 SBPS to a third-party investor, Shanghai Oriental Pearl Culture Development Co., Ltd., (“Oriental
Pearl”), for an aggregate consideration of RMB118.3 million (US$17.0 million). In conjunction with the issuance of
SBPS, Oriental Pearl also purchased 5,948,488 common shares of Red 5 from two executives of Red 5 at the same per share price as
the per share price of SBPS for an aggregate consideration of RMB25.6 million (US$3.7 million). The purchase price for these common
shares was determined to be less than fair value as the transaction was contemplated in conjunction with the issuance of the SPBS.
The difference between the purchase price and fair value of SBPS as determined by the Group with the assistance of an independent
valuation firm, amounted to RMB131.3 million (US$18.9 million), was recognized as a compensation paid to the two executives in
the amount of RMB13.0 million (US$1.9 million).
Due to share exchange transaction with L&A
in 2016, a 37% share of SBPS was owned by L&A. As of December 31, 2019, the holders of SBPS were as follows:
Holder
|
|
December 31, 2018
|
|
|
December 31, 2019
|
|
|
|
|
Number of Shares
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
|
L&A International Holdings Limited
|
|
|
10,180,553
|
|
|
|
10,180,553
|
|
Shanghai Oriental Pearl Culture Development Co., Ltd.
|
|
|
17,258,399
|
|
|
|
17,258,399
|
|
As of 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.
The key terms of the SBPS are as follows:
Conversion
Each SBPS may be converted at any time into
common shares at the then applicable conversion price. The initial conversion ratio is 1:1, subject to adjustment in the event
of (i) share splits, share combinations, share dividends or distribution, other dividends, recapitalizations and similar events,
or (ii) issuance of common shares at a price per share less than the conversion price in effect on the date of or immediately prior
to such issuance. In that case, the conversion price shall be reduced concurrently to the subscription price of such issuance.
The SBPS shall be automatically converted
into common shares immediately prior to the consummation of a public offering of Red 5’s shares wherein gross proceeds are
at least US$30,000,000, immediately following the public offering (the “Qualifying IPO”).
The conversion option can only be settled
by issuance of common shares except that fractional shares may be settled in cash.
Dividends
The holder of each share of SBPS shall be
entitled to receive dividends at the rate per share of $0.038237 per annum if and when a dividend is declared on common shares.
The preferred shares participate in dividends on an as-converted basis and must be paid prior to any payment on common shares.
Upon conversion, any declared or accrued but
unpaid dividends will be converted into common shares at the same applicable conversion price.
Redemption
At any time on or after April 1, 2017, if
requested by at least 50% of the holders of SBPS then outstanding, Red 5 shall redeem all of the outstanding SBPS at a redemption
price equal to 200% of the issuance price in three equal annual installments. The full amount of the redemption price due but
not paid shall accrue interest daily at a rate of 10% per annum from the issuance date of SBPS (see Note 30.2).
Voting
Each SBPS has voting rights equivalent to
the number of common shares to which it is convertible at the record date. The holders of SBPS shall vote together with the common
shareholders, and not as a separate class or series, on all matters put before the shareholders.
Liquidation
The holders of SBPS have preference over holders
of common shares with respect to distribution of assets upon voluntary or involuntary liquidation of Red 5. The holders of SBPS
shall be entitled to receive 100% of the original issue price (“preferred liquidation”). The holders of SBPS are also
entitled to distribution of remaining assets from preferred liquidation, along with other shareholders, while the total distribution
entitled to the holders of SBPS should not exceed 200% of the original issue price.
A reconciliation of redeemable noncontrolling
interest is as follows:
|
|
For the year ended December 31,
2018
|
|
|
For the year ended December 31,
2019
|
|
|
For the year ended December 31,
2019
|
|
|
|
|
RMB
|
|
|
|
RMB
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Redeemable noncontrolling interest opening balance
|
|
|
306,014,668
|
|
|
|
341,074,539
|
|
|
|
48,992,293
|
|
Net loss attributable to redeemable noncontrolling interest
|
|
|
(5,858,902
|
)
|
|
|
(4,855,589
|
)
|
|
|
(697,462
|
)
|
Change in redeemable noncontrolling interest
|
|
|
40,918,773
|
|
|
|
12,827,598
|
|
|
|
1,842,569
|
|
Redeemable noncontrolling interest ending balance
|
|
|
341,074,539
|
|
|
|
349,046,548
|
|
|
|
50,137,400
|
|
29.
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$70.8 million). These subsidiaries hold the land use rights and office buildings located at Zhangjiang, Shanghai. Proceeds
from the disposal will be used to repay both the outstanding entrusted bank loan and convertible notes, with the residual to be
used as working capital for the Group’s operations.
As of December 31, 2019, the transaction was under process and
the equity interest of The9 Computer, C9I Shanghai and Shanghai Kaie have been transferred to Kapler Pte. Ltd. The Group, however,
continued to manage operation of these subsidiaries, including subsequent repayment of the entrusted bank loan, until final completion
of the transaction in February 2020. As of December 31, 2019, the Group still retained power over decisions that most significantly
impact the economic activities and potential to receive significant benefits or absorb significant losses of these subsidiaries.
As such, these subsidiaries are part of consolidated entities of the Group as of December 31, 2019 and the Group has presented
the assets and liabilities of these subsidiaries as held-for-sale. The transaction was subsequently completed on February 21, 2020.
30. COMMITMENTS AND CONTINGENCIES
30.1 Other operating commitments
In October 2016, the Group had raised RMB57.5
million (US$8.3 million), and the Group planned to raise an additional RMB100.0 million (US$14.4 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. In August 2016, the Group granted a third-party consultant 1,000,000 options
to acquire shares of the Group as payment for consulting services related to the RMB157.5 million (US$22.6 million) financing plan
of CrossFire Mobile Game with Inner Mongolia Culture Assets and Equity Exchange. The options will vest in accordance with the schedule
of the actual funding to be received. In October 2016, 365,079 options were vested after the Group received the first funding of
RMB57.5 million (US$8.3 million). The Group continues to cooperate with a third-party company for development and operation of
CrossFire Mobile Game. The Group plans to apply for a license (“Banhao”) from GAPPRPT for CrossFire New Mobile Game
as soon as development of the game is finalized to launch the game. The Group does not plan to finance the remaining RMB100.0 million
(US$14.4 million) from the planned fund raising arrangement, and due to non-recovery of the advance financing fee, the Group fully
impaired the advance finance fee in 2018. In January 2019, total 1,000,000 options granted to the third-party consultant were canceled.
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 June 2017, Shanghai IT has entered into
an investment agreement with the shareholders of Beijing Ti Knight where Shanghai IT will invest a total of RMB9.0 million (US$1.3
million) in Beijing Ti Knight. As of December 31, 2019, Shanghai IT has invested RMB4.9 million (US$0.7 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$1.0 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, 2019, 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$1.0 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, 2019
the agreements have not been terminated but the related outsourcing development of the related game has been transferred to a third-party
company.
In 2019, Jiu Gang has signed a joint venture
agreement with Shenzhen EN-plus Technologies Co., Ltd. ("EN+"), an electric vehicle charging equipment company incorporated
in the PRC, to establish a joint venture to engage in sales of new energy electric vehicle charging equipment, investment, construction
and operation of charging stations, and provision of operational services for urban charging equipment and platforms for electric
vehicles. According to the joint venture agreement, the Group will make a cash investment of RMB50.0 million (US$7.2 million) in
the joint venture in consideration for which it will receive 80% equity interest in the joint venture, and EN+ will contribute
its current and future proprietary electric vehicle charging technology to the joint venture in consideration for which it will
receive a 20% equity interest of the joint venture. As of December 31, 2019, the joint venture has not been commenced and no progress
on the joint venture.
In March 2019, the Group entered into a
joint venture agreement with F&F to establish a joint venture to manufacture, market, distribute and sell electric cars in
the PRC. Under the terms of joint venture agreement, the Group will make capital contribution of up to US$600.0 million in three
equal installments to the joint venture, and F&F will make contributions including its use rights for a piece of land in the
PRC to manufacture electric cars and will grant the joint venture an exclusive license to manufacture, market, distribute and sell
certain F&F’s car models and other potential selected car models in the PRC, in each case subject to the satisfaction
of certain conditions, such as establishment of the joint venture and funding arrangements. As of December 31, 2019, the Group
has paid the initial deposit of US$5.0 million and has not paid remaining capital contribution.
In October 2019, the Group entered into
a development agreement with F&F to establish a development plan for the joint venture’s business conduct in the PRC.
Under the terms of development agreement, the Group shall pay an amount of US$18.0 million as development fee in four-equal installments.
The first installment of US$6.0 million shall be paid within 2 business days following the receipt by the Group of the proceeds
from its proposed offering under that certain Registration Statement on Form F-1 filed with the U.S SEC on June 24, 2019. The Group
has applied to withdraw the Registration Statement on Form F-1 in February 2020.
30.2 Contingencies
In June 2016, Asian Development borrowed
HK$92.3 million (US$11.9 million) from a financial services company at an annual interest rate of 2% for a term of 24 months.
This loan is secured by 417,440,000 shares of L&A (see Note 16). Pursuant to the financing agreement (“Agreement”),
such loan is considered to be in default since the market price of the pledged shares had fallen below the collateralized stock
price by more than 35% for ten consecutive trading days. Asian Development had not made any remediation pursuant to the Agreement.
Upon default, the lender shall be entitled to foreclose the pledged shares and become the legal and beneficial owner of the pledged
shares. If the market value of the pledged shares cannot cover the total outstanding amount owed by Asian Development to the lender
under the Agreement, the lender may claim against Asian Development to recover any outstanding amounts under the Agreement, in
addition to foreclosure of the pledged shares as mentioned above.
As mentioned in Note 24, Red 5 and its
affiliates are currently in dispute with Qihoo 360 and its affiliates regarding System Link and Firefall and various legal proceedings
have been initiated and are ongoing in connection with such dispute since 2016 where litigations have been filed with both Intellectual
Property Court of Shanghai and Hong Kong International Arbitration Centre. In May 2019, the Group has entered into an out-of-court
settlement with Qihoo 360 where both the Group and Qihoo 360 agreed to withdraw litigations filed in relation to the dispute over
Firefall and to liquidate the joint venture, System Link. As of December 31, 2019, the Group has withdrew all the claims against
Qihoo 360 and settled the litigation proceedings in Shanghai in May 2019. In August 2019, the Group has received a refund from
Intellectual Property Court of Shanghai on court acceptance fee paid in 2016 and recognized other income amounting to RMB3.8 million
(US$0.5 million) for the year ended December 31, 2019. As of the issuance date of these consolidated financial statements, the
Group is implementing the mediation agreement with Qihoo 360 to settle the arbitration proceeding in Hong Kong.
Shanghai Oh Yeah Information Technology
Co., Ltd. (“Shanghai Oh Yeah”) filed several related civil claims against joint defendants including Shanghai IT, ZTE9
and a third-party defendant, regarding copy-right infringements of their intellectual property to the Intellectual Property Court
of Shanghai with a total aggregated claim amount of RMB3.0 million (US$0.4 million). These civil claims are still in process as
of December 31, 2019. The Group has assessed the likelihood of the outcome and has accrued an amount for the contingency. The Group
may be subject to other legal or administrative proceedings in the ordinary course of business. The Group does not believe that
any currently pending legal or administrative proceeding to which the Group is a party will have a material adverse effect on the
business or financial condition.
As described in Note 28, 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 (see Note 28).
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$19.9 million for the third installment. Since Red
5 is in a net liability position, the Group does not believe the preferred shareholders will request such redemption. As of the
issuance date of these consolidated financial statements, there was no such preferred shareholder requiring Red 5 to redeem the
preferred shares.
31.
SEGMENT REPORTING
The
Group operates in one segment whose business is developing and operating online games and related services. The Group’s chief
operating decision maker is the chief executive officer, who reviews consolidated results when making decisions about allocating
resources and assessing performance of the Group. The Group generates its revenues from customers in the Greater China (including
PRC, Taiwan, Hong Kong and Macau), North America and other areas for the years ended December 31, 2017, 2018 and 2019.
The
following geographic area information includes revenue based on location of players for the years ended December 31, 2017,
2018 and 2019:
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Greater China
|
|
|
19,690,716
|
|
|
|
16,430,205
|
|
|
|
182,107
|
|
|
|
26,158
|
|
North America
|
|
|
51,156,109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other areas
|
|
|
2,301,731
|
|
|
|
1,001,653
|
|
|
|
159,388
|
|
|
|
22,895
|
|
Total
|
|
|
73,148,556
|
|
|
|
17,431,858
|
|
|
|
341,495
|
|
|
|
49,053
|
|
The majority of the Group’s assets
are located in Greater China.
32. SUBSEQUENT EVENTS
In February 2020, the Group completed the
sale of three subsidiaries, namely The9 Computer, C9I Shanghai and Shanghai Kaie that held the mortgaged office buildings located
at Zhangjiang, Shanghai to Kapler Pte. Ltd. As of the issuance date of these consolidated financial statements, the Group has received
90% of sale proceeds from Kapler Pte. Ltd. amounting to RMB443.7 million. The Group has repaid the principal and interest due on
the entrusted bank loan and has repaid US$4.8 million to the issuer of convertible notes. The Group plans to use proceeds from
the above sale to settle the remaining outstanding balance of convertible notes amounting to US$55.5 million.
In February 2020, the Group 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 at an initial conversion price of US$1.05 per ADS to Iliad
Research and Trading, L.P. (“Iliad”). The convertible note bears interest at a rate of 6.0% per year, compounded
daily. Iliad has the right, at its sole discretion, for any time after six months from the purchase date until the
outstanding balance has been paid in full, to convert all or any portion of the outstanding balance up to US$150,000 per
calendar month into ADSs of the Group at an initial conversion price of US$1.05 per ADS, subject to adjustment. Beginning on
the date that is six months from the note purchase date, Iliad has the right, exercisable at any time in its sole and
absolute discretion, to redeem any portion of the convertible note. The Group could pay the redemption amount to Iliad in
cash or the Group’s ADSs. In the events the principal amount and interest accrued for the convertible note issued to
Iliad are fully repaid, the Company has the right to repurchase the remaining Class A ordinary shares held by Iliad that are
unsold at US$0.0001 per share.
On March 6, 2020, the Company received a letter from the Listing
Qualifications Department of Nasdaq, notifying that the minimum bid price per ADS, each representing three Class A ordinary shares
of the Company, was below US$1.00 for a period of 30 consecutive business days and the Company did not meet the minimum bid price
requirement set forth in Rule 5550(a)(2) of the Nasdaq Listing Rules. The Group has a compliance period of 180 calendar days, or
until September 2, 2020, to regain compliance with Nasdaq’s minimum bid price requirement. If the Company fail to satisfy
Nasdaq Capital Market’s continued listing requirements and fail to regain compliance on a timely basis, the ADSs could be
delisted from Nasdaq Capital Market.
