The Group is the primary beneficiary of its VIE, 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.

There are certain key contractual arrangements between the Group’s subsidiary, Huiling (wholly-owned foreign enterprise, the “WOFE”) and each of the VIE that provide the Group with control over the VIE. As a result of these contracts, the Group concluded that it is required to consolidate the VIE pursuant to the guidance in ASC 810 Consolidation.

The Group shall be deemed to have a controlling financial interest in a VIE if it has both of the following characteristics:

The power to direct the activities of a VIE that most significantly impact the VIE’s economic performance; and

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 VIE’s 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 VIE, and as such, the Group’s management concluded that the WOFE has the requisite power to direct the activities of the VIE that most significantly impact the VIE’s 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 VIE 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 VIE 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 VIE that most significantly affect the VIE’s economic performance, and (2) the right to receive benefits from the VIE that could potentially be significant to the VIE, the Group has been deemed to be the primary beneficiary of the VIE and has consolidated the VIE since the date of execution of such agreements.

Shareholders of the VIE 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 VIE. As most of the shareholders of the VIE 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 VIE in the PRC. Shanghai IT holds the necessary licenses and approvals that are essential for the online game business in China. Shanghai IT is principally owned by certain shareholder and employee of the Company. Pursuant to certain other agreements and undertakings, The9 Limited in substance controls Shanghai IT. The Group believes that its current ownership structures and contractual arrangements with Shanghai IT and its equity owners, as well as its operations, are in compliance with all existing PRC laws and regulations. There may, however, be changes and other developments in the PRC laws and regulations or their interpretation. Specifically, following the recent promulgation of the GAPPRFT Circular, it is unclear whether the authorities will deem the Group’s VIE structure and contractual arrangements with Shanghai IT as an “indirect or disguised” way for foreign investors to gain control over or participate in domestic online game operators, and challenge the Group’s VIE structure accordingly.

If the Group is found to be in violation of any existing or future PRC laws or regulations, or fails to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including requiring the Group to undergo a costly and disruptive restructuring, such as forcing The9 Limited to transfer its equity interest in the VIE 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 VIE, the Group may lose the ability to consolidate and reflect in its financial statements the financial position, and results of operation of the VIE. The Group, however, does not believe such actions would result in the liquidation or dissolution of the Group, the WOFEs or VIE.

The aforementioned contractual arrangements with the VIE and their respective shareholders are subject to risks and uncertainties:

●

The VIE 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 VIE or the Group mandate a change in ownership structure or operations for the VIE or the Group, restrict the VIE or the Group’s use of financing sources, or otherwise restrict the VIE 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 VIE 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 VIE have failed to comply with the legal obligations required to effectuate such contractual arrangements.

●

It may be difficult to finance the VIE by means of loans or capital contributions. Loans from The9 Limited to the VIE must be approved by the relevant PRC government body and such approval may be difficult or impossible to obtain. The VIE are domestic PRC enterprises owned by nominee shareholders, thus the Group is not likely to finance activities of the VIE by means of direct capital contributions.

Summary financial information of the VIE and its subsidiaries included in the accompanying consolidated financial statements with intercompany balances and transactions eliminated are as follows:


	December 31, 2021	December 31, 2022	December 31, 2022
	RMB	RMB	US$
			(Note 3)
Total assets	28,596,733	21,943,116	3,181,453
Total liabilities	282,163,247	272,939,140	39,572,455


	2020	2021	2022	2022
	RMB	RMB	RMB	US$
				(Note 3)
Net revenues	625,488	1,278,918	655,201	94,995
Net loss	(52,410,094)	(23,621,808)	(23,286,056)	(3,376,161)

The VIE contributed an aggregate of 100%, 0.9% and 0.6% of the consolidated net revenues for the years ended December 31, 2020, 2021 and 2022, respectively. As of the fiscal years ended December 31, 2021 and 2022, the VIE accounted for an aggregate of 2.2% and 3.7%, respectively, of the consolidated total assets, and 51.6% and 47.8%, 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 21 for disclosure of restricted net assets.