On April 13,
2020, the Company received a letter from the Listing Qualifications Department of Nasdaq
indicating that the Company no longer met the continued listing requirement of minimum MVLS
for the Nasdaq Global Market because the market value of the Company’s securities listed
on Nasdaq for the last 30 consecutive business days was below the minimum requirement of US$35.0 million. Pursuant to the relevant
Nasdaq listing rules, the Company has a compliance period of 180 calendar days, or until October
12, 2020, to regain minimum MVLS requirements. If the Company fails to satisfy Nasdaq Global
Market’s continued listing requirements and fail to regain compliance on a timely basis, the ADSs could be delisted from
Nasdaq Global Market.
On April 17, 2020, the Company received a
notification letter from the Listing Qualifications Department of Nasdaq indicating that Nasdaq has determined to toll the compliance
period for minimum bid price and market value of publicly held shares requirements through June 30, 2020. As a result of the tolling
of the compliance period, the Company will have until November 16, 2020 to regain compliance. The Company can regain compliance,
either during the tolling period or during the compliance period resuming after the tolling period, by evidencing compliance with
the minimum bid price requirement for a minimum of ten consecutive trading days.
In April 2020, Inner Mongolia Culture Assets
and Equity Exchange filed a civil claim against Wuxi Qudong and Shanghai IT to recover RMB57.5 million (US$8.3 million) of principal
and interest that it previously raised to finance the early phase development of CrossFire New Mobile Game. The Group is cooperating
with a third-party company for the development and operation of CrossFire Mobile Game. The Group plans to apply for a license (“Banhao”)
from GAPPRPT for CrossFire New Mobile Game as soon as development of the game is finalized. The Group may seek to meditate and
settle this claim amid ongoing game development. The Group does not expect this case to significantly affect the business operations.
Starting from January 2020, a novel strain
of coronavirus, later named COVID-19, has spread worldwide. Government-imposed measures such as travel restrictions, extended holidays
and delay of business resumption have interrupted normal operation of businesses in various regions. On March 11, 2020, the World
Health Organization declared the outbreak of COVID-19 to be a pandemic. This pandemic may cause pressure on the Group due to delayed
ability to identify alternative business opportunities and to obtain additional financing to support business transitions. Travel
restrictions have affected Group management’s progress of discussions with its business partners regarding potential cooperation
to facilitate transition into a different industry. Consequently, the Group is unable to accurately predict the impact that the
pandemic will have on our financial condition and results of operations due to numerous uncertainties, including the severity of
the disease, the duration of the outbreak, actions that may be taken by government authorities, the impact to the business of our
customers, and other factors.
ADDITIONAL FINANCIAL INFORMATION OF PARENT
COMPANY
FINANCIAL STATEMENTS SCHEDULE I
THE9 LIMITED
FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2017,
2018 AND 2019
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cost of revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
(43,710
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Sales and marketing
|
|
|
(231,884
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
(62,979,090
|
)
|
|
|
(21,435,150
|
)
|
|
|
(68,165,230
|
)
|
|
|
(9,791,323
|
)
|
Total operating expenses
|
|
|
(63,254,684
|
)
|
|
|
(21,435,150
|
)
|
|
|
(68,165,230
|
)
|
|
|
(9,791,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(63,254,684
|
)
|
|
|
(21,435,150
|
)
|
|
|
(68,165,230
|
)
|
|
|
(9,791,323
|
)
|
Interest expenses
|
|
|
(76,989,899
|
)
|
|
|
(98,308,205
|
)
|
|
|
(33,154,189
|
)
|
|
|
(4,762,301
|
)
|
Fair value change on warrants liability
|
|
|
12,615,466
|
|
|
|
2,251,427
|
|
|
|
1,292,243
|
|
|
|
185,619
|
|
Foreign exchange gain (loss)
|
|
|
35,473,519
|
|
|
|
1,963,364
|
|
|
|
(1,648,652
|
)
|
|
|
(236,814
|
)
|
Other expenses, net
|
|
|
(21,649,514
|
)
|
|
|
(18,180,060
|
)
|
|
|
(1,636,394
|
)
|
|
|
(235,053
|
)
|
Loss before income tax expense and share of loss in equity method investments
|
|
|
(113,805,112
|
)
|
|
|
(133,708,624
|
)
|
|
|
(103,312,222
|
)
|
|
|
(14,839,872
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recovery of equity investment in excess of cost
|
|
|
60,548,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Equity in loss of subsidiaries and VIEs
|
|
|
(64,909,389
|
)
|
|
|
(83,384,302
|
)
|
|
|
(74,482,946
|
)
|
|
|
(10,698,805
|
)
|
Net loss
|
|
|
(118,165,850
|
)
|
|
|
(217,092,926
|
)
|
|
|
(177,795,168
|
)
|
|
|
(25,538,677
|
)
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
(19,027,771
|
)
|
|
|
7,241,192
|
|
|
|
5,426,604
|
|
|
|
779,483
|
|
Total comprehensive loss
|
|
|
(137,193,621
|
)
|
|
|
(209,851,734
|
)
|
|
|
(172,368,564
|
)
|
|
|
(24,759,194
|
)
|
ADDITIONAL FINANCIAL INFORMATION OF PARENT
COMPANY
FINANCIAL STATEMENTS SCHEDULE I
THE9 LIMITED
FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2018 AND 2019
|
|
December 31,
2018
|
|
|
December 31,
2019
|
|
|
December 31,
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
18
|
|
|
|
143,896
|
|
|
|
20,669
|
|
Prepayments and other current assets, net
|
|
|
61,979
|
|
|
|
63,873
|
|
|
|
9,175
|
|
Amounts due from intercompany
|
|
|
1,305,838,856
|
|
|
|
1,303,065,115
|
|
|
|
187,173,592
|
|
Total current assets
|
|
|
1,305,900,853
|
|
|
|
1,303,272,884
|
|
|
|
187,203,436
|
|
Investments in subsidiaries and VIEs
|
|
|
(1,635,525,945
|
)
|
|
|
(1,681,526,537
|
)
|
|
|
(241,536,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
(329,625,092
|
)
|
|
|
(378,253,653
|
)
|
|
|
(54,332,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
34,881,000
|
|
|
|
5,010,342
|
|
Accrued expenses and other current liabilities
|
|
|
5,248,838
|
|
|
|
11,578,754
|
|
|
|
1,663,184
|
|
Warrants
|
|
|
1,490,844
|
|
|
|
198,600
|
|
|
|
28,527
|
|
Convertible notes
|
|
|
375,257,140
|
|
|
|
414,127,908
|
|
|
|
59,485,752
|
|
Total current liabilities
|
|
|
381,996,822
|
|
|
|
460,786,262
|
|
|
|
66,187,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
381,996,822
|
|
|
|
460,786,262
|
|
|
|
66,187,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHODERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares
|
|
|
6,502,658
|
|
|
|
-
|
|
|
|
-
|
|
Class A ordinary shares
|
|
|
-
|
|
|
|
7,321,099
|
|
|
|
1,051,610
|
|
Class B ordinary shares
|
|
|
-
|
|
|
|
648,709
|
|
|
|
93,181
|
|
Additional paid-in capital
|
|
|
2,496,069,065
|
|
|
|
2,539,552,478
|
|
|
|
364,783,889
|
|
Statutory reserves
|
|
|
28,071,982
|
|
|
|
28,071,982
|
|
|
|
4,032,288
|
|
Accumulated other comprehensive loss
|
|
|
(9,204,556
|
)
|
|
|
(3,777,952
|
)
|
|
|
(542,669
|
)
|
Accumulated deficit
|
|
|
(3,233,061,063
|
)
|
|
|
(3,410,856,231
|
)
|
|
|
(489,938,842
|
)
|
Total shareholders’ deficit
|
|
|
(711,621,914
|
)
|
|
|
(839,039,915
|
)
|
|
|
(120,520,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
|
(329,625,092
|
)
|
|
|
(378,253,653
|
)
|
|
|
(54,332,738
|
)
|
ADDITIONAL FINANCIAL INFORMATION OF PARENT
COMPANY
FINANCIAL STATEMENTS SCHEDULE I
THE9 LIMITED
FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017
2018 AND 2019
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(118,165,850
|
)
|
|
|
(217,092,926
|
)
|
|
|
(177,795,168
|
)
|
|
|
(25,538,678
|
)
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expenses
|
|
|
37,727,861
|
|
|
|
3,645,751
|
|
|
|
21,705,240
|
|
|
|
3,117,763
|
|
Fair value change on warrants liability
|
|
|
(12,615,466
|
)
|
|
|
(2,251,427
|
)
|
|
|
(1,292,244
|
)
|
|
|
(185,619
|
)
|
Amortization of discount and interest on convertible notes
|
|
|
76,990,826
|
|
|
|
98,308,205
|
|
|
|
33,154,191
|
|
|
|
4,762,302
|
|
Foreign exchange (gain) loss
|
|
|
(35,473,519
|
)
|
|
|
(1,963,364
|
)
|
|
|
1,648,652
|
|
|
|
236,813
|
|
Recovery of equity investment in excess of cost
|
|
|
(60,548,651
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Equity in loss of subsidiaries and VIEs
|
|
|
64,909,389
|
|
|
|
83,384,302
|
|
|
|
74,482,946
|
|
|
|
10,698,806
|
|
Consulting fee paid by issuance of shares
|
|
|
13,454,692
|
|
|
|
4,172,800
|
|
|
|
35,091,686
|
|
|
|
5,040,605
|
|
Change in prepayments and other current assets
|
|
|
915,269
|
|
|
|
(2,971
|
)
|
|
|
(1,894
|
)
|
|
|
(272
|
)
|
Change in amounts due from intercompany
|
|
|
(130,954,737
|
)
|
|
|
30,882,203
|
|
|
|
(28,060,447
|
)
|
|
|
(4,030,631
|
)
|
Change in accrued expenses and other current liabilities
|
|
|
(2,092,500
|
)
|
|
|
898,712
|
|
|
|
6,329,916
|
|
|
|
909,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(165,852,686
|
)
|
|
|
(18,715
|
)
|
|
|
(34,737,122
|
)
|
|
|
(4,989,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement payment from investee
|
|
|
165,812,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
34,881,000
|
|
|
|
5,010,341
|
|
Net cash provided by (used in) financing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
34,881,000
|
|
|
|
5,010,341
|
|
Net change in cash and cash equivalents
|
|
|
(40,186
|
)
|
|
|
(18,715
|
)
|
|
|
143,878
|
|
|
|
20,666
|
|
Cash and cash equivalents, beginning of year
|
|
|
58,919
|
|
|
|
18,733
|
|
|
|
18
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
|
18,733
|
|
|
|
18
|
|
|
|
143,896
|
|
|
|
20,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplement disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Income taxes paid
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
ADDITIONAL FINANCIAL INFORMATION OF PARENT
COMPANY
FINANCIAL STATEMENTS SCHEDULE I
THE9 LIMITED
FINANCIAL INFORMATION OF PARENT COMPANY
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 principally engaged in the development and operation of online games. In 2019, the
Group attempted to enter into electric vehicle industry and now aims to become a diversified high-tech Internet company.
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’ profit or loss as “Equity in income/loss of subsidiaries
and VIEs” on the Condensed Statements of Comprehensive Loss. 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, 2018 and 2019, 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 2017, 2018 and 2019
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, 2019 and for the year ended December 31, 2019 are solely
for the convenience of the readers and were calculated at the rate of US$1.00 = RMB6.9618, representing the noon buying rate set
forth in the H.10 statistical release of the U.S. Federal Reserve Board on December 31, 2019. No representation is made that
the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2019,
or at any other rate.
THE9 LIMITED
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE (LOSS) GAIN
FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
|
|
Six month ended June 30,
|
|
|
|
2019
|
|
|
2020
(Restated)
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Online game services
|
|
|
263,579
|
|
|
|
465,726
|
|
|
|
65,919
|
|
Other revenues
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales taxes
|
|
|
(12,252
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
251,327
|
|
|
|
465,726
|
|
|
|
65,919
|
|
Cost of revenues
|
|
|
(115,060
|
)
|
|
|
(468,288
|
)
|
|
|
(66,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
136,267
|
|
|
|
(2,562
|
)
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (expenses) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
(8,658,009
|
)
|
|
|
(892,739
|
)
|
|
|
(126,359
|
)
|
Sales and marketing
|
|
|
(852,176
|
)
|
|
|
(297,853
|
)
|
|
|
(42,158
|
)
|
General and administrative
|
|
|
(33,479,081
|
)
|
|
|
(57,359,337
|
)
|
|
|
(8,118,687
|
)
|
Gain on disposal of subsidiaries
|
|
|
1,235,874
|
|
|
|
391,848,588
|
|
|
|
55,462,568
|
|
Total operating (expenses) income
|
|
|
(41,753,392
|
)
|
|
|
333,298,659
|
|
|
|
47,175,364
|
|
Other operating income, net
|
|
|
22,680
|
|
|
|
27,358
|
|
|
|
3,872
|
|
(Loss) gain from operations
|
|
|
(41,594,445
|
)
|
|
|
333,323,455
|
|
|
|
47,178,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment on other investments
|
|
|
-
|
|
|
|
(10,000,000
|
)
|
|
|
(1,415,408
|
)
|
Interest expense, net
|
|
|
(17,193,207
|
)
|
|
|
(3,820,725
|
)
|
|
|
(540,789
|
)
|
Fair value change on warrants liability
|
|
|
(964,594
|
)
|
|
|
(123,056
|
)
|
|
|
(17,417
|
)
|
Gain on disposal of equity investee and available-for-sale investments
|
|
|
3,694,628
|
|
|
|
-
|
|
|
|
-
|
|
Gain on disposal of other investments
|
|
|
-
|
|
|
|
2,818,643
|
|
|
|
398,953
|
|
Other income (expenses), net
|
|
|
7,840,727
|
|
|
|
(11,863,492
|
)
|
|
|
(1,679,168
|
)
|
(Loss) gain before income tax expense and share of loss in equity method investments
|
|
|
(48,216,891
|
)
|
|
|
310,334,825
|
|
|
|
43,925,044
|
|
Income tax
|
|
|
-
|
|
|
|
(7,165,097
|
)
|
|
|
(1,014,154
|
)
|
Gain on extinguishment of convertible notes
|
|
|
-
|
|
|
|
56,755,902
|
|
|
|
8,033,277
|
|
Share of loss in equity method investments
|
|
|
(1,824,878
|
)
|
|
|
-
|
|
|
|
-
|
|
Net (loss) gain
|
|
|
(50,041,769
|
)
|
|
|
359,925,630
|
|
|
|
50,944,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest
|
|
|
(7,030,290
|
)
|
|
|
(2,032,463
|
)
|
|
|
(287,676
|
)
|
Net loss attributable to redeemable noncontrolling interest
|
|
|
(2,525,192
|
)
|
|
|
(738,246
|
)
|
|
|
(104,492
|
)
|
Net (loss) gain attributable to The9 Limited
|
|
|
(40,486,287
|
)
|
|
|
362,696,339
|
|
|
|
51,336,335
|
|
Change in redemption value of redeemable noncontrolling interest
|
|
|
(10,497,201
|
)
|
|
|
(738,246
|
)
|
|
|
(104,492
|
)
|
Net (loss) gain attributable to holders of ordinary shares
|
|
|
(50,983,488
|
)
|
|
|
361,958,093
|
|
|
|
51,231,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
(2,642,951
|
)
|
|
|
(1,259,760
|
)
|
|
|
(178,307
|
)
|
Total comprehensive (loss) gain
|
|
|
(52,684,720
|
)
|
|
|
358,665,870
|
|
|
|
50,765,860
|
|
THE9 LIMITED
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE (LOSS) GAIN (RESTATED)
FOR THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (Continued)
|
|
Six month ended June 30,
|
|
|
|
2019
|
|
|
2020
(Restated)
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Comprehensive (loss) gain attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
(9,063,344
|
)
|
|
|
(2,295,550
|
)
|
|
|
(324,914
|
)
|
Redeemable noncontrolling interest
|
|
|
(2,525,192
|
)
|
|
|
(738,246
|
)
|
|
|
(104,492
|
)
|
The9 Limited
|
|
|
(41,096,184
|
)
|
|
|
361,699,666
|
|
|
|
51,195,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to holders of ordinary shares per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
(0.60
|
)
|
|
|
3.12
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
84,283,464
|
|
|
|
115,876,017
|
|
|
|
115,876,017
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
THE9 LIMITED
UNAUDITED
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER
31, 2019 AND JUNE 30, 2020
|
|
As of December 31,
2019
|
|
|
As of June 30,
2020
(Restated)
|
|
|
As of June 30,
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
10,113,141
|
|
|
|
57,942,855
|
|
|
|
8,201,279
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
110,437
|
|
|
|
532,964
|
|
|
|
75,436
|
|
Advances to suppliers
|
|
|
11,246,608
|
|
|
|
353,499
|
|
|
|
50,035
|
|
Prepayments and other current assets, net of allowance for doubtful accounts
|
|
|
8,848,534
|
|
|
|
20,806,632
|
|
|
|
2,944,988
|
|
Amounts due from related parties
|
|
|
758,761
|
|
|
|
944,795
|
|
|
|
133,727
|
|
Assets classified as held-for-sale
|
|
|
123,390,350
|
|
|
|
-
|
|
|
|
-
|
|
Total current assets
|
|
|
154,467,831
|
|
|
|
80,580,745
|
|
|
|
11,405,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
10,000,000
|
|
|
|
-
|
|
|
|
-
|
|
Property, equipment and software, net
|
|
|
1,218,521
|
|
|
|
928,520
|
|
|
|
131,423
|
|
Land use rights, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating lease right-of-use assets
|
|
|
9,257,604
|
|
|
|
6,872,223
|
|
|
|
972,700
|
|
Other long-lived assets, net
|
|
|
6,515,200
|
|
|
|
6,515,200
|
|
|
|
922,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
181,459,156
|
|
|
|
94,896,688
|
|
|
|
13,431,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
117,526,089
|
|
|
|
119,670,027
|
|
|
|
16,938,193
|
|
Accounts payable
|
|
|
38,232,425
|
|
|
|
38,643,441
|
|
|
|
5,469,624
|
|
Other taxes payable
|
|
|
1,203,644
|
|
|
|
622,232
|
|
|
|
88,071
|
|
Advances from customers
|
|
|
39,527,778
|
|
|
|
39,733,943
|
|
|
|
5,623,975
|
|
Other advances
|
|
|
56,276,200
|
|
|
|
-
|
|
|
|
-
|
|
Amounts due to related parties
|
|
|
74,379,529
|
|
|
|
55,365,594
|
|
|
|
7,836,491
|
|
Refund of game points
|
|
|
169,998,682
|
|
|
|
169,998,682
|
|
|
|
24,061,752
|
|
Warrants
|
|
|
198,600
|
|
|
|
321,656
|
|
|
|
45,527
|
|
Convertible notes
|
|
|
414,127,908
|
|
|
|
3,543,737
|
|
|
|
501,583
|
|
Interest payable
|
|
|
5,371,931
|
|
|
|
6,320,440
|
|
|
|
894,600
|
|
Accrued expenses and other current liabilities
|
|
|
93,140,843
|
|
|
|
86,347,936
|
|
|
|
12,221,758
|
|
Current portion of operating lease liabilities of the consolidated VIE without recourse to the Group
|
|
|
3,407,670
|
|
|
|
3,139,867
|
|
|
|
444,419
|
|
Liabilities directly associated with assets held-for-sale
|
|
|
44,691,296
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,058,082,595
|
|
|
|
523,707,555
|
|
|
|
74,125,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion of operating lease liabilities of the consolidated VIE without recourse to the Group
|
|
|
6,251,705
|
|
|
|
4,213,565
|
|
|
|
596,391
|
|
TOTAL LIABILITIES
|
|
|
1,064,334,300
|
|
|
|
527,921,120
|
|
|
|
74,722,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
|
|
34,046,548
|
|
|
|
349,046,548
|
|
|
|
49,404,332
|
|
THE9 LIMITED
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2019 AND JUNE 30, 2020 (Continued)
|
|
As of December 31,
2019
|
|
|
As of June 30,
2020
(Restated)
|
|
|
As of June 30,
2020
(Restated)
|
|
SHAREHOLDERS’ EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A ordinary shares (US$0.01 par value; 4,300,000,000 shares authorized, 103,737,691 and 151,722,691 shares issued and outstanding as of December 31, 2019 and June 30, 2020, respectively)
|
|
|
7,321,099
|
|
|
|
10,719,683
|
|
|
|
1,536,022
|
|
Class B ordinary shares (US$0.01 par value; 600,000,000 shares authorized, 9,192,011 and 11,067,011 shares issued and outstanding as of December 31, 2019 and June 30, 2020, respectively)
|
|
|
648,709
|
|
|
|
781,175
|
|
|
|
91,819
|
|
Additional paid-in capital
|
|
|
2,539,552,478
|
|
|
|
2,626,468,024
|
|
|
|
371,752,420
|
|
Statutory reserves
|
|
|
28,071,982
|
|
|
|
7,326,560
|
|
|
|
1,037,007
|
|
Accumulated other comprehensive loss
|
|
|
(3,777,952
|
)
|
|
|
(4,774,625
|
)
|
|
|
(675,804
|
)
|
Accumulated deficit
|
|
|
(3,410,856,231
|
)
|
|
|
(3,027,414,470
|
)
|
|
|
(428,502,706
|
)
|
The9 Limited shareholders’ deficit
|
|
|
(839,039,915
|
)
|
|
|
(386,893,653
|
)
|
|
|
(54,761,242
|
)
|
Noncontrolling interest
|
|
|
(392,881,777
|
)
|
|
|
(395,177,327
|
)
|
|
|
(55,933,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ deficit
|
|
|
(1,231,921,692
|
)
|
|
|
(782,070,980
|
)
|
|
|
(110,694,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
|
|
|
181,459,156
|
|
|
|
94,896,688
|
|
|
|
13,431,754
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
UNAUDITED
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2019
|
|
Ordinary shares
|
|
|
Additional
paid-in capital
|
|
|
Statutory
reserves
|
|
|
Accumulated other
comprehensive
income (loss)
|
|
|
Accumulated
deficit
|
|
|
Equity (deficit)
attributable to
The9 Limited
|
|
|
Noncontrolling
interest
|
|
|
Total
shareholder
equity (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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(40,486,287
|
)
|
|
|
(40,486,287
|
)
|
|
|
(7,030,290
|
)
|
|
|
(47,516,577
|
)
|
Currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(609,897
|
)
|
|
|
-
|
|
|
|
(609,897
|
)
|
|
|
(2,033,054
|
)
|
|
|
(2,642,951
|
)
|
Issuance of ordinary shares
|
|
|
3,744,882
|
|
|
|
257,364
|
|
|
|
1,504,109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,761,473
|
|
|
|
-
|
|
|
|
1,761,473
|
|
Issuance of ordinary shares upon vesting of restricted shares
|
|
|
2,419,355
|
|
|
|
164,052
|
|
|
|
8,202,581
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,366,633
|
|
|
|
-
|
|
|
|
8,366,633
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128,986
|
|
|
|
128,986
|
|
Balance as of June 30, 2019
|
|
|
97,479,702
|
|
|
|
6,924,074
|
|
|
|
2,495,278,554
|
|
|
|
28,071,982
|
|
|
|
(9,814,453
|
)
|
|
|
(3,273,547,350
|
)
|
|
|
(753,087,193
|
)
|
|
|
(382,123,310
|
)
|
|
|
(1,135,210,503
|
)
|
UNAUDITED
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2020
|
|
Ordinary shares
|
|
|
Additional
paid-in capital
|
|
|
Statutory
reserves
|
|
|
Accumulated other
comprehensive loss
|
|
|
Accumulated
deficit
|
|
|
Equity (deficit)
attributable to
The9 Limited
|
|
|
Noncontrolling
interest
|
|
|
Total
shareholder
equity (deficit)
|
|
|
|
(US$0.01 par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
shares
|
|
|
Par value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Balance as of January 1, 2020
|
|
|
112,929,702
|
|
|
|
7,969,808
|
|
|
|
2,539,552,478
|
|
|
|
28,071,982
|
|
|
|
(3,777,952
|
)
|
|
|
(3,410,856,231
|
)
|
|
|
(839,039,915
|
)
|
|
|
(392,881,777
|
)
|
|
|
(1,231,921,692
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
362,696,339
|
|
|
|
362,696,339
|
|
|
|
(2,032,463
|
)
|
|
|
360,663,877
|
|
Currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(996,673
|
)
|
|
|
-
|
|
|
|
(996,673
|
)
|
|
|
(263,087
|
)
|
|
|
(1,259,760
|
)
|
Accretion in redemption value of redeemable noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(738,246
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(738,246
|
)
|
|
|
-
|
|
|
|
(738,246
|
)
|
Issuance of ordinary shares
|
|
|
34,110,000
|
|
|
|
2,416,878
|
|
|
|
54,235,021
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,651,899
|
|
|
|
-
|
|
|
|
56,651,899
|
|
Share-based compensation
|
|
|
15,750,000
|
|
|
|
1,114,172
|
|
|
|
33,312,745
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
34,426,917
|
|
|
|
-
|
|
|
|
34,426,917
|
|
Equity on conversion option of convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
106,026
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106,026
|
|
|
|
-
|
|
|
|
106,026
|
|
Reversal of statutory reserves due to disposal of subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,745,422
|
)
|
|
|
-
|
|
|
|
20,745,422
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of June 30, 2020 (Restated)
|
|
|
162,789,702
|
|
|
|
11,500,858
|
|
|
|
2,626,468,024
|
|
|
|
7,326,560
|
|
|
|
(4,774,625
|
)
|
|
|
(3,027,414,470
|
)
|
|
|
(386,893,653
|
)
|
|
|
(395,177,327
|
)
|
|
|
(782,070,980
|
)
|
Balance as of June 30, 2020 (US$ except share
data, Note 3) (Restated)
|
|
|
162,789,702
|
|
|
|
1,627,841
|
|
|
|
371,752,420
|
|
|
|
1,037,007
|
|
|
|
(675,804
|
)
|
|
|
(428,502,706
|
)
|
|
|
(54,761,242
|
)
|
|
|
(55,933,720
|
)
|
|
|
(110,694,962
|
)
|
THE9 LIMITED
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2019
AND 2020
|
|
Six months ended June 30,
|
|
|
|
2019
|
|
|
2020
(Restated)
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Cash flows from operating activities:
|
|
|
(50,041,769
|
)
|
|
|
359,925,630
|
|
|
|
50,944,167
|
|
Net (loss) gain
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of property, equipment and software
|
|
|
(1,055,269
|
)
|
|
|
(7,188
|
)
|
|
|
(1,017
|
)
|
Gain on disposal of subsidiaries
|
|
|
(1,206,925
|
)
|
|
|
(391,848,588
|
)
|
|
|
(55,462,568
|
)
|
Gain on disposal of other investments
|
|
|
-
|
|
|
|
(2,818,643
|
)
|
|
|
(398,953
|
)
|
Share-based compensation expenses
|
|
|
9,275,857
|
|
|
|
34,426,917
|
|
|
|
4,872,814
|
|
Impairment on other investments
|
|
|
-
|
|
|
|
10,000,000
|
|
|
|
1,415,408
|
|
Provision for doubtful accounts receivable
|
|
|
169,416
|
|
|
|
-
|
|
|
|
-
|
|
Consulting fee paid by issuance of shares
|
|
|
-
|
|
|
|
3,077,958
|
|
|
|
435,657
|
|
Depreciation and amortization of property, equipment and software
|
|
|
1,250,450
|
|
|
|
259,254
|
|
|
|
36,695
|
|
Amortization of land use right
|
|
|
960,455
|
|
|
|
-
|
|
|
|
-
|
|
Share of loss in equity method investments
|
|
|
1,824,878
|
|
|
|
-
|
|
|
|
-
|
|
Gain on disposal of investment in equity investee and available-for-sales investment
|
|
|
(694,628
|
)
|
|
|
-
|
|
|
|
-
|
|
Gain on extinguishment of convertible notes
|
|
|
-
|
|
|
|
(56,755,902
|
)
|
|
|
(8,033,277
|
)
|
Foreign currency exchange (gain) loss
|
|
|
2,259,149
|
|
|
|
12,382,752
|
|
|
|
1,752,665
|
|
Fair value change on warrant liability
|
|
|
(964,594
|
)
|
|
|
123,056
|
|
|
|
17,417
|
|
Amortization of discount and interest on convertible notes
|
|
|
16,112,241
|
|
|
|
2,923,316
|
|
|
|
413,769
|
|
Non-cash lease expense
|
|
|
-
|
|
|
|
208,876
|
|
|
|
29,564
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accounts receivable
|
|
|
104,874
|
|
|
|
(422,527
|
)
|
|
|
(59,805
|
)
|
Change in advances to suppliers
|
|
|
(384,555
|
)
|
|
|
798,137
|
|
|
|
112,969
|
|
Change in prepayments and other current assets
|
|
|
(1,359,634
|
)
|
|
|
(5,581,257
|
)
|
|
|
(789,976
|
)
|
Change in right-of-use assets
|
|
|
-
|
|
|
|
2,176,505
|
|
|
|
308,064
|
|
Change in accounts payable
|
|
|
(265,968
|
)
|
|
|
411,016
|
|
|
|
58,176
|
|
Change in amounts due to related parties
|
|
|
2,154,449
|
|
|
|
(186,034
|
)
|
|
|
(26,331
|
)
|
Change in other taxes payable
|
|
|
(468,586
|
)
|
|
|
(581,412
|
)
|
|
|
(82,294
|
)
|
Change in advances from customers
|
|
|
(495,832
|
)
|
|
|
206,165
|
|
|
|
29,181
|
|
Change in deferred revenue
|
|
|
(159,125
|
)
|
|
|
-
|
|
|
|
-
|
|
Change in interest payable
|
|
|
134,033
|
|
|
|
948,509
|
|
|
|
134,253
|
|
Change in accrued expenses and other current liabilities
|
|
|
5,130,795
|
|
|
|
(29,559,749
|
)
|
|
|
(4,183,910
|
)
|
Change in lease liabilities
|
|
|
-
|
|
|
|
(2,305,943
|
)
|
|
|
(326,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(17,720,288
|
)
|
|
|
(62,199,152
|
)
|
|
|
(8,803,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of equity investee and available-for-sale investment
|
|
|
694,628
|
|
|
|
-
|
|
|
|
-
|
|
Deposit for joint venture arrangement
|
|
|
(34,881,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds from disposal of property, equipment and software
|
|
|
1,312,170
|
|
|
|
43,000
|
|
|
|
6,086
|
|
Proceeds from disposal of assets and liabilities classified as held-for-sale
|
|
|
-
|
|
|
|
443,939,997
|
|
|
|
62,835,628
|
|
Purchase of property, equipment and software
|
|
|
(423,351
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(33,297,553
|
)
|
|
|
443,982,997
|
|
|
|
62,841,714
|
|
THE9 LIMITED
UNAUDITED
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JUNE 30, 2019 AND 2020 (Continued)
|
|
2019
|
|
|
2020
(Restated)
|
|
|
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of convertible note
|
|
|
-
|
|
|
|
3,358,369
|
|
|
|
475,346
|
|
Loans from a related party
|
|
|
16,065,376
|
|
|
|
-
|
|
|
|
-
|
|
Repayment of loans from a related party
|
|
|
(500,000
|
)
|
|
|
(19,013,935
|
)
|
|
|
(2,691,248
|
)
|
Proceeds from other loans
|
|
|
34,881,000
|
|
|
|
-
|
|
|
|
-
|
|
Repayments of convertible notes and interest-free loan
|
|
|
-
|
|
|
|
(315,873,493
|
)
|
|
|
(44,708,991
|
)
|
Net cash provided by (used in) financing activities
|
|
|
50,446,376
|
|
|
|
(331,529,059
|
)
|
|
|
(46,924,893
|
)
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
|
(1,596,907
|
)
|
|
|
(2,425,072
|
)
|
|
|
(343,247
|
)
|
Net change in cash and cash equivalents
|
|
|
(2,168,372
|
)
|
|
|
47,829,714
|
|
|
|
6,769,857
|
|
Cash and cash equivalents, beginning of period
|
|
|
4,256,449
|
|
|
|
10,113,141
|
|
|
|
1,431,422
|
|
Cash and cash equivalents, end of period
|
|
|
2,088,077
|
|
|
|
57,942,855
|
|
|
|
8,201,279
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
THE9 LIMITED
NOTES TO THE UNAUDITED CONDENSED 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 Group is principally engaged in the development and operation
of online games and internet related businesses. The Group aims to become a diversified high-tech Internet company.
The Company’s principal subsidiaries
and VIEs are as follows as of June 30, 2020:
Name of Entity
|
|
Date of
Registration
|
|
Place of
Registration
|
|
Legal
Ownership
|
|
Principal subsidiaries:
|
|
|
|
|
|
|
|
|
GameNow.net (Hong Kong) Ltd. (“GameNow Hong Kong”)
|
|
January-2000
|
|
Hong Kong
|
|
|
100
|
%
|
China The9 Interactive Limited (“C9I”)
|
|
October-2003
|
|
Hong Kong
|
|
|
100
|
%
|
China The9 Interactive (Beijing) Ltd. (“C9I Beijing”)
|
|
March-2007
|
|
People’s Republic of China (“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 Development Ltd. (“Asian Development”)
|
|
January-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
|
%
|
Red 5 Studios, Inc. (“Red 5”) (Note 2.2)
|
|
June-2005
|
|
USA
|
|
|
34.71
|
%
|
Red 5 Singapore Pte. Ltd. (“Red 5 Singapore”) (Note 2.2)
|
|
April-2010
|
|
Singapore
|
|
|
34.71
|
%
|
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
|
%
|
Name of Entity
|
|
Date of
Registration
|
|
Place of
Registration
|
|
Legal
Ownership
|
|
The9 Singapore Pte. Ltd. (“The9 Singapore”)
|
|
April-2010
|
|
Singapore
|
|
|
100
|
%
|
Ninebit Inc. (“Ninebit”)
|
|
January -2018
|
|
Cayman Islands
|
|
|
100
|
%
|
1111 Limited (“1111”)
|
|
January -2018
|
|
Hong Kong
|
|
|
100
|
%
|
Supreme Exchange Limited (“Supreme”)
|
|
December-2018
|
|
Malta
|
|
|
90
|
%
|
BET 111 Ltd. (“Bet 111”)
|
|
Jan-2019
|
|
Malta
|
|
|
90
|
%
|
Coin Exchange Ltd (“Coin”)
|
|
Jan-2019
|
|
Malta
|
|
|
90
|
%
|
Comtec Solar (China) Investment Holding Limited (“Comtec Solar”)
|
|
June-2019
|
|
Hong Kong
|
|
|
100
|
%
|
Huiling Computer Technology Consulting (Shanghai) Co. Ltd. (“Huiling”)
|
|
March-2019
|
|
PRC
|
|
|
100
|
%
|
Leixian Information Technology (Shanghai) Co., Ltd. (“Leixian”)
|
|
March-2019
|
|
PRC
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Variable interest entity:
|
|
|
|
|
|
|
|
|
Shanghai The9 Information Technology Co., Ltd. (“Shanghai IT”) (Note 4)
|
|
September-2000
|
|
PRC
|
|
|
N/A
|
|
Subsidiaries and VIEs of Shanghai IT:
Name of Entity
|
|
Date of
Registration
|
|
Place of
Registration
|
|
Legal
Ownership
Held 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
|
%
|
Wuxi Interest Dynamic Network Technology Co., Ltd. (“Wuxi Qudong”)
|
|
June-2016
|
|
PRC
|
|
|
100
|
%
|
Changsha Quxiang Network Technology Co., Ltd. (“Changsha Quxiang”)
|
|
July-2016
|
|
PRC
|
|
|
100
|
%
|
Silver Express Investments Ltd. (“Silver Express”)
|
|
November-2007
|
|
Hong Kong
|
|
|
100
|
%
|
2. PRINCIPAL ACCOUNTING POLICIES
<1> Basis of presentation
These consolidated financial statements have
been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the
“SEC”), and reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the
results for the interim periods reported in all material respects, on a basis consistent with the annual audited consolidated financial
statements. Certain information, accounting policies, and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles ("GAAP") have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting
policies and notes included in the Company’s most recent annual report on Form 20-F. Results for the six months ended June
30, 2020 are not necessarily indicative of the results expected for the full year.
Restatement of Previously Issued Unaudited
Consolidated Financial Statements
The Company has restated its unaudited consolidated
financial statements to correct an error in the accounting treatment on extinguishment of convertible notes, which impacted related
interest expense, foreign exchange gain (loss) and reversal of gain on extinguishment of convertible notes from additional paid-in
capital. The restatement is also being made to correct the reclassification for certain line items to the condensed consolidated
financial statements including reclassification between cost of sales and product development expenses; reclassification of income
tax expense out from gain on disposal of subsidiaries; reclassification on reversal of statutory reserves due to disposal of subsidiaries
to accumulated deficit and reclassification between Class A ordinary shares and Class B ordinary shares. This error as of June
30, 2020 was identified in the course of preparing the Company's consolidated financial statements for the year ended December
31, 2020.
The following tables present the effect of
the error correction and reclassification adjustments discussed above on all affected line items of our previously issued condensed
consolidated balance sheets as of June 30, 2020, condensed consolidated statements of operations and comprehensive (loss) gain
for the six months ended June 30, 2020, condensed consolidated statements of changes in equity for the six months ended June 30,
2020 and the condensed consolidated statements of cash flows for the six months ended June 30, 2020.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Six month ended June 30, 2020
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Cost of revenues
|
|
|
(1,242,790
|
)
|
|
|
774,502
|
|
|
|
(468,288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(777,064
|
)
|
|
|
774,502
|
|
|
|
(2,562
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
(118,237
|
)
|
|
|
(774,502
|
)
|
|
|
(892,739
|
)
|
Gain on disposal of subsidiaries
|
|
|
384,483,491
|
|
|
|
7,365,097
|
|
|
|
391,848,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating (expenses) income
|
|
|
326,708,064
|
|
|
|
6,590,595
|
|
|
|
333,298,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from operations
|
|
|
325,958,358
|
|
|
|
7,365,097
|
|
|
|
333,323,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(7,495,801
|
)
|
|
|
3,675,076
|
|
|
|
(3,820,725
|
)
|
Other income (expenses), net
|
|
|
(12,002,498
|
)
|
|
|
139,006
|
|
|
|
(11,863,492
|
)
|
(Loss) gain before income tax expense and share of loss in equity method investments
|
|
|
299,155,646
|
|
|
|
11,179,179
|
|
|
|
310,334,825
|
|
Income tax
|
|
|
-
|
|
|
|
(7,165,097
|
)
|
|
|
(7,165,097
|
)
|
Gain on extinguishment of convertible notes
|
|
|
148,647,177
|
|
|
|
(91,891,275
|
)
|
|
|
56,755,902
|
|
Net (loss) gain
|
|
|
447,802,823
|
|
|
|
(87,877,193
|
)
|
|
|
359,925,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain attributable to The9 Limited
|
|
|
450,573,532
|
|
|
|
(87,877,193
|
)
|
|
|
362,696,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain attributable to holders of ordinary shares
|
|
|
449,835,286
|
|
|
|
(87,877,193
|
)
|
|
|
361,958,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) gain
|
|
|
446,543,063
|
|
|
|
(87,877,193
|
)
|
|
|
358,665,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (gain) loss attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
The9 Limited
|
|
|
449,576,859
|
|
|
|
(87,877,193
|
)
|
|
|
361,699,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to holders of ordinary shares per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
3.88
|
|
|
|
(0.76
|
)
|
|
|
3.12
|
|
CONSOLIDATED BALANCE SHEETS
|
|
As of June 30, 2020
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Prepayments and other current assets, net of allowance for doubtful accounts
|
|
|
20,606,632
|
|
|
|
200,000
|
|
|
|
20,806,632
|
|
Total current assets
|
|
|
80,380,745
|
|
|
|
200,000
|
|
|
|
80,580,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
94,696,688
|
|
|
|
200,000
|
|
|
|
94,896,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
84,272,527
|
|
|
|
35,397,500
|
|
|
|
119,670,027
|
|
Total current liabilities
|
|
|
488,310,055
|
|
|
|
35,397,500
|
|
|
|
523,707,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
492,523,620
|
|
|
|
35,397,500
|
|
|
|
527,921,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A ordinary shares (US$0.01 par value; 4,300,000,000 shares authorized, 103,737,691 and 151,722,691 shares issued and outstanding as of December 31, 2019 and June 30, 2020 , respectively)
|
|
|
10,852,149
|
|
|
|
(132,466
|
)
|
|
|
10,719,683
|
|
Class B ordinary shares (US$0.01 par value; 600,000,000 shares authorized, 9,192,011 and 11,067,011 shares issued and outstanding as of December 31, 2019 and June 30, 2020, respectively)
|
|
|
648,709
|
|
|
|
132,466
|
|
|
|
781,175
|
|
Additional paid-in capital
|
|
|
2,573,788,331
|
|
|
|
52,679,693
|
|
|
|
2,626,468,024
|
|
Statutory reserves
|
|
|
28,071,982
|
|
|
|
(20,745,422
|
)
|
|
|
7,326,560
|
|
Accumulated deficit
|
|
|
(2,960,282,699
|
)
|
|
|
(67,131,771
|
)
|
|
|
(3,027,414,470
|
)
|
The9 Limited shareholders’ deficit
|
|
|
(351,696,153
|
)
|
|
|
(35,197,500
|
)
|
|
|
(386,893,653
|
)
|
Total shareholders’ deficit
|
|
|
(746,873,480
|
)
|
|
|
(35,197,500
|
)
|
|
|
(782,070,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND SHAREHOLDERS’ EQUITY
|
|
|
94,696,688
|
|
|
|
200,000
|
|
|
|
94,896,688
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six month ended June 30, 2020
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net (loss) gain
|
|
|
447,802,823
|
|
|
|
(87,877,193
|
)
|
|
|
359,925,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of subsidiaries
|
|
|
(384,483,491
|
)
|
|
|
(7,365,097
|
)
|
|
|
(391,848,588
|
)
|
Gain on extinguishment of convertible notes
|
|
|
(148,647,177
|
)
|
|
|
91,891,275
|
|
|
|
(56,755,902
|
)
|
Foreign currency exchange (gain) loss
|
|
|
11,598,132
|
|
|
|
784,620
|
|
|
|
12,382,752
|
|
Fair value change on warrant liability
|
|
|
(123,056
|
)
|
|
|
246,112
|
|
|
|
123,056
|
|
Amortization of discount and interest on convertible notes
|
|
|
6,598,391
|
|
|
|
(3,675,075
|
)
|
|
|
2,923,316
|
|
Change in prepayments and other current assets
|
|
|
(5,781,257
|
)
|
|
|
200,000
|
|
|
|
(5,581,257
|
)
|
Change in accrued expenses and other current liabilities
|
|
|
6,494,048
|
|
|
|
(36,053,797
|
)
|
|
|
(29,559,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(20,349,997
|
)
|
|
|
(41,849,155
|
)
|
|
|
(62,199,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of entrusted loan
|
|
|
(43,009,402
|
)
|
|
|
43,009,402
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(374,538,461
|
)
|
|
|
43,009,402
|
|
|
|
(331,529,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
|
(1,264,825
|
)
|
|
|
(1,160,247
|
)
|
|
|
(2,425,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Six month ended June 30, 2020
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
RMB
|
|
|
RMB
|
|
|
RMB
|
|
Net (loss) gain
|
|
|
447,802,823
|
|
|
|
(87,877,193
|
)
|
|
|
359,925,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of subsidiaries
|
|
|
(384,483,491
|
)
|
|
|
(7,365,097
|
)
|
|
|
(391,848,588
|
)
|
Gain on extinguishment of convertible notes
|
|
|
(148,647,177
|
)
|
|
|
91,891,275
|
|
|
|
(56,755,902
|
)
|
Foreign currency exchange (gain) loss
|
|
|
11,598,132
|
|
|
|
784,620
|
|
|
|
12,382,752
|
|
Fair value change on warrant liability
|
|
|
(123,056
|
)
|
|
|
246,112
|
|
|
|
123,056
|
|
Amortization of discount and interest on convertible notes
|
|
|
6,598,391
|
|
|
|
(3,675,075
|
)
|
|
|
2,923,316
|
|
Change in prepayments and other current assets
|
|
|
(5,781,257
|
)
|
|
|
200,000
|
|
|
|
(5,581,257
|
)
|
Change in accrued expenses and other current liabilities
|
|
|
6,494,048
|
|
|
|
(36,053,797
|
)
|
|
|
(29,559,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(20,349,997
|
)
|
|
|
(41,849,155
|
)
|
|
|
(62,199,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of entrusted loan
|
|
|
(43,009,402
|
)
|
|
|
43,009,402
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(374,538,461
|
)
|
|
|
43,009,402
|
|
|
|
(331,529,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
|
(1,264,825
|
)
|
|
|
(1,160,247
|
)
|
|
|
(2,425,072
|
)
|
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 accompanying consolidated financial
statements have been prepared on a going concern basis. The Group has accumulated deficit of approximately RMB3,027.4 million (US$428.5
million) and total current liabilities exceeded total assets by approximately RMB428.8 million (US$60.7 million) as of June 30,
2020. The Group expects to continue to incur product development and sales and marketing expenses for licensed and proprietary
new games in order to achieve overall revenue growth.
To meet its working capital needs, the Group
is considering multiple alternatives, including, but not limited to, additional equity financing, settlement of secured convertible
notes, launch of new games, and cost controls as outlined below. There can be no assurance that the Group will be able to complete
any such transaction on acceptable terms or otherwise. If the Group is unable to obtain the necessary capital, it will need to
pursue a plan to license or sell its assets, seek to be acquired by another entity, or cease operations.
These factors raise substantial doubt about
the Group’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of asset or liability amounts that might result from the outcome
of this uncertainty.
Additional Equity Financing
In 2020, the Group completed an offering
and raised a net proceed of US$8.1 million. The Group also issued and sold a one-year convertible note and received a net proceed
of US$0.5 million. The Group may continue to do similar equity financing in the future.
In addition, the Group intends to obtain
financial support from Mr. Jun Zhu, CEO and Chairman of the Group, if needed in the future.
Settlement of Secured Convertible Notes
On November 24, 2015, the Group entered into an agreement
with Splendid Days Limited for a private placement of secured convertible notes for gross proceeds of US$40,050,000. This transaction
closed on December 11, 2015. Pursuant to the terms of the agreement, the convertible notes matured in December 2018,
subject to a two-year extension at the discretion of the investor. In March 2019, the Group entered into a deed of settlement
agreement relating to the settlement of convertible notes which matured in December 2018, pursuant to which the convertible
notes should be repaid by May 31, 2019 through the proceeds from the sale of the Group’s subsidiaries that hold office
buildings located at Zhangjiang, Shanghai. On May 29, 2020, the Group entered into a confidential deed of settlement with
Splendid Days Limited and Ark Pacific Associates Limited, according to the deed of settlement, the Group repaid the principal and
interest by cash and by granting ordinary shares of RMB 315.9 million (US$44.6 million) and RMB 53.6 million(US$7.6 million), respectively.
The total repayment amount on outstanding debts including the convertible notes and interest-free loan is approximately RMB 369.5
million (US$52.2 million).
Launch of New Games
In 2020, the Group signed a cooperation agreement with Voodoo,
a French game developer and publisher. The Group and Voodoo will collaborate on the publishing and operation of casual mobile games
in mainland China. The Group will publish and operate two games under this agreement, with an option for a third game for casual
game with In App Purchase (“IAP”) licensed by Voodoo. The Group plans to launch these licensed casual mobile games
in 2021.
Cost Controls
Currently, a significant portion of our cash outflows is attributable
to administrative expenses. The Group has the ability to control the level of discretionary spending on administrative expenses
by implementation of cost savings on non-essential expenses from the day-to-day business operations.
<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 only a majority vote is required to approve Board of Director resolutions, and as the
Group has continuously funded the operation of Red 5, the Group still retained effective control over Red 5. Red 5 remained as
a consolidated entity of the Group as of June 30, 2020.
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
our 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 our 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, Red 5, The9 Interactive, and Red 5 Singapore, is
the RMB. The functional currency of Red 5, The9 Interactive, and Red 5 Singapore, is the United States dollar (“US$”
or “U.S. dollar”), U.S. dollar, and Singapore dollar, respectively. Assets and liabilities of Red 5, The9 Interactive,
and Red 5 Singapore, 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 income (loss) in the consolidated statements
of changes in equity for the years presented.
Transactions denominated in currencies other than functional
currencies, are translated into functional currencies at the exchange rates prevailing at the dates of the transactions. Gains
and losses resulting from foreign currency transactions are included in the consolidated statements of operations and comprehensive
loss. 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) gain in the
consolidated statements of operations and comprehensive loss.
<5> Cash and cash equivalents
Cash and cash equivalents represent cash on hand and highly
liquid investments with a maturity date when acquired of three months or less. As of December 31, 2019 and June 30, 2020,
cash and cash equivalents were comprised primarily of bank deposits where cash is deposited with reputable financial institutions.
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.
<6> Allowance for doubtful accounts
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. The Group determines the allowances for doubtful accounts when facts and circumstances indicate
that the receivable is unlikely to be collected. Allowances for doubtful accounts are charged to general and administrative expenses.
If the financial condition of the Group’s customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
<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.
<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
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Shorter of respective lease term or estimated useful life
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Computer and equipment
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3 to 4 years
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Software
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5 years
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Office furniture and fixtures
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3 years
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Motor vehicles
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5 years
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Office buildings
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10 to 20 years
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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 and the transaction was completed on February 21, 2020.
<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 Accounting Standards Codification (“ASC”)
360-10-45-9 are met:
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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;
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An active program to locate a buyer and other actions required to complete the plan to sell the
asset have been initiated;
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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;
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The asset is being actively marketed for sale at a price that is reasonable in relation to its
current fair value; and
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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.
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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 and the transaction was completed on February 21, 2020.
<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
On January 1, 2018, the Group adopted ASC 606, Revenue
from Contracts with Customers, applying the modified retrospective method to contracts that were not completed as of January 1,
2018. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC 606, while prior period
results are not adjusted.
Revenues are recognized when control of the promised goods or
services is transferred to the Group’s customers, in an amount that reflects the consideration of the Group expects 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.
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.
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.
Deferred revenue 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.
<13> Convertible notes and warrants
Convertible Notes and Beneficial Conversion Feature
(“BCF”)
The Group
issued convertible notes and warrants in December 2015. The Group has 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 the Group’s evaluation, the conversion feature is not considered an embedded
derivative instrument subject to bifurcation as the 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 per the terms of the convertible notes
agreement is below market value. In these instances, the value of the BCF is determined as the intrinsic value of the conversion
feature 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 at the date of issuance. The allocated fair value for the warrants and the value of the BCF are both recorded in
the consolidated financial statements as a debt discount from the face amount of the notes, which is then accreted to interest
expense over the life of the related debt using the effective interest method.
The Group 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 comprehensice (loss) gain of the period of extinguishment.
Warrants
The Group accounts for the detachable warrants
issued in connection with convertible notes under the authoritative guidance on accounting for derivative financial instruments
indexed to, and potentially settled in, a company’s own stock. The Group classifies warrants in its consolidated balance
sheet as a liability which is revalued at each balance sheet date subsequent to the initial issuance. The Group uses the Black-Scholes-Merton
pricing model (the “Black-Scholes Model”) to value the warrants. Determining the appropriate fair-value model and calculating
the fair value of warrants requires considerable judgment. A small change in the estimates used may cause a relatively large change
in the estimated valuation. The estimated volatility of the Group’s common stock at the date of issuance, and at each subsequent
reporting period, is based on historical fluctuations in the Company’s stock price. The risk-free interest rate is based
on United States Treasury zero-coupon issues with a maturity similar to the expected remaining life of the warrants at the valuation
date. The expected life of the warrants is based on the historical pattern of exercises of warrants.
<14> Cost of revenues
Cost of revenues consists primarily of 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.
<15> 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 six months ended June 30, 2019 and 2020, although software products has reached technological
feasibility, total software costs incurred subsequent to reaching technological feasibility amounted to be immaterial and therefore
not capitalized.
For website and internally used software development costs,
the Group expenses all costs that are incurred in connection with the planning and implementation phases of development and costs
that are associated with repair or maintenance of the existing websites and software. Costs incurred in the application and infrastructure
development phase are capitalized and amortized over the estimated product life. Since the inception of the Group, the amount of
internally generated costs qualifying for capitalization has been immaterial and, as a result, all website and internally used
software development costs have been expensed as incurred.
Product development costs consist primarily of outsourced research
and development, 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.
<16> 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.
<17> 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 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.
<18> 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 Group 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.
On January 1, 2019, the effective date of ASC 842, the
Group has no lease assets and lease liabilities to be recognized as the Group has no lease contracts that require transition. There
was no impact to retained earnings at adoption.
<19> 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.
<20> Redeemable noncontrolling interests
Redeemable noncontrolling interests are equity interests of
our 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.
<21> 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 sheet and modifies the presentation
of net income by requiring earnings and other comprehensive income loss to be attributed to controlling and noncontrolling interest.
<22> (Loss) gain per share
Basic (loss) gain per share
is computed by dividing net (loss) gain attributable to the holders of ordinary shares by the weighted average number of ordinary
shares outstanding during the year. Diluted loss per share is calculated by dividing net (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) gain is recorded.
<23> Segment reporting
The Group has one operating segment whose business is developing
and operating online games and related services. The Group’s chief operating decision maker is the chief executive officer,
who reviews consolidated results when making decisions about allocating resources and assessing performance of the Group. The Group
generates its revenues from customers in Greater China, North America, and other areas.
<24> 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, 2019 and June 30, 2020, substantially all of the Group’s cash and cash
equivalents were held by major financial institutions, which management believes are of high credit worthiness.
<26> 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.
<27> Financial instruments
Financial instruments primarily consist of cash and cash equivalents,
investments, accounts receivable, accounts payable, short-term borrowings, warrants and convertible notes. The carrying value of
the Group’s cash and cash equivalents, investments, accounts receivable, accounts payable and short-term borrowings approximate
their market values due to the short-term nature of these instruments. Warrants are recorded in the consolidated balance sheets
based on fair value.
The Company adopted ASU 2016-13 Financial Instruments—Credit
Losses (“ASU 2016-13”) beginning January 1, 2020 by applying the modified retrospective method with the cumulative
effect of initially applying the guidance recognized at the date of initial application. The Group’s adoption of ASU 2016-13
did not have a material impact on the consolidated financial statements.
<28> Recent accounting pronouncements
Income Taxes
In December 2019, the FASB issued ASU 2019-12 - Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 provides an exception to the general methodology for
calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This update also
(1) requires an entity to recognize a franchise tax (or similar tax) that is partially based on income as an income-based
tax and account for any incremental amount incurred as a non-income-based tax, (2) requires an entity to evaluate when a step-up
in the tax basis of goodwill should be considered part of the business combination in which goodwill was originally recognized
for accounting purposes and when it should be considered a separate transaction, and (3) requires that an entity reflect the
effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes
the enactment date. The standard is effective for the Company for fiscal years beginning after December 15, 2020, with early
adoption permitted. The Group is currently evaluating the impact of ASU 2019-12 on its financial position, results of operations,
and cash flow.
3. CONVENIENCE TRANSLATION
The Group, with the exception of its subsidiaries, Red 5, The9
Interactive and Red 5 Singapore, maintains its accounting records and prepares its financial statements in RMB. The U.S. dollar
amounts disclosed in the accompanying financial statements are presented solely for the convenience of the readers at the rate
of US$1.00 = RMB7.0651, 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 June 30, 2020. 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.
A summary of these contractual agreements is as follows:
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1)
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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)
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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.
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3)
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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.
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4)
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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.
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5)
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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.
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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.
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 our 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 our 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.
|
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, 2019
|
|
|
June 30,
2020
|
|
|
June 30,
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Total assets
|
|
|
150,615,709
|
|
|
|
52,566,963
|
|
|
|
7,440,371
|
|
Total liabilities
|
|
|
423,900,573
|
|
|
|
305,203,132
|
|
|
|
43,198,700
|
|
|
|
Six months ended June 30,
|
|
|
|
2019
|
|
|
2020
|
|
|
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Net revenues
|
|
|
100,193
|
|
|
|
465,726
|
|
|
|
65,919
|
|
Net loss
|
|
|
(18,808,288
|
)
|
|
|
(31,563,605
|
)
|
|
|
(4,467,538
|
)
|
The VIEs contributed an aggregate of 39.9% and 100.0% of the
consolidated net revenues for the six months ended June 30, 2019 and 2020, respectively. As of December 31, 2019 and June 30, 2020,
the VIEs accounted for an aggregate of 39.8% and 57.8% , respectively, of the consolidated total assets, and 39.9% and 57.8%, 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.
5. ADVANCES TO SUPPLIERS
Advances to suppliers are as follows:
|
|
December 31, 2019
|
|
|
June 30,
2020
|
|
|
June 30,
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Advance to subscribe tokens
|
|
|
10,094,972
|
|
|
|
-
|
|
|
|
-
|
|
Company registration fee
|
|
|
794,692
|
|
|
|
-
|
|
|
|
-
|
|
Advertising fee
|
|
|
255,259
|
|
|
|
-
|
|
|
|
-
|
|
Financing fee
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
101,685
|
|
|
|
353,499
|
|
|
|
50,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,246,608
|
|
|
|
353,499
|
|
|
|
50,035
|
|
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 RMB14.1 million
(US$2.0 million). The issuer was expected to issue the tokens in April 2020 or to further extend the launch date or enter
into a termination arrangement depending on the development of the events. In July 2019, the
Group received an advance of RMB7.0 million (US$1.0 million)
from a third-party to transfer approximately 2,222,222 tokens to this third-party and the transaction was closed in May 2020
with a gain.
Due to unexpected events to the development for issuance of
tokens by the issuer, the Group has performed an impairment assessment in 2019 to consider on the recoverable amount. The Group
has provided an impairment loss of RMB6.0 million as of December 31, 2019. On May 18, 2020, the Group received a letter
from the third-party company about the termination on issuance of tokens and the Group is to receive a refund amounting to RMB5.9
million (US$0.8 million). The Group has received the refund subsequently in July 2020.
6. PREPAYMENTS AND OTHER CURRENT ASSETS, NET
Prepayments and other current assets are
as follows:
|
|
December 31,
2019
|
|
|
June 30,
2020
(Restated)
|
|
|
June 30,
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Receivable from subscribe tokens
|
|
|
-
|
|
|
|
5,937,415
|
|
|
|
840,386
|
|
Employee advances
|
|
|
1,648,197
|
|
|
|
4,506,262
|
|
|
|
637,820
|
|
Prepayments and deposits
|
|
|
1,488,463
|
|
|
|
2,662,336
|
|
|
|
376,829
|
|
Input VAT recoverable
|
|
|
1,441,700
|
|
|
|
1,441,700
|
|
|
|
204,059
|
|
Refundable withholding tax
|
|
|
1,297,016
|
|
|
|
1,297,016
|
|
|
|
183,581
|
|
Other receivables, net of allowance for doubtful accounts
|
|
|
2,973,158
|
|
|
|
4,961,903
|
|
|
|
702,312
|
|
|
|
|
8,848,534
|
|
|
|
20,806,633
|
|
|
|
2,944,987
|
|
7. ASSETS HELD-FOR-SALE AND LIABILITIES HELD-FOR-SALE
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$69.8 million). These subsidiaries hold land use rights and office buildings located at Zhangjiang,
Shanghai. The sale of the subsidiaries was completed on February 21, 2020 with a gain on disposal amounting to RMB384.5 million
(US$54.4 million).
8. INVESTMENTS
The Group’s investments comprise
the following:
|
|
December 31, 2019
|
|
|
June 30,
2020
|
|
|
June 30,
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
( Note 3)
|
|
Investments accounted for under equity method:
|
|
|
|
|
|
|
|
|
|
|
|
ZTE9 Network Technology Co., Ltd., Wuxi (“ZTE9”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
System Link Corporation Limited (“System Link”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Shanghai Big Data Cultures & Media Co., Ltd. (“Big Data”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Maxline Holdings Limited (“Maxline”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Leading Choice Holdings Limited (“Leading Choice”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments accounted for under cost method:
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai Institute of Visual Art of Fudan University (“SIVA”)
|
|
|
10,000,000
|
|
|
|
-
|
|
|
-
|
|
Smartposting Co, Ltd. (“Smartposting”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Beijing Ti Knight Network Technology Co., Ltd. (“Beijing Ti Knight”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Shanghai The9 Education Technology Co., Ltd. (“The9 Education Technology”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Shanghai Ronglei Culture Communication Co., Ltd. (“Shanghai Ronglei”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Plutux Limited (“Plutux”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
Zhenjiang Kexin Power System Design and Research Co., Ltd. (“Zhenjiang Kexin”)
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,000,000
|
|
|
|
-
|
|
|
-
|
|
<1>SIVA
The Group has provided an impairment of RMB10.0 million (US$1.4
million) for the investment in SIVA after assessed the recoverable amount of the investment for the six months ended June 30,
2020.
9. LEASES
The Group has operating leases primarily
for office space, parking lots and warehouse after relocation of their principal office in August 2019. Operating lease ROU
assets and operating lease liabilities are recognized based on the present value of the lease payments over the lease term at commencement
date.
As the leases do not provide an implicit
rate, an incremental borrowing rate is used based on the information available at commencement date, to determine the present value
of lease payments. The incremental borrowing rates approximate the rate the Group would pay to borrow in the currency of the lease
payments for the weighted-average life of the lease.
The operating lease ROU assets also include
any lease payments made prior to lease commencement and excludes lease incentives and initial direct costs incurred if any. Lease
terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease
expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Operating lease costs are recognized on
a straight-line basis over the lease term.
10. SHORT-TERM BORROWINGS
Short-term borrowings are as follows:
|
|
December 31,
2019
|
|
|
June 30,
2020
(Restated)
|
|
|
June 30,
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Pledged loan
|
|
|
82,645,089
|
|
|
|
84,272,527
|
|
|
|
11,928,002
|
|
Interest-free loan
|
|
|
34,881,000
|
|
|
|
35,397,500
|
|
|
|
5,010,191
|
|
Long-term borrowing due within one year
|
|
|
31,624,560
|
|
|
|
-
|
|
|
|
-
|
|
Less: borrowing classified as held for sale
|
|
|
(31,624,560
|
)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
117,526,089
|
|
|
|
119,670,027
|
|
|
|
16,938,193
|
|
In June 2016, Asian Development borrowed
a total of HK$92.3 million from a financial services company at an annual interest rate of 2% for a term of 24 months, which is
secured by a pledge of 417,440,000 shares of L&A. The outstanding balance as of June 30, 2020 is RMB90.6 million (US$12.8
million), which includes RMB6.3 million (US$0.9 million) of interest payable and the pledged loan was due in June 2018. Asian
Development has defaulted the loan in June 2016 due to a sharp decline in share price of L&A.
In December 2015, the Group entered an entrusted bank loan
agreement, amounted to RMB31.6 million (US$4.0 million), with a subsidiary of the investor holding the convertible notes and China
Merchants Bank as entrustment bank. The borrowing agreement matured in December 2018, with the annual interest rate of 12%
continuing after maturity of the loan. The loan is secured by the Group’s office buildings. In December 2019, the Group
signed a confirmation letter with the lender regarding settlement. According to the confirmation letter, if the total amount of
principal and interest of the entrusted bank loan amounted to RMB43.0 million is repaid before December 31, 2019, the overdue
interest since December 2018 will be exempted. The parties subsequently agreed to extend the payment period from December 31,
2019 to February 29, 2020. Both the principal and interest of the entrusted bank loan was repaid on February 11, 2020
and the overdue interest has been exempted.
In March 2019, the Group entered into a joint venture agreement
with F&F, to establish a joint venture in China to manufacture and distribute electric vehicles designed and developed by F&F
with a committed capital investment amounting to US$600.0 million. The Group made the initial deposit of US$5.0 million to F&F
in April 2019 through an interest-free loan granted from Ark Pacific Associates Limited, an entity affiliated with the Group’s
former president, for a period of one year. The loan was due on March 31, 2020. On May 29, 2020, the Group entered into a confidential
deed of settlement with Splendid Days Limited and Ark Pacific Associates Limited, according to the deed of settlement, the Group
repaid the principal and interest by cash and by granting ordinary shares of RMB 315.9 million (US$44.6 million) and RMB 53.6 million(US$7.6
million), respectively. The total repayment amount on outstanding debts is approximately RMB 369.5 million (US$52.2 million). Ipon
the settlement of the convertible notes and the satisfaction of the conditions set forth in the private settlement deed, the interest-free
loan will be waived.
11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities
are as follows:
|
|
December 31,
2019
|
|
|
June 30,
2020
|
|
|
June 30,
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Funds raised for CrossFire New Mobile Game
|
|
|
57,499,910
|
|
|
|
56,453,454
|
|
|
|
7,990,468
|
|
Professional services
|
|
|
11,844,738
|
|
|
|
14,725,865
|
|
|
|
2,084,311
|
|
Staff cost related payables
|
|
|
9,851,024
|
|
|
|
7,779,131
|
|
|
|
1,101,065
|
|
Office expenses
|
|
|
3,543,495
|
|
|
|
40,322
|
|
|
|
5,707
|
|
Other payables
|
|
|
3,540,000
|
|
|
|
1,840,000
|
|
|
|
260,435
|
|
Utility fees
|
|
|
1,646,394
|
|
|
|
-
|
|
|
|
-
|
|
Product development services
|
|
|
906,906
|
|
|
|
3,298,512
|
|
|
|
466,874
|
|
Others
|
|
|
4,308,376
|
|
|
|
2,210,651
|
|
|
|
312,898
|
|
Total
|
|
|
93,140,843
|
|
|
|
86,347,935
|
|
|
|
12,221,758
|
|
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 June 30, 2020, the Group had raised RMB57.5 million (US$8.1 million). The Group does not
plan to finance the remaining RMB100.0 million (US$14.2 million) from the planned fund raising arrangement, and due to non-recovery
of the advance financing fee, the Group fully impaired the advance financing fee in 2018. The Group has been cooperating with a
third-party company for development and future operation of CrossFire New Mobile Game. The launch of the game has been delayed
due to various reasons including license (“Banhao”) from GAPPRPT. Inner Mongolia Culture Assets and Equity Exchange
claims refund of RMB57.5 million (US$8.1 million), which the Group has previously raised through Inner Mongolia Culture Assets
and Equity Exchange to finance the early phase development of CrossFire New Mobile Game with compensation of interest on the principal
financed. 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. In October 2020, Intermediate Court of
Changsha City, Hunan Province issued a decision to reject all claims against Wuxi Qudong and Shanghai IT. Appeal claim has not
been received by the original defendants.
12. 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$28.4 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$3.7 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$24.1 million) as of both December 31, 2019
and June 30, 2020.
13. CONVERTIBLE NOTES
On
November 24, 2015, the Group entered into an agreement with Splendid Days Limited for a private placement of secured
convertible notes and warrants for gross proceeds of US$40,050,000. The transaction closed on December 11, 2015 and the
Group has recognized an amount of US$8.1 million as BCF from the convertible notes. Pursuant to the terms of the agreement,
the convertible notes shall mature in December 2018, subject to an extension for two years at the discretion of the
investor. The convertible notes accrue interest at a rate of 12% per annum and are payable upon maturity of the notes.
According to the Schedule 13D filed by Splendid Days Limited on March 5, 2018, Splendid Days Limited’s equity was
transferred from Ark Pacific Special Opportunities Fund I, L.P., an entity affiliated with the Group's former president to
Truth Beauty Limited. On April 9,2020, Splendid Days Limited’s equity was transferred from Truth Beauty Limited to
Arthur Lau. The notes are secured by the equity interest of the Group’s former subsidiaries (The9 Computer and C9I
Shanghai), and the Group’s former office buildings. Splendid Days Limited is entitled to put the convertible notes to
the Group upon a change in control and upon an event of default. The Group has entered into a deed of settlement with the
Splendid Days Limited on March 12, 2019 wherein the Group will proceed to dispose of office buildings and use the
proceeds to repay both convertible notes and the entrusted bank loan. Annual interest rate on the loan remained at 12% up to
settlement date. In September 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$70.0
million). These subsidiaries hold land use rights and office buildings located at Zhangjiang, Shanghai. The transaction was
completed on February 21, 2020. On May 29, 2020, the Group entered into a confidential deed of settlement with
Splendid Days Limited, according to the settlement, the Group repaid the principal and interest by cash and by granting
ordinary shares of RMB315.9 million (US$44.6 million) and RMB53.6 million (US$7.6 million), respectively to repay the
outstanding debts including the convertible notes and interest-free loan. The total repayment amount is approximately RMB
369.5 million (US$52.2 million). As of June 30, 2020, the Group has made repayments to Splendid Days Limited on
convertible notes with no outstanding balance and the ordinary shares issued for repayment are with lock-up period of six
months then convert into unrestricted and freely tradeable ADSs. For the extinguishment of the convertible notes, the
intrinsic value of the BCF as of extinguishment date was determined as nil and all the reacquisition price allocated to the
convertible notes. The Group has recorded a gain on extinguishment of convertible notes amounting to RMB56.8 million (US$8.0
million).
On February 3,
2020, the Group entered into a convertible promissory note with Ilaid Research and Trading, L.P., for convertible notes of US$
500,000 with interest at a rate of 6% per annum. The convertible note was subsequently repaid off in October 2020.
14. 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.
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. Only Mr. Jun Zhu and Incsight Limited (“Incsight”)
hold Class B ordinary shares. As of June 30, 2020, there were 162,789,702 ordinary shares issued or outstanding, being
the sum of 153,597,691 Class A ordinary shares and 9,192,011 Class B ordinary shares.
15. SHARE-BASED COMPENSATION
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.
16. RELATED PARTY TRANSACTIONS AND
BALANCES
Transaction with equity investee
Total amount due from ZTE9 for outstanding
loans was RMB1.0 million and RMB1.0 million (US$0.1 million) as of December 31, 2019 and June 30, 2020, respectively.
The Group charged service fees to Big Data
of RMB 0.01 million and nil for the six months ended June 30, 2019 and 2020, respectively. Total amount due from Big Data
was RMB0.1 million and RMB0.1 million (US$0.01 million) as of December 31, 2019 and June 30, 2020, respectively.
Transaction with Mr. Jun Zhu
Mr. Jun Zhu, the chairman and chief
executive officer, provided loans of RMB16.1 million and nil to the Group in 2019 and 2020, respectively. The loans were interest-free
and the outstanding balance of RMB63.2 million and RMB44.1 million (US$6.2 million) remained as of December 31, 2019 and June 30,
2020, respectively.
In May 2019, the issued and outstanding
ordinary shares then held by Incsight, which is wholly owned by Mr. Jun Zhu, and the issued and outstanding ordinary shares
then held by Mr. Jun Zhu himself, were re-designated and re-classified as Class B ordinary shares. All other ordinary
shares then issued and outstanding were re-designated and re-classified as Class A ordinary shares. On the same date, the
Company amended and restated then effective Amended and Restated Memorandum of Association and Articles of Association in their
entirety and adopted the Second Amended and Restated Memorandum and Articles of Association which reflect, among other things,
the changes to the capital structure of the Company. As a result of such changes, Mr. Jun Zhu holds the majority of our outstanding
voting power and we became a “controlled company” as defined under Nasdaq Stock Market Rules.
Transaction with Comtec
In June 2019, the Group entered into a share purchase agreement
with Comtec Windpark Renewable (holdings) Co., Ltd. ("Comtec"), a wholly-owned subsidiary of Comtec Solar Systems Group
Limited (SEHK: 00712) (“Comtec Group”), an entity affiliated with Kwok Keung Chau, independent director of the Company.
Pursuant to the share purchase agreement, the Company has issued 3,444,882 Class A ordinary shares to purchase 9.9% equity interest
in Zhenjiang Kexin, a lithium battery management system and power storage system supplier.
17. LOSS PER SHARE
Loss per share is calculated as follows:
|
|
For the six months
ended June 30,
2019
|
|
|
For the six months
ended June 30,
2020
(Restated)
|
|
|
For the six months
ended June 30,
2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to ordinary shareholders before change in redeemable noncontrolling interest
|
|
|
(40,486,287
|
)
|
|
|
362,696,340
|
|
|
|
51,336,335
|
|
Change in redeemable noncontrolling interest
|
|
|
(10,497,201
|
)
|
|
|
(738,246
|
)
|
|
|
(104,492
|
)
|
Net loss attributable to ordinary shareholders
|
|
|
(50,983,488
|
)
|
|
|
361,958,094
|
|
|
|
51,231,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss per share – weighted-average shares outstanding
|
|
|
84,283,464
|
|
|
|
115,876,017
|
|
|
|
115,876,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic and diluted
|
|
|
(0.60
|
)
|
|
|
3.12
|
|
|
|
0.44
|
|
The Company had 13,213,978 and 25,063,978 stock options, warrants
and non-vested shares outstanding as of December 31, 2019 and June 30, 2020, 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.
18. NONCONTROLLING INTEREST
As of June 30, 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 six months ended June 30, 2019 and 2020.
|
|
June 30, 2019
|
|
|
June 30, 2020
(Restated)
|
|
|
June 30, 2020
(Restated)
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
(Note 3)
|
|
Net loss attributable to The9 Limited
|
|
|
(50,983,488
|
)
|
|
|
361,958,094
|
|
|
|
51,231,843
|
|
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 (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change from net loss attributable to The9 Limited and transfers to noncontrolling interests
|
|
|
(50,983,488
|
)
|
|
|
361,958,094
|
|
|
|
51,231,843
|
|
|
(1)
|
In June 2016, the Group completed a share exchange transaction with L&A and certain other shareholders of Red 5, whereby
the Group exchanged approximately 30.6% equity interest (on a fully-diluted basis) owned in Red 5 for a total of 723,313,020 (after
a one-to-five stock split) of newly issued shares of L&A, after deducting a 6% of total shares received (769,481,940 shares)
for the payment of a service fee to a third-party consultant. As a result, the percentage of noncontrolling interest in Red 5 changed
from 10.4% to 58.1%, after deducting shares of Series B redeemable convertible preferred shares (“SBPS”) from
total shares of Red 5.
|
19. REDEEMABLE NONCONTROLLING INTEREST
In January 2014, Red 5 issued 27,438,952 SBPS to a third-party
investor, Shanghai Oriental Pearl Culture Development Co., Ltd., (“Oriental Pearl”), for an aggregate consideration
of RMB118.3 million (US$16.7 million). In conjunction with the issuance of SBPS, Oriental Pearl also purchased 5,948,488 common
shares of Red 5 from two executives of Red 5 at the same per share price as the per share price of SBPS for an aggregate consideration
of RMB25.6 million (US$3.6 million). The purchase price for these common shares was determined to be less than fair value as the
transaction was contemplated in conjunction with the issuance of the SPBS. The difference between the purchase price and fair value
of SBPS as determined by the Group with the assistance of an independent valuation firm, amounted to RMB131.3 million (US$18.6
million), was recognized as a compensation paid to the two executives in the amount of RMB13.0 million (US$1.8 million).
Due to share exchange transaction with L&A in 2016, a 37%
share of SBPS was owned by L&A. As of June 30, 2020, the holders of SBPS were as follows:
Holder
|
|
December 31,
2019
|
|
|
June 30,
2020
|
|
|
|
Number of
Shares
|
|
|
Number of
Shares
|
|
|
|
|
|
|
|
|
|
|
L&A International Holdings Limited
|
|
|
10,180,553
|
|
|
|
10,180,553
|
|
Shanghai Oriental Pearl Culture Development Co., Ltd.
|
|
|
17,258,399
|
|
|
|
17,258,399
|
|
As of 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.
The key terms of the SBPS are as follows:
Conversion
Each SBPS may be converted at any time into common shares at
the then applicable conversion price. The initial conversion ratio is 1:1, subject to adjustment in the event of (i) share
splits, share combinations, share dividends or distribution, other dividends, recapitalizations and similar events, or (ii) issuance
of common shares at a price per share less than the conversion price in effect on the date of or immediately prior to such issuance.
In that case, the conversion price shall be reduced concurrently to the subscription price of such issuance.
The SBPS shall be automatically converted into common shares
immediately prior to the consummation of a public offering of Red 5’s shares wherein gross proceeds are at least US$30,000,000,
immediately following the public offering (the “Qualifying IPO”).
The conversion option can only be settled by issuance of common
shares except that fractional shares may be settled in cash.
Dividends
The holder of each share of SBPS shall be entitled to receive
dividends at the rate per share of $0.038237 per annum if and when a dividend is declared on common shares. The preferred shares
participate in dividends on an as-converted basis and must be paid prior to any payment on common shares.
Upon conversion, any declared or accrued but unpaid dividends
will be converted into common shares at the same applicable conversion price.
Redemption
At any time on or after April 1, 2017, if requested by
at least 50% of the holders of SBPS then outstanding, Red 5 shall redeem all of the outstanding SBPS at a redemption price equal
to 200% of the issuance price in three equal annual installments. The full amount of the redemption price due but not paid shall
accrue interest daily at a rate of 10% per annum from the issuance date of SBPS.
Voting
Each SBPS has voting rights equivalent to the number of common
shares to which it is convertible at the record date. The holders of SBPS shall vote together with the common shareholders, and
not as a separate class or series, on all matters put before the shareholders.
Liquidation
The holders of SBPS have preference over holders of common shares
with respect to distribution of assets upon voluntary or involuntary liquidation of Red 5. The holders of SBPS shall be entitled
to receive 100% of the original issue price (“preferred liquidation”). The holders of SBPS are also entitled to distribution
of remaining assets from preferred liquidation, along with other shareholders, while the total distribution entitled to the holders
of SBPS should not exceed 200% of the original issue price.
A reconciliation of redeemable noncontrolling interest is as
follows:
|
|
For the six months
ended June 30,
2019
|
|
|
For the six months
ended June 30,
2020
|
|
|
For the six months
ended June 30,
2020
|
|
|
|
RMB
|
|
|
RMB
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
(Note 3)
|
|
Redeemable noncontrolling interest opening balance
|
|
|
341,074,539
|
|
|
|
349,046,548
|
|
|
|
49,404,332
|
|
Net loss attributable to redeemable noncontrolling interest
|
|
|
(2,525,192
|
)
|
|
|
(738,246
|
)
|
|
|
(104,492
|
)
|
Change in redeemable noncontrolling interest
|
|
|
10,497,201
|
|
|
|
738,246
|
|
|
|
104,492
|
|
Redeemable noncontrolling interest ending balance
|
|
|
349,046,548
|
|
|
|
349,046,548
|
|
|
|
49,404,332
|
|
20. 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$69.8 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$55.5 million).
21. COMMITMENTS
AND CONTINGENCIES
21.1 Other operating commitments
In October 2016, the Group had raised
RMB57.5 million (US$8.1 million), and the Group planned to raise an additional RMB100.0 million (US$14.2 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. In August 2016, the Group granted a third-party consultant 1,000,000
options to acquire shares of the Group as payment for consulting services related to the RMB157.5 million (US$22.3 million) financing
plan of CrossFire Mobile Game with Inner Mongolia Culture Assets and Equity Exchange. The options will vest in accordance with
the schedule of the actual funding to be received. In October 2016, 365,079 options were vested after the Group received the
first funding of RMB57.5 million (US$8.1 million). The Group continues to cooperate with a third-party company for development
and operation of CrossFire Mobile Game. The Group plans to apply for a license (“Banhao”) from GAPPRPT for CrossFire
New Mobile Game as soon as development of the game is finalized to launch the game. The Group does not plan to finance the remaining
RMB100.0 million (US$14.2 million) from the planned fund raising arrangement, and due to non-recovery of the advance financing
fee, the Group fully impaired the advance finance fee in 2018. In January 2019, total 1,000,000 options granted to the third-party
consultant were canceled. 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 June 2017, Shanghai IT has entered
into an investment agreement with the shareholders of Beijing Ti Knight where Shanghai IT will invest a total of RMB9.0 million
(US$1.3 million) in Beijing Ti Knight. As of December 31, 2019, Shanghai IT has invested RMB4.9 million (US$0.7 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$1.0 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$0.8
million). Hence, as of June 30, 2020, 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$1.0 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$0.8 million). As of June 30,
2020, the agreements have not been terminated but the related outsourcing development of the related game has been transferred
to a third-party company.
In 2019, Jiu Gang has signed a joint venture
agreement with Shenzhen EN-plus Technologies Co., Ltd. ("EN+"), an electric vehicle charging equipment company incorporated
in the PRC, to establish a joint venture to engage in sales of new energy electric vehicle charging equipment, investment, construction
and operation of charging stations, and provision of operational services for urban charging equipment and platforms for electric
vehicles. According to the joint venture agreement, the Group will make a cash investment of RMB50.0 million (US$7.1 million) in
the joint venture in consideration for which it will receive 80% equity interest in the joint venture, and EN+ will contribute
its current and future proprietary electric vehicle charging technology to the joint venture in consideration for which it will
receive a 20% equity interest of the joint venture. As of June 30, 2020, the joint venture has not been commenced and no progress
on the joint venture.
In March 2019, the Group entered into
a joint venture agreement with F&F to establish a joint venture to manufacture, market, distribute and sell electric cars in
the PRC. Under the terms of joint venture agreement, the Group will make capital contribution of up to US$600.0 million in three
equal installments to the joint venture, and F&F will make contributions including its use rights for a piece of land in the
PRC to manufacture electric cars and will grant the joint venture an e-xclusive license to manufacture, market, distribute and
sell certain F&F’s car models and other potential selected car models in the PRC, in each case subject to the satisfaction
of certain conditions, such as establishment of the joint venture and funding arrangements. The Group has paid the initial deposit
of US$5.0 million in April 2019. In November 2020, the Group has converted initial deposit of US$5.0 million 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 at a pre-agreed conversion price set forth in the joint venture agreement.
21.2 Contingencies
In June 2016, Asian Development borrowed
HK$92.3 million (US$11.9 million) from a financial services company at an annual interest rate of 2% for a term of 24 months. This
loan is secured by 417,440,000 shares of L&A. Pursuant to the financing agreement (“Agreement”), such loan is considered
to be in default since the market price of the pledged shares had fallen below the collateralized stock price by more than 35%
for ten consecutive trading days. Asian Development had not made any remediation pursuant to the Agreement. Upon default, the lender
shall be entitled to foreclose the pledged shares and become the legal and beneficial owner of the pledged shares. If the market
value of the pledged shares cannot cover the total outstanding amount owed by Asian Development to the lender under the Agreement,
the lender may claim against Asian Development to recover any outstanding amounts under the Agreement, in addition to foreclosure
of the pledged shares as mentioned above. In June 2020, petition to wind-up Asian Development was submitted by New Star International
Development Limited to the High Court of Hong Kong. On September 9, 2020, the High Court of Hong Kong issued the order to
wind-up Asian Development and appointed provisional liquidator to close remaining corporate affairs within the statutory timeframe.
Asian Development will be de-consolidated from the Group after the completion of liquidation.
Red 5 and its affiliates are currently
in dispute with Qihoo 360 and its affiliates regarding System Link and Firefall and various legal proceedings have been initiated
and are ongoing in connection with such dispute since 2016 where litigations have been filed with both Intellectual Property Court
of Shanghai and Hong Kong International Arbitration Centre. In May 2019, the Group has entered into an out-of-court settlement
with Qihoo 360 where both the Group and Qihoo 360 agreed to withdraw litigations filed in relation to the dispute over Firefall
and to liquidate the joint venture, System Link. The Group has withdrew all the claims against Qihoo 360 and settled the litigation
proceedings in Shanghai in May 2019. In August 2019, the Group has received a refund from Intellectual Property Court
of Shanghai on court acceptance fee paid in 2016 and recognized other income amounting to RMB3.8 million (US$0.5 million) in 2019.
As of June 30, 2020, the Group is implementing the mediation agreement with Qihoo 360 to settle the arbitration proceeding
in Hong Kong.
Shanghai Oh Yeah Information Technology Co., Ltd. (“Shanghai
Oh Yeah”) filed several related civil claims against joint defendants including Shanghai IT, ZTE9 and a third-party defendant,
regarding copy-right infringements of their intellectual property to the Intellectual Property Court of Shanghai with a total aggregated
claim amount of RMB3.0 million (US$0.4 million). On July 28, 2020, the Intellectual Property Court of Shanghai granted the
claims withdrawal request from Shanghai Oh Yeah and underlying legal proceeding was dismissed.
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 June 30, 2020. 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.
On May 29, 2020, the Group entered into a confidential
settlement deed with Splendid Days Limited and Ark Pacific Associates Limited, according to the deed of settlement, the Group repaid
part of the principal and interest by granting ordinary shares. Class A ordinary shares issued are subject to certain lock-up
conditions and the number of Class A ordinary shares held or to be held by Splendid Days Limited may also be subject to quantitative
adjustments based on the market value of these shares, as set forth in the deed of settlement.
22. SUBSEQUENT EVENTS
In April 2020, Inner Mongolia Culture Assets and Equity
Exchange filed a civil claim against Wuxi Qudong and Shanghai IT to recover RMB57.5 million (US$8.1 million) of principal and interest
that it previously raised to finance the early phase development of CrossFire New Mobile Game. The Group is cooperating with a
third-party company for the development and operation of CrossFire Mobile Game. The Group plans to apply for a license (“Banhao”)
from GAPPRPT for CrossFire New Mobile Game as soon as the development of the game is finalized. In October 2020, Intermediate
Court of Changsha City, Hunan Province has issued a decision to reject all claims against Wuxi Qudong and Shanghai IT. As of issuance
date of these condensed interim financial consolidated statements, no appeal claim being file by the original defendants.
In September 2020, the Group has issued 1,500,000 Class A
ordinary shares (equivalent to 500,000 ADSs) to a third party consultant as share incentive awards for his services to us pursuant
to our Eighth Amended and Restated 2004 Stock Option Plan. His services were successfully performed on facilitation of business
transaction with Voodoo, a French game developer and publisher, to cooperate on the publishing and operations of casual games in
China. In September 2020, the Group has issued 1,575,000 Class A ordinary shares, equivalent to 525,000 ADS to a third
party consultant as share incentive awards for his services to us pursuant to our Eighth Amended and Restated 2004 Stock Option
Plan. His services were successfully performed in connection with share sale and purchase of Leading Choice Holdings Limited.
In June 2020, the Group entered into a definitive agreement
with a third party to sell the shares in Leading Choice Holdings Limited for a consideration of US$25,000. The transaction was
closed in July 2020.
In October 2020, the Company issued 23,500,000 ADS and
warrants (the “Warrants”) to purchase 23,500,000 ADSs at a combined offering price of US$0.37 for one ADS and one Warrant
to purchase one ADS. The ADSs and the Warrants were issued and sold to investors in a combination of one ADS and one Warrant to
purchase one ADS, and are immediately separated upon issuance. Number of ADS and Warrants sold was subsequently adjusted based
on the change of the ratio of the ADS to the Class A ordinary shares from one ADS representing three Class A ordinary
shares to one ADS representing thirty Class A ordinary shares.
In October 2020 the Company issued additional 3,525,000
Warrants upon partial exercise of the underwriter’s 45-day option to purchase up to additional 3,525,000 ADSs and/or up to
additional 3,525,000 Warrants, at the offering price less discounts and commissions.
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, 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, including an upfront payment of US$3.0
million that the Group has paid in September 2020.
On November 12, 2020, the Company
received a letter from the Listing Qualifications Department of Nasdaq, notifying us that the Company 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, the Company a compliance period of
180 calendar days, or until May 11, 2021, to regain compliance with Nasdaq’s minimum MVLS requirement.
Effective October 19, 2020, the Company
has effected a change of the ratio of the ADS to the 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 the Class A
ordinary shares had no impact on the 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 the 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 originally 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.
In November 2020, we have issued 3,040,050 Class A
ordinary shares to Thurgau Limited to settle outstanding portion of their service fee in connection with sale transaction entered
into with Kapler Pte. Ltd., a third-party, to sell three subsidiaries which hold land use rights and office buildings located at
Zhangjiang, Shanghai.
In November 2020, the Group has converted the initial deposit
of US$5.0 million, which the Group paid to F&F through an interest-free loan from Ark Pacific Associates Limited in April 2019,
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 at a pre-agreed conversion price set forth in the joint venture agreement.
In January 2021, the Company entered into
a share subscription and warrant purchase agreement with the holding entities of several investors in the cryptocurrencies mining
industry based on the pre-agreed legally-binding term sheet. Pursuant to the Purchase Agreement, the Company 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 2020.
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.
In February 2021, the Company 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 the Company’s at an initial conversion price of US$14 per ADS, each ADS representing thirty Class A
ordinary shares, subject to adjustment. Payment of the redemption amount could be in cash or our ADSs, provided that any redemption
made in cash which exceed half of the original principal amount will be subject to a ten percent (10%) premium. The Company has
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, the Company have the right to repurchase the remaining Class A ordinary shares held by Streeterville that are unsold at
US$0.0001 per share.
In February 2021 the Company 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 the Company 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.
In February 2021, the Company 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, the Company 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 have already been 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 January 2021, the Company entered into a share subscription
and warrant purchase agreement with several investors in the cryptocurrencies mining industry based on the pre-agreed legally-binding
term sheet. Pursuant to the Purchase Agreement, the Company 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 2020. 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.
In February 2021, the Company 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. 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.
In the event the principal amount and interest accrued for the convertible note issued to Streeterville are fully repaid, the Company
have the right to repurchase the remaining Class A ordinary shares held by Streeterville that are unsold at US$0.0001 per share.
In February 2021 the Company 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 the Company 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.
In February 2021, the Company 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, the Company 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 have already been 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).
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 6. INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
Cayman Islands law
does not limit the extent to which a company’s 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 Second Amended
and Restated Memorandum and Articles of Association provide that we shall indemnify our directors and officers (each an indemnified
person) against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such
indemnified person, 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 such indemnified person in defending (whether successfully or otherwise) any civil proceedings concerning our company or its
affairs in any court whether in the Cayman Islands or elsewhere.
Pursuant to the indemnification
agreements the form of which is filed as Exhibit 10.3 to this registration statement, we agree to indemnify our directors and executive
officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being
such a director or officer.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to
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.
ITEM
7. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three
years, we have issued the following securities. We believe that each of the following issuances was exempt from registration under
the Securities Act pursuant to Section 4(2) of the Securities Act regarding transactions not involving a public offering
or in reliance on Regulation S under the Securities Act regarding sales by an issuer in offshore transactions. No underwriters
were involved in these issuances of securities.
Purchaser
|
|
Date of Sale or
Issuance
|
|
Number of
Securities
|
|
Consideration
|
Ordinary Shares
|
|
|
|
|
|
|
Red Ace Limited
|
|
January 26, 2018
|
|
3,571,429(1)
|
|
US$3,357,143
|
Leading Choice Holding Limited
|
|
August 31, 2018
|
|
21,000,000(1)
|
|
US$8,750,000
|
Plutux Labs Limited
|
|
September 3, 2018
|
|
21,000,000(1)
|
|
US$10,710,000
|
Huge Profit Atlantic Inc.
|
|
September 4, 2018
|
|
1,200,000
|
|
Past services to us
|
Jun Zhu
|
|
September 4, 2018
|
|
15,000,000(2)(3)
|
|
Past and future services to us
|
Certain directors, officers and consultant as a group
|
|
September 4, 2018
|
|
15,000,000(1)(3)
|
|
Past and future services to us
|
Class A Ordinary Shares
|
|
|
|
|
|
|
ABMP Consultants Limited
|
|
May 24, 2019
|
|
300,000
|
|
Past services to us
|
Comtec Renewable Energy Group Limited
|
|
June 12, 2019
|
|
3,444,882
|
|
US$1,504,265
|
Iliad Research and Trading, L.P.
|
|
February 3, 2020
|
|
3,300,000
|
|
US$500,000(4)
|
Splendid Day Limited
|
|
June 12, 2020
|
|
32,400,000
|
|
Settlement of Convertible Notes of US$7.6 million
|
Certain directors, officers and consultant as a group
|
|
June 17, 2020
|
|
29,100,000
|
|
Past and future services to us
|
Thurgau Limited
|
|
November 17, 2020
|
|
3,040,050
|
|
Settlement of service fee of US$1.6 million
|
JPKONG Ltd.
|
|
February 2, 2021
|
|
3,603,600
|
|
US$444,324
|
Qifeng Ltd.
|
|
February 2, 2021
|
|
1,801,800
|
|
US$222,162
|
Luckylily Ltd.
|
|
February 2, 2021
|
|
900,900
|
|
US$111,081
|
Root Grace Ltd.
|
|
February 2, 2021
|
|
1,801,800
|
|
US$222,162
|
Streeterville Capital LLC
|
|
February 2, 2021
|
|
10,000,000
|
|
US$5,000,000(5)
|
Zhifang Cai
|
|
February 7, 2021
|
|
7,042,950
|
|
US$2.6 million worth of cryptocurrencies mining machines
|
Peng Chen
|
|
February 7, 2021
|
|
7,128,240
|
|
US$2.7 million worth of cryptocurrencies mining machines
|
Sencheng Jin
|
|
February 7, 2021
|
|
7,042,770
|
|
US$2.6 million worth of cryptocurrencies mining machines
|
Yadong Shao
|
|
February 7, 2021
|
|
1,951,380
|
|
US$0.7 million worth of cryptocurrencies mining machines
|
Peng Yao
|
|
February 7, 2021
|
|
3,673,020
|
|
US$1.4 million worth of cryptocurrencies mining machines
|
Create Pennant Holdings Limited
|
|
February 22, 2021
|
|
4,013,580
|
|
US$5.0 million
|
Tujia Ltd
|
|
February 22, 2021
|
|
3,210,870
|
|
US$4.0 million
|
Koikoo Ltd
|
|
February 22, 2021
|
|
1,204,080
|
|
US$1.5 million
|
Wayne & Elizabeth Yao Ltd.
|
|
February 22, 2021
|
|
802,710
|
|
US$1.0 million
|
Zhifang Cai
|
|
March 8, 2021
|
|
353,100
|
|
US$274,823 worth of cryptocurrencies mining machines
|
Peng Chen
|
|
March 8, 2021
|
|
2,490,780
|
|
US$1.9 million worth of cryptocurrencies mining machines
|
Sencheng Jin
|
|
March 8, 2021
|
|
353,100
|
|
US$274,823 worth of cryptocurrencies mining machines
|
Shixuan Wang
|
|
March 8, 2021
|
|
436,860
|
|
US$340,023 worth of cryptocurrencies mining machines
|
Na Zhang
|
|
March 8, 2021
|
|
198,990
|
|
US$154,875 worth of cryptocurrencies mining machines
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
Certain employees and consultants as a group
|
|
January 24, 2018
|
|
Options to purchase 50,000 Class A ordinary shares, which are outstanding as of the date of this prospectus
|
|
Past and future services to us
|
|
|
|
|
|
|
|
Convertible Note
|
|
|
|
|
|
|
Iliad Research and Trading, L.P.
|
|
February 3, 2020
|
|
Principal amount of US$500,000
|
|
US$500,000(4)
|
Streeterville Capital LLC
|
|
February 2, 2021
|
|
Principal amount of US$5,000,000
|
|
US$5,000,000(5)
|
Streeterville Capital LLC
|
|
March 17, 2021
|
|
Principal amount of US$20,000,000
|
|
US$20,000,000
|
Warrants
|
|
|
|
|
|
|
JPKONG Ltd.
|
|
February 2, 2021
|
|
Warrants to purchase an aggregate of up to 92,396,372 Class A ordinary shares
|
|
N/A
|
Qifeng Ltd.
|
|
February 2, 2021
|
|
Warrants to purchase an aggregate of up to 46,198,188 Class A ordinary shares
|
|
N/A
|
Luckylily Ltd.
|
|
February 2, 2021
|
|
Warrants to purchase an aggregate of up to 23,099,092 Class A ordinary shares
|
|
N/A
|
Root Grace Ltd.
|
|
February 2, 2021
|
|
Warrants to purchase an aggregate of up to 46,198,188 Class A ordinary shares
|
|
N/A
|
(1) Re-designated
as same number of Class A ordinary shares of our company in May 2019.
(2) Re-designated
as same number of class B ordinary shares of our company in May 2019.
(3) Among
which, 7,500,000 ordinary shares were forfeited and cancelled in January 2019.
(4) US$500,000
represents aggregate consideration for (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, issued to Iliad Research and Trading, L.P.
(5) US$5,000,000
represents aggregate consideration for (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.
ITEM 8. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
See Exhibit Index beginning
on page II-5 of this registration statement.
The agreements included as
exhibits to this registration statement contain representations and warranties by each of the parties to the applicable agreement.
These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were
not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties
if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosure that was made to
the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of “materiality”
that are different from “materiality” under the applicable securities laws; and (iv) were made only as of the
date of the applicable agreement or such other date or dates as may be specified in the agreement.
We acknowledge that,
notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional
specific disclosure of material information regarding material contractual provisions is required to make the statements in this registration
statement not misleading.
(b) Financial Statement
Schedules
Schedules have been
omitted because the information required to be set forth therein is not applicable or is shown in the Consolidated Financial Statements
or the Notes thereto.
ITEM
9. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
|
1.
|
To file, during any period in which offers or sales are being made, a post-effective
amendment to this Registration Statement:
|
|
(i)
|
To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
|
|
(ii)
|
To reflect in the prospectus any facts or events arising after the effective date of
the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change
in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration
statement.
|
|
(iii)
|
To include any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such information in the registration statement.
|
|
2.
|
For the purposes of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering
thereof.
|
|
3.
|
To remove from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
|
|
4.
|
To file a post-effective amendment to the registration statement to include any financial
statements required by “Item 8.A. of Form 20-F” at the start of any delayed offering or throughout a continuous offering.
Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the
registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph
(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of
those financial statements.
|
|
5.
|
For the purpose of determining liability under the Securities Act of 1933 to any purchaser,
if the registrant is relying on Rule 430B, each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to
be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement;
and each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) (§ 230.424(b)(2), (b)(5), or (b)(7)
of this chapter) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i),
(vii), or (x) (§ 230.415(a)(1)(i), (vii), or (x) of this chapter) for the purpose of providing the information required by
section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities
in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that
is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to
the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement
or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.
|
|
6.
|
For the purposes of determining liability under the Securities Act of 1933 to any purchaser
in the initial distributions of the securities, the undersigned registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities
to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
|
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule
424;
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to
by the undersigned registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant
or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
|
7.
|
For purposes of determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared effective.
|
The9 Limited
EXHIBIT INDEX
Exhibit Number
|
|
Description
of Document
|
|
|
3.1
|
|
Second Amended and Restated Memorandum and Articles of Association of the Registrant as currently in effect (incorporated by reference to Exhibit 1.1 to the Annual Report on Form 20-F (File No. 001-34238) filed with the Securities and Exchange Commission on April 30, 2020)
|
|
|
|
4.1
|
|
Registrant’s Specimen American Depositary Receipt (included in Exhibit 4.3)
|
|
|
4.2
|
|
Registrant’s Specimen Certificate for Class A Ordinary Shares (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)
|
|
|
4.3
|
|
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 the Registration Statement on Form F-6 (File No. 333-250194) filed with the Securities and Exchange Commission on November 19, 2020)
|
|
|
|
4.4
|
|
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)
|
|
|
|
4.5
|
|
Form of Warrant Offered in the Offering (included in Exhibit 4.4)
|
|
|
|
4.6
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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)
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5.1
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Opinion of Maples and Calder (Hong Kong) LLP regarding the validity of the ordinary shares being registered and certain Cayman Islands tax matters (incorporated by reference to Exhibit 5.1 to our Post-effective Amendment No. 1 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on January 4, 2021)
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|
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8.1
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|
Opinion of Maples and Calder (Hong Kong) LLP regarding certain Cayman Islands tax matters (included in Exhibit 5.1) (incorporated by reference to Exhibit 8.1 to our Post-effective Amendment No. 1 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on January 4, 2021)
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8.2
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Opinion of Grandall Law Firm regarding certain PRC tax matters (included in Exhibit 99.2) (incorporated by reference to Exhibit 8.2 to our Post-effective Amendment No. 1 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on January 4, 2021)
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|
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10.1
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Eighth Amended and Restated 2004 Stock Option Plan (incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 20-F (File No. 001-34238) filed with the Securities and Exchange Commission on April 29, 2019)
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|
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10.2
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Form of Employment Agreement between the Registrant and a Senior Executive Officer of the Registrant (incorporated by reference to Exhibit 10.3 to 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)
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|
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10.3
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Form of Indemnification Agreement with the Registrant’s directors and executive officers
(incorporated by reference to Exhibit 10.2 to 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)
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10.4
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|
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)
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10.5
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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)
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10.6
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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)
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10.7
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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)
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10.8
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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)
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10.9
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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)
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10.10†
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|
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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|
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10.11
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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)
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10.12
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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)
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10.13*
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|
Form of Share Purchase Agreement between the Registrant 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
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10.14*
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|
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 Registrant
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10.15*†
|
|
Future Sales and Purchase Agreement dated March 16, 2021 between
Bitmain Technologies Limited and NBTC Limited
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|
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|
10.16*
|
|
Securities Purchase Agreement dated March 17, 2021 between The9 Limited and Streeterville Capital, LLC
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|
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21.1
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|
List of Significant and Other Principal Subsidiaries and Affiliated Entity of the Registrant (incorporated by reference to Exhibit 21.1 to our Post-effective Amendment No. 1 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on January 4, 2021)
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23.1*
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Consent of Grant Thornton, an independent registered public accounting firm
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|
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23.2
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|
Consent of Maples and Calder (Hong Kong) LLP (included in Exhibit 5.1)
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|
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23.3
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|
Consent of Grandall Law Firm (included in Exhibit 99.2) (incorporated by reference to Exhibit 23.3 to our Post-effective Amendment No. 1 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on January 4, 2021)
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24.1
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|
Powers of Attorney (included on the signature page of our Registration Statement on Form F-1 (File No. 333-240331) filed on August 4, 2020)
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|
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99.1
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|
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)
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|
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99.2
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|
Opinion of Grandall Law Firm regarding certain PRC law matters (incorporated by reference to Exhibit 99.2 to our Post-effective Amendment No. 1 to Registration Statement on Form F-1 (File No. 333-240331) filed with the Securities and Exchange Commission on January 4, 2021)
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|
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|
101.INS*
|
|
XBRL Instance Document
|
|
|
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema Document
|
|
|
|
101.CAL*
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
|
101.LAB*
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
|
*
|
Being filed with this registration statement.
|
†
|
Portions of this exhibit have been omitted for confidentiality purpose
|
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing
on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized,
in Shanghai, China, on March 23, 2021.
|
The9 Limited
|
|
|
|
|
By:
|
/s/ Jun Zhu
|
|
Name:
|
Jun Zhu
|
|
Title:
|
Chairman and Chief Executive Officer
|
Pursuant to the requirements
of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities
and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Jun Zhu
|
|
Chairman of the Board of Directors and
Chief Executive Officer
|
|
March 23, 2021
|
Jun Zhu
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/ George
Lai
|
|
Director and Chief Financial Officer
|
|
March 23, 2021
|
George Lai
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
March 23, 2021
|
Davin Alexander Mackenzie
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
March 23, 2021
|
Kwok Keung Chau
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
March 23, 2021
|
Ka Keung Yeung
|
|
|
|
|
*By:
|
/s/
Jun Zhu
|
|
|
Name: Jun Zhu
|
|
|
Attorney-in-fact
|
|
SIGNATURE OF AUTHORIZED REPRESENTATIVE
IN THE UNITED STATES
Pursuant to the Securities Act of 1933, the undersigned, the
duly authorized representative in the United States of The9 Limited has signed this registration statement or amendment thereto
in Newark, Delaware, United States of America on March 23, 2021.
|
Authorized U.S. Representative
|
|
|
|
|
By:
|
/s/ Donald J. Puglisi
|
|
Name:
|
Donald J. Puglisi
|
|
Title:
|
Managing Director
|
